Download China: All Eyes on Another Five Years of Economic Reform

Market Overview – Asia
Third Quarter 2010
China: All Eyes on Another Five Years of Economic Reform
12th FIVE YEAR PLAN – END OF MANAGED GROWTH “ERA”?
In October, the Central Committee of the Chinese Communist Party released
the framework for the formation of the PRC’s twelfth Five Year Plan (FYP).
Unlike all prior FYPs, which revolved around achieving specific growth targets,
the central theme of the new framework is a rebalancing of the economy. The
fact that Beijing no longer prioritizes a specific GDP growth target is another
milestone in China’s economic reform: the end of the managed growth “era”.
The main objective for the next five years is to continue with structural reforms
focusing on: (i) stimulating domestic consumption to reduce the reliance on
investments and exports; (ii) developing new industries, such as new energy,
IT and biotech, while upgrading the country’s existing manufacturing base, and
boosting the services sector; and (iii) the urbanization of inland regions and
development of small and medium sized cities.
The PRC property market, and in particular the residential and retail sectors,
are expected to benefit from the new FYP as it supports the continuing trends
of rapid urbanization and increasing domestic consumption. More specifically,
the new framework seeks to facilitate the urbanization process in small- and
medium-sized cities by loosening the urban residential permit requirement. At
the same time, continuous investment in transport infrastructure should also
benefit the urbanization process. Domestic consumption will be stimulated by
promoting policies in favor of income growth and the establishment of a social
safety net, which will release spending power and drive retail sales.
The first FYP was established in 1953 with the adoption of a Soviet style
planned economy setting out rigid growth targets. Since then, the Communist
Party has played a key role in establishing strategies and setting targets for development and reform. As China gradually transitioned to a market economy
following the implementation of the open-door policy under Deng Xiaoping,
the FYP now serves as a guideline rather than a set plan, but it still carries
critical importance in understanding the overall direction of China’s economic
reform.
access to opportunities, relatively lower cost of capital and tax advantages.
While in the near term, significant competition from domestic capital is inevitable, over time, interesting opportunities for offshore investors to partner
with and leverage domestic capital are expected to evolve. At the same time,
offshore investors will likely need to adapt their investment strategies – e.g. by
focusing on specialized property sectors that require specific operating or asset
management expertise. In the long run, domestic capital will play a key part
in the healthy development of the PRC property market, including improved
liquidity and exit options for foreign investors.
Sources: China Trust Association, Savills, First Finance Daily, M3 Capital Partners.
CHINA PROPERTY STOCKS LAG GLOBAL MARKETS
Global real estate equities showed a strong performance in Q3 with an increase of 18.4% according Standard & Poor’s. Europe led its peers with a
28.9% return for the quarter, followed by Asia (19.3%) and North America
(13.4%). Positive economic data from several European economies including Germany, France, Sweden and Finland – together with relatively moderate
tightening in China and Australia – provided the foundation for last quarter’s
strong performance. Singapore and Hong Kong both outperformed several
other markets in Q3 with increases of 24.5% and 23.9% respectively, compared
with more moderate increases in Australia (19.2%), Japan (15.1%) and mainland China (11.1%). The performance of PRC property stocks was buoyed by
outstanding quarterly sales figures from several large developers as the Government’s recent macro controls have yet to show their full effect.
Standard & Poor’s Global Property Index (as at 30 September 2010)
Annualized Returns (%)
Global
North America
Europe
Asia
QTD
18.4%
13.4%
28.9%
19.3%
YTD
13.2%
19.6%
5.6%
12.0%
1-Year
17.6%
30.3%
6.7%
13.2%
3-Year
-9.6%
-6.4%
-15.0%
-10.4%
5-Year
2.3%
1.7%
-2.5%
5.0%
10-Year
10.1%
10.6%
10.0%
8.1%
Sources: Standard & Poor’s, Cohen & Steers, M3 Capital Partners.
Sources: UBS, Bank of America Merrill Lynch, Government Websites, M3 Capital Partners.
SERVICED APARTMENTS VS. GLORIFIED MULTIFAMILY
DOMESTIC CAPITAL: THREAT OR OPPORTUNITY?
Serviced apartments are a fairly new phenomenon in China. The sector
emerged over the past few years along with the development of a private rented residential market. Thanks to China’s strong economic development, the
number of expatriate executives and young local professionals has increased
exponentially over the past five years. This, in turn, has created significant demand for a more organized form of rental housing: the serviced apartment
sector.
On September 9, after a delay of almost one year, the Chinese Insurance
Regulator finally released detailed guidelines for insurance companies’ investments in property and private equity. From October 1 onward, approximately
Rmb450B ($66.2B) of insurance capital will be available for investment in PRC
real estate. Under the guidelines, insurance companies will be allowed to invest
in traditional property types such as office, retail and hotels, but prohibited
from investing in ”for sale” residential, setting up real estate development companies and participating directly in real estate development.
Besides the vast insurance sector, other domestic institutions such as trust fund
companies, RMB funds and investment arms of commercial banks are also increasingly active. In Q3 alone, Rmb220B ($32.4B) of trust fund capital was
invested in the PRC property sector. The trend towards RMB real estate funds
is also continuing, with new sponsors emerging from amongst developers, private equity fund managers and local mutual fund management houses. It is
estimated that approximately Rmb15.6B of RMB fund capital has been invested
in PRC property. Finally, the Hong Kong based subsidiaries of PRC commercial
banks have also been expanding into private equity investment in mainland
China, with real estate being one of their focus areas.
The sudden unleashing of significant domestic capital will make life more difficult for offshore investors, particularly given domestic institutions’ more direct
M3 CAPITAL PARTNERS IS A GLOBAL REAL
ESTATE PRIVATE EQUITY INVESTMENT
A N D A DV I S O RY F I R M T H AT M A K E S
P R I N C I PA L I N V E S T M E N T S I N , A N D
R A I S E S C A P I TA L F O R , S P E C I A L I S E D
REAL ESTATE OPERATING COMPANIES.
WWW.M3CP.COM
CHICAGO
M3 Capital Partners LLC
150 S. Wacker Drive, 31st Floor
Chicago, Illinois 60606
Tel +1 312 499 8500
Fax +1 312 499 8585
At this point in time, the serviced apartments sector is fragmented. The highend market is small and dominated by well-established international operators.
Tenants are mostly expatriates, the mid-to-low end market, on the other hand,
has become the mainstream. It targets local demand and can be seen as a
surrogate for a non-existent multifamily sector. Even though services are usually limited, rented residential is often times labeled and marketed as serviced
apartments as the name sounds more prestigious to many Chinese. Tenants
are primarily young professionals, and “branding” has yet to be established.
The high-end market is generally well capitalized as institutional investors are
attracted to the compelling investment fundamentals. Meanwhile, building design and service quality of serviced apartments in the mid-to-low end segment
lag far behind the higher-end market, making it difficult to deliver attractive
rental yields. Due to the lack of management quality and long-term capital,
strata-title ownership has become the norm.
Source: M3 Capital Partners.
HONG KONG
M3 Capital Partners (HK) Limited
Level 8, Two Exchange Square
8 Connaught Place
Central, Hong Kong
Tel +852 2168 0688
Fax +852 2168 0621
LONDON
M3 Capital Partners Limited
180 Piccadilly, 6th Floor
London, England W1J 9ER
Tel +44 (0) 20 7280 3600
Fax +44 (0) 20 7280 3601
NEW YORK
M3 Capital Partners LLC
630 Fifth Avenue, 32nd Floor
New York, New York 10111
Tel +1 212 582 7210
Fax +1 212 582 7211
M3 Capital Partners LLC, member FINRA and SIPC; M3 Capital Partners Limited, authorised and regulated by the Financial Services Authority;
M3 Capital Partners (HK) Limited, licensed with the Securities and Futures Commission.
Information current as of September 30, 2010 unless otherwise noted. This Asian market overview is provided, at no cost, to interested parties for information only. Please contact us if you do not want to receive future reports.
This report does not represent an offer to buy or sell any securities and is neither investment advice nor investment research. Investment in any of the securities referenced herein involves risk of loss. Past performance is not
indicative of future results.