Singaporean and other foreign investors are stepping up purchases of foreclosed properties in China, as Beijing’s crackdown on speculation and a slowing economy lead to a wave of defaults by developers.
Sales of Chinese distressed properties, including office buildings and factories, hit a quarterly record of $1.93bn in the last three months of 2022, according to MSCI, up 14 per cent from the same period a year earlier and 73 per cent higher than in 2019, the first year it tracked such data.
Benjamin Chow, head of Asia real assets research at MSCI, said foreign buying had been more pronounced during this property downturn than in past ones in China. He linked the wave of developer defaults to a series of policies begun in 2021 to bring down leverage in the financial system.
Singapore government-backed CapitaLand Investment highlighted the foreign interest in distressed Chinese properties in February when it raised a 1.1bn Singapore dollar ($820mn) fund to hunt for bargains in the Chinese commercial property sector.
“The uncertainties in the market in the last two years have brought forth many opportunities, particularly in the special situations space, as developers continue to face [a] credit crunch,” Simon Treacy, chief executive of private equity real estate at CapitaLand, told Nikkei Asia in May.
One of the biggest distressed deals on the mainland came in October when CapitaLand agreed to pay Rmb2.04bn ($290mn) for a Beijing office building sold at auction after a default by Te Er Te, a property management company owned by Dalian-based developer Yongjia Group, court records show. The price represented a 30 per cent discount from its 2021 valuation.
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In January, a Singapore-headquartered private equity manager with about $7bn of assets under management signed a deal with a Taiwanese manufacturer to buy a bankrupt logistics facility in China, said an executive with the buyer who asked not be named because he is not authorised to speak with the media.
“We go after these manufacturers who have been hurting,” the executive said. “So if we look at where most of the pain is, we will continue to see select opportunities to refurbish [and] take over . . . underutilised or even bankrupt manufacturers.”
Some western investors, including Brookfield Asset Management and Pictet Wealth Management, have also shown interest in such deals. Alexandre Tavazzi, Pictet’s managing director, said in Hong Kong last month that distressed properties in China have “become quite attractive”.
“I do think there should be good opportunities to buy assets at good valuations over the next five years,” said Ronald Thompson, Hong Kong-based managing director of Alvarez & Marsal, which specialises in restructuring.
However, MSCI’s Chow said other global investors have been more reluctant to invest in Chinese properties because of “concerns about long-term returns, particularly with China’s lower trajectory as it moves away from a reliance on the real estate sector to bolster GDP growth”.
Additional reporting by Pak Yiu.
A version of this article was first published by Nikkei Asia on June 13, 2023. ©2023 Nikkei Inc. All rights reserved.
