Last month we had our sixth annual Editorial Advisory Board meeting for The Institutional Real Estate Letter – Asia Pacific in Bangkok. As always, we had very interesting discussions, and I will be writing about them in an upcoming issue of our Asia Pacific publication.
There was a high degree of confidence expressed during the discussions: Confidence in the general economic environment, in interest rates staying low, and in China continuing its “long march” up, up and up.
China is one of my favorite subjects, and I try to follow news and research on China regularly. It is not only the members of our Editorial Advisory Board who expressed a high level of confidence in China. Recently, there have been numerous reports on U.S. blue-chip asset management companies raising funds and investing in China in a big way. KKR, Blackstone, Carlyle and even Sam Zell’s Equity International all raised huge amounts of capital to invest in China, with some of this capital having been invested already.
I may be jumping the gun, but the current situation reminds me of the pre-crisis times when White Hall, MSREIF and several other mega-funds were piling into Chinese real estate at the top of the market with very tragic results for many of their investors.
It always makes me nervous to see such frenzied investment activity by foreign investors while locals are starting to exit the market. As I mentioned in one of my previous posts, prominent Chinese developers have started seeking projects in the United States and other markets outside of their home turf. Although this can be explained as a natural progression of successful firms expanding overseas, how would you interpret recent transactions by Li Ka-Shing, who is often compared to Warren Buffett and Sam Zell thanks to his documented ability to predict markets’ tops and bottoms? He has started exiting his positions in China and has recently sold his holdings in a shopping mall in Guangzhou and an office building in Shanghai. Not a big deal you may argue, just two transactions. But these transactions coincided with the weakening of the rental market in Shanghai and other cities. Such trophy properties as Plaza 66 and Wheelock Square in Shanghai have started lowering their rents, and office owners started offering huge incentives to leasing firms to attract tenants to their buildings. Is this a temporary aberration or the beginning of a new trend? We all know what happens when property prices continue going up while rents start declining.
What is your take on the situation in China? Do you think we should brush off recent signs of weakness in the office market and look at Li Ka-Shing’s transactions as simple profit taking, or is it similar to Sam Zell selling his office portfolio at the peak of the market right before its crash?
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Alex Eidlin is managing director – Asia Pacific with Institutional Real Estate, Inc.
