Chinese real estate assets are quickly catching the attention of investors following the in-country setup of a distressed real estate investing arm by US private equity giant Warburg Pincus.

However, some property experts argue successful investing into assets in China and Asia more broadly will increasingly require environmental, social and governance (ESG) considerations. 

Warburg Pincus has launched a distressed Chinese real estate joint venture (JV) with Shanghai-headquartered distressed asset manager Wensheng Asset Management.

Known as Wensheng Special Situations Asset Management Co, the unit aims to offer opportunities for foreign investors of distressed debt as China opens up its bad debt market, in line with the country’s ambitions to curb its financial bubbles in the fast-growing property sector.

The two parties will invest up to $600 million into the JV, and plan to bring its assets under management to $5 billion over the next five years.

The JV will focus on acquiring single real estate projects in cities including Shanghai, Zhejiang, and Hainan province. The firm did not reply to emailed questions on JV shareholding details and launch date.

RISK VS. REWARD

Richard van den Berg, M&G
Richard van den Berg, M&G

New rules regulating and limiting the financing of real estate in China have made refinancing more difficult, prompting nonperforming loans (NPLs) to grow in number and size.

Richard van den Berg, fund manager at M&G Real Estate, told AsianInvestor that for investment purposes, cities in China are sizeable and have high liquidity. 

China is, for now, more alluring to investors who hold a short-to-medium term view, due to factors like ambiguous policies on land ownership. Such policy-related risks still exist for long-term investors, according to van den Berg. But deals in different cities may require different customized approaches, according to a Preqin report

Wealth and cultural variances as well as differing levels of local government transparency across the regions, all pose as potential obstacles and will affect the ways that deals are executed.

A NEW FOCUS

Being selective and fully applying environmental, social and governance (ESG) in the Chinese real estate market are key to success, particularly when it comes to troubled assets, say experts.

“For real estate ESG, E is the easiest and a concrete part, while S and G need more work and research,” van den Berg said.

In late June, Houston-based real estate developer and investor Hines named European fund manager Peter Epping as global ESG head, to lead its dedicated 22-strong global team in tackling ESG issues. Epping told AsianInvestor that investors “are in the middle of the transition of economies around the world to ambitious net zero carbon targets and more stringent ESG requirements.”

Peter Epping, Hines

 

Epping believes that many Asian investors have yet to prioritise ESG, unlike many of their European and US counterparts – but the need to do so is obviously strong.

He explained that ESG has become a third dimension to evaluate investments, apart from risk and return. European investors are taking ESG much more seriously while Asian investors still lag behind, despite increased awareness.

In the real estate industry where policies do play a big role, ESG deployment is topping the list of priorities.. 

Chiang Ling Ng, Hines
Chiang Ling Ng, Hines

Chiang Ling Ng, chief investment officer of Hines, noted that the company’s real estate exposure to Asia Pacific was still relatively low, but growing.

As of end 2020, Hines managed $5.3 billion in Asia Pacific market assets, representing 3.3% of a $160 billion pool.

The fund manager has secured $400 million from Cadillac Fairview, the real estate investment arm of Canadian pension Ontario Teachers’ Pension Plan, for its newly launched pan-Asia property fund.