An M&A wave In China’s real estate sector
December 12, 2013 / By
China has seen a number of big acquisitions and investments in real estate developers in the past few months. Examples include Blackstone buying Tysan Holdings, a Hong Kong-based developer for $322 million and a 40% stake in the shopping mall developer SCP Co., and TPG buying a 20% stake in Xinyuan Real Estate, a listed residential developer. According to Dealogic, real estate is now the leading sector for China-targeted M&A, reaching a record $37 billion so far in 2013 and accounting for 17% of total M&A deals.
There are a number of reasons why M&A is taking off in China’s real estate sector. First, for foreign players looking to tap into the Chinese residential market, it makes sense to have a domestic partner that knows the local market. Experienced local developers are often able to better navigate the lengthy and complicated process of acquiring land and building and selling residential properties fit for the local market. Despite cooling measures by the central government, we feel that the long term growth prospects for the residential market in medium sized cities that are undergoing rapid urbanisation are still strong. The mechanism through which investors are gaining exposure to residential real estate has evolved in the last several years, with more mezzanine finance and debt structures than before, and investors are once again raising capital to target the sector. According to Preqin, overseas closed-end funds targeting residential property in China have grown from $800 million in 2012 to $1.6 billion this year.
On the commercial side, M&A makes sense for investors that have raised large funds targeting office and retail property because the number of tradable assets in these sectors remains in chronically short supply. The Singaporean and Hong Kong-based developers that dominated the first wave of commercial development in China are for the most part still holding on to their assets for rental income, while most domestic developers that started out in residential development and moved into commercial property prefer to strata-sell their projects to get a quick return on their investment. This has meant that China still has very few wholly-owned, investment-grade assets available to buy compared to more developed markets. Foreign investors that have large amounts of capital to deploy therefore also look to invest directly in the developer’s corporate entities, in addition to the real estate assets. Investors need to be aware, however of the varying market dynamics in each city when buying into a developer. With rapid growth in commercial supply, particularly in Tier 2 cities, many portfolios will suffer in the short term and only well-positioned developers will make for smart investments.
As the domestic credit markets continue to tighten, many local developers may soon find themselves in serious need of capital, providing more opportunities for foreign funds to target developers with strong land banks and development pipelines that would be difficult to access directly. As China-focused fundraising has shown no signs of slowing down, and ample amounts of capital will continue to target real estate investment opportunities in China, I expect that the crest of this wave is still a long way off and we can expect to see even more M&A activity in the real estate sector in 2014.
