UBS set to pump money into China housing market

It raises US$100m; first investments are likely to be in second-tier markets

UBS Global Asset Management is poised to enter China’s housing market after raising about US$100 million for its 50-50 joint venture with one of China’s biggest developers, Gemdale Corp .

The investment bank’s move into China fuels hope that a global aversion to emerging market risk is ending and may even encourage other Western banks to reconsider Chinese property buys as well-priced assets in mature markets become scarce.

UBS is mulling four development projects, and its first investments are likely to be in second-tier markets such as Shenyang and Wuhan, said Lijian Chen, head of global real estate, Greater China, at UBS Global Asset Management.

‘Last year, the national GDP growth was 8.7 per cent but people should note that many provincial capitals are still growing at 15-16 per cent,’ Mr Chen told Reuters in an interview.

‘I think everyone is coming to realise that China is not a single-market country. These cities have huge populations and are well positioned for the next decade to replicate the economic success of the more mature coastal areas.’

UBS raised the capital at first close from European, Asian and Middle Eastern institutional investors enthused by China’s economic might and the property investment opportunities presented by its increasing urban population.

The capital raised will be leveraged by up to 50 per cent and will be invested in residential development projects in first-tier and selected second-tier cities.

UBS is targeting a 20 per cent net return and a second closing is expected shortly.

In March, Aberdeen Property Investors, one of Europe’s largest fund managers, told Reuters that it was planning to launch a second Asian fund of funds to help European insurers and pension funds put capital to work in key Asian markets.

Some observers fear the rising influx of foreign capital may worsen an unprecedented phase of Chinese house price growth, making homes even less affordable for economic migrants.

Property price inflation is seen by some as an unfortunate by-product of an economic stimulus plan that has kept China’s annual GDP growth near double-digit rates, despite fickle demand for its exports in the US and Europe.

The government is working to curb price growth and there is speculation that it may hike property taxes to aid its efforts, but Mr Chen said that investors who ensured their strategies were aligned with local interests could still achieve ’strong risk-adjusted returns’.

Countering bubble concerns, he said that all real estate markets suffered some degree of volatility and Chinese real estate cycles tended to be much shorter than more mature markets.

‘Only a year ago, I remember an article that said Chinese house prices had 50 per cent to fall, nowadays all the talk is about a bubble forming,’ he said.

‘For investors outside looking in, that could be very worrisome. Nobody should be under any illusion that investing in the second-tier market is a no-brainer or a slam-dunk.

‘Nonetheless, over the long term, these markets should still offer very compelling upside in the coming years.’

Source : Business Times – 8 Apr 2010