Warburg Pincus Sets Up $1B JV for China Real Estate Special Situations

Warburg Pincus announced today that it has formed a $1 billion joint venture with a Beijing-based asset management firm for investing in distressed and “special situations” real estate opportunities in mainland China.

The US private equity firm revealed the latest branch in its network of China real estate businesses in a joint statement with Hande Group, a 23-year-old privately held asset management and investment firm run by attorney Liu Xu, with the goal of building a portfolio of $5 billion in assets within three years.

The vulture investment initiative comes less than three weeks after Warburg Pincus unveiled a new structured debt effort, to add to the more than $4 billion it has already invested in more than 20 mainland real estate ventures, including warehouse developer ESR, rental apartment startups Nova, Mofang and Ziroom, as well as numerous other developers, operators and asset managers.

China’s Bad Debts Becoming Good Business

“The economic growth and the urban renewal theme have created enormous opportunities for asset acquisitions and consolidation, as well as long-term holding of a portfolio of high-quality real estate assets,” Joseph Gagnon, managing director and head of Asia real estate for Warburg Pincus said in a statement. “Through the strategic partnership with Hande, we are also trying to explore an investment path suitable for non-performing real estate assets in China.”

Warburg Pincus’ venture into special situations, which include distressed assets, as well as other assets where sellers may have extra motivation to close a deal, comes as China’s slowing economic growth and tighter lending conditions are creating a new bumper crop of bad loans, which is already piquing the interest of the PE firm’s friends and competitors.

A recent PwC report found that Blackstone and Goldman Sachs, among other foreign investors have puchased 20 portfolios of bad loans in China worth approximately $1.5 billion in the last year and a half.

Setting Up Special Situations Funds in China

“Through acquiring poorly managed or underutilized properties in central areas of core cities, and reconstructing or renovating those assets, we could create value through improved operations and prudent management,” Gagnon pointed out. Based on this, the Warburg-Hande JV says it aims to become one of the leading distressed real estate investor and owners in China.

The partners said that they would potentially look for ways to raise third party capital to help pursue these special situations through “real estate focused special situation funds” with the new company acting as both the fund and property managers for these vehicles.

The strategy has echoes of efforts by Blackstone, which is now expecting to raise $18 billion for a distressed real estate fund targetting opportunities globally. Plans for this new fund follow the success of a $15 billion distressed real estate fund that Blackstone closed on in 2015.

Finding Mainland Debt Partners

Warburg Pincus’ partner in the new venture, Hande Group, is a privately held firm which redirected its efforts to distressed real estate investment and urban renewal last year, and has since acquired 12 projects with a total asset valuation of over RMB 5 billion, according to the statement.

In late November Warburg Pincus announced a new partnership with Greg Wells, former Asia head of real estate private equity firm Forum Partners, to focus on structured debt investment opportunities in Asia, primarily in China.

As with special situations, China’s economic slowdown and tighter bank lending conditions are creating greater demand for alternative debt financing.