Hong Kong-based fund manager RP Capital is launching an open-ended China physical property fund invested in commercial retail premises in major mainland cities.
The independent firm’s Greater China regional fund will focus primarily on commercial retail property in mainland China, with RP Capital forecasting consistent double-digit rates of growth on the back of strong sales supported by the nation’s rampaging economic growth.
“A lot of foreign investors are looking at commercial properties after Chinese authorities introduced measures to curb the overheating of the residential property sector,” notes a Shanghai-based real estate analyst.
On February 8, the People’s Bank of China raised benchmark interest rates by 25 basis points. That followed a 25bp hike last October as the central bank strives to dampen the residential market by raising the costs for homebuyers.
The analyst notes that commercial property is more suitable for long-term investors as it generates stable rental revenue, particularly in comparison with residential real estate, where investors more typically target quick profit-taking.
Still, RP Capital is raising funds from both foreign individual and institutional investors, including fund of funds, discretionary fund managers and investment banks.
The firm’s director, Raymond Fung, confidently projects a “conservative return” of 10-12% a year for the fund, taking into account rental income, price increases and renminbi appreciation.
Its initial fundraising target is $50 million to $100 million, with a minimum investment level of $100,000, in accordance with the rules of the Cayman Islands where the fund is domiciled. Fung says he expects fundraising to be completed in the second quarter of this year.
He notes that the fund will seek to acquire completed commercial properties with quality tenants in prime city locations within mainland China. But RP Capital is required to establish an onshore presence to do so, as foreign investors in commercial real estate have to set up an onshore entity.
But according to the analyst, an offshore fund can also acquire shares in mainland properties already owned by an offshore holding company, meaning it may not need to set up an onshore company to acquire property assets in mainland China.
Fung does not rule out the possibility of going for the offshore route “as long as we can hold the property in China directly”.
RP Capital’s fund is structured as an open-ended fund with quarterly entry/exit options to balance liquidity and direct investment. The company says its aim is to match the liquidity of underlying investments with the liquidity provided to investors at the fund level.
Fung notes that, compared with real estate investment trusts and traditional property equity funds that are highly correlated to the stock market, the target volatility rate of its open-ended fund will be lower, at 4% to 6% per annum. He adds that the structure allows investors to hold physical property indirectly via the fund.
Deutsche Bank has been appointed fund administrator, KPMG auditor and Walkers legal adviser, with independent property valuation performed by DTZ.