Chinese Private Equity Funds struggle with Investment Options

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Chinese private equity funds specializing in real estate have a unique problem. They are swimming in cash but nothing to invest with that cash. Everything is perfectly good on a theoretical level in the Beijing market. It goes without saying that the prime located and older commercial properties would be a prime catch for both international and domestic funds. Investors would simply have to follow the buy, fix, and sell strategy. The problem is that in actual reality, options remain rare, with a large majority of such buildings under the ownership of people who have no intention of selling.

Beijing property scene

Beijing is the most affected of all Chinese cities to be afflicted by such a phenomenon. CBRE, the multinational real estate firm, said that 24 large transactions worth about 39.7 billion yuan took place in 2017, an increase of 11 percent compared to 2016. These numbers are negligible compared to the transactions done in Shanghai, where a whopping 82 deals resulted in a monetary value transaction of 116.9 billion yuan. This is a rise of 18 percent compared to 2016.

The causes of these differing markets are not hard to understand. The brokerages and PE funds point to dissimilar structures of ownership in these two markets as the basic reason. A significant number of properties in Shanghai are held by overseas and domestic funds. These come with fixed maturities and the assets must be sold prior to maturity. This results in predictable sales. Not so in the case of Beijing. According to Wang Yutao of Z River Capital, a PE firm, it is hard to find properties to invest in Beijing as not many commercial properties are available for sale.

Conversion impossible

To compound the problem, most of the malls and hotels located in the city cannot be converted into offices. All these factors reduce the viable projects numbers. The company took over two Beijing properties in 2016. One is a departmental store located on third ring road's northern part and the other a hotel in close proximity to the almost saturated Financial street in Beijing. It took almost a year for the fund to renovate and then transform these two properties into highly desirable offices. These were then put on the market.

Comparing real estate statistics of both Shanghai and Beijing brings to light a number of factors. In Beijing, PE funds made up 44 percent of all deals. In Shanghai, it made up 49 percent. Developers made up the latter's 29 percent while they made up 32 percent in Beijing.

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