UBS Fund For China Property

Source : The Business Times, February 26, 2008

Fund to pour US$1b in housing; bank seeks US$300m to finance venture

UBS plans to launch a fund that will pour about US$1 billion into Chinese property, a further sign of enthusiasm for Asia at a time when investors are nervous about ailing European and US real estate markets.

Braving a sector that Beijing is desperate to slow, the Swiss bank signed a deal to build housing with Shanghai-listed developer Gemdale Corporation last month.

It is now looking to raise about US$300 million in equity to finance the venture, which will include the bank's own money as well as investment from its clients, and will be supplemented by debt to help lift returns.

'The focus is on residential, and we're hoping to launch a vehicle, and we're working on details,' said Lijian Chen, head of China real estate for UBS Global Asset Management.

'We're targeting US$300 million in capital overseas, with leverage, to give us roughly a billion dollars of buying power,' he said in a telephone interview from New York.

UBS is following the likes of Morgan Stanley, Deutsche Bank's property arm RREEF, and ING Real Estate, which raised a US$350 million fund for Chinese housing last year and has partnered Gemdale on individual projects.

While European and US property markets are waning in the face of a global credit crunch, Asia still appears strong, notching up a 26 per cent jump in direct property investment to US$121 billion in 2007, according to consultant Jones Lang LaSalle.

The UBS tie-up with Gemdale, which follows a similar deal in Japan with Mitsubishi Corp, is targeting 20 per cent internal rates of return over an investment period of five years.

The move comes at a time when Chinese developers are hungry for finance as government austerity policies, aimed at cooling the property market, start to bite.

But Mr Chen, who is moving back to his native China after 20 years in North America, said Gemdale was not starved of funds.

He said the firm raised 4.5 billion yuan (S$884 million) in a secondary share offering last year and has a further US$2.52 billion share sale pending approval. However, analysts say Chinese regulators are loath to approve property company listings in Shanghai for fear of further stoking property prices.

'It's not forced,' Mr Chen said. 'It's much more about their senior managers' vision. They want to create a diverse source of sound funding.'

With average home prices doubling since 2002, Beijing has told banks to curb loans to developers, raised interest rates, imposed taxes on capital gains and land appreciation and employed a 'use it or lose it' policy to deter land speculation.

The measures hit housing market transactions at the end of last year in some cities, including Guang-zhou, Shanghai and Shenzhen. With many developers struggling to recycle money from apartment sales to finance new projects, analysts believe thousands could go bust.

Although his initial aim is to work on land bought by Gemdale, Mr Chen said he would also look to take over companies to obtain their land.

'With the macro control measures implemented by the authorities, smaller and less established, capital-starved developers are finding it difficult to obtain funding,' he said. 'There are opportunities out there.'

Mr Chen, former head of property research at UBS Global Asset Management, said some prospective homebuyers would probably hold back because of the government's cooling measures.

But with some eight million people moving away from the countryside each year, he was keen to invest in China's second-tier cities, which are transforming fast.

'I wouldn't recognise the back alleys around my old high school,' Mr Chen said of his home city, Xiamen in the south-east. 'It's been rebuilt three to five times. The pace of change is really fast back home.' - Reuters