Singapore-listed property firm Treasury China Trust (TCT) believes China’s commercial real estate sector is set to attract a great deal more capital from domestic sources in the near future.

Company chief executive Richard David points out that the commercial property market is still nascent in China and dominated by foreign investment.

“Real estate is a domestic industry,” he says. “As markets mature, they tend to have far more input from domestic capital than foreign capital. It is the case in [China’s] residential sector, but not yet in the commercial sector, where there is still a huge amount of foreign investment.”

From 2007 to 2011 investment in commercial real estate in China totalled Rmb3.1 trillion, or 17.7% of total property investment, finds the National Bureau of Statistics. By comparison, the commercial sector accounted for 59% of the overall US property market, and 78% in Japan.

Following the Chinese government’s decision in 2008 to open up its commercial real estate market to the domestic insurance and pension fund sectors, David expects the pace of change to quicken over the next five years.

Accordingly TCT registered locally a wholly owned foreign enterprise, Treasury Holdings (Shanghai) Property Management, and obtained its RMB private equity licence in February this year. It means TCT now has the flexibility to raise capital onshore and offshore across a diverse range of investor profiles.

Most listed foreign investors in China’s commercial real estate sector are Hong Kong and Singapore firms, with names including Hang Lung, Hutchison Whampoa, Shui On, TCT, Capita Retail China Trust, Capita Malls Asia (Sing), and Perennial China Retail Trust.

Unlisted foreign investors are far more diverse and have been exclusively raising capital offshore. They often invest in joint-venture partnerships or into existing platforms or to provide pre-IPO seed capital. These investors include Gaw Capital, Harvest Capital, Canada Pension Plan Investment Board, Warburg Pincus, Forum Capital and Carlyle.

Another factor that drove TCT to apply for an RMB private equity licence was that the government started to tighten liquidity to commercial real estate late last year.

“In the first half of last year, the government made a clear distinction between residential housing and commercial real estate in terms of liquidity,” David notes. “But in the third quarter of last year, the government moved from restraining liquidity to the residential sector to making no distinction [with commercial property].”

He says authorities are making sure that banks do not make any new property loans over Rmb30 million, a sum he argues you can’t do much with in China’s commercial real estate sector.

“For the two transactions we did last year we did them with bank loans, including loans from Chinese banks,” he notes. “If we had settled them in the second half of last year or any time this year, we wouldn’t have been able to buy these properties.”

TCT has its core commercial assets located centrally in Shanghai’s business districts. It also makes investment in second-tier cities such as Qingdao and Xi’an, although for the office sector the firm does not see much opportunity outside of first-tier cities.

“For our business the certainty of recurrent income is important, so having a strong tenancy group is part of our strategy and down-side risk protection,” David says. “More than 80% of our tenants are fortune-500 companies and multi-national companies. But in second- and third-tier cities, you will be far more reliant on local companies.”

“We exerted downsize risk protection by investing substantially in Shanghai as China’s major commercial real estate market. Shanghai is now an internationally competitive commercial real estate market. If 80-90% of our assets are in Shanghai, then we are very comfortable with that.”