Singaporean sovereign wealth fund GIC is making its first foray into China’s rental housing market by establishing a joint venture with Warburg Pincus-backed rental housing startup Nova. According to a joint announcement today by GIC, Nova and Warburg Pincus, the new entity could invest up to RMB 4.3 billion ($675 million) in acquiring, renovating and operating “quality rental apartment projects” in core locations in China’s first tier cities.
As part of the agreement, the $300 billion sovereign fund is also acquiring a minority stake Nova, the three companies indicated. The transaction is expected to be completed in the third quarter of this year.
According to sources familiar with the deal who spoke with Mingtiandi on condition of anonymity, the stake acquisition, which would make GIC the third-largest investor in Nova after its co-founders, could bring the Singaporean fund’s investment in Nova and its projects to more than $1 billion.
GIC Makes Biggest Bet Yet on China’s Multi-Family Sector
“As a long-term value investor, we are attracted by the promising outlook of China’s fast-growing rental apartment sector, with demand driven by changing demographic trends and cultural shifts towards city-living,” said Lee Kok Sun, Chief Investment Officer of GIC Real Estate in the statement. “There is a large and growing population of renters within our target income group, with a limited supply of quality institutionally-owned and professionally-managed projects.”
The joint venture is understood to give the Singaporean fund a first option on new rental housing projects being undertaken by Nova that fit pre-set guidelines established by the parties involved. By purchasing a stake in Nova’s core business, GIC would get further visibility into the company’s overall business of acquiring, renovating and operating rental apartments for China’s increasingly mobile professional class, as well as sharing in the returns from the company’s existing and future projects.
The deal with three-year-old Nova would reportedly make GIC the biggest investor yet in China’s multi-family sector, a market which has become a target of government planners, major developers and international investors as housing prices in major cities have quickly climbed out of reach for all but the country’s richest citizens.
Grabbing a Piece of Trillion Dollar Asset Class
GIC and its new partners are joining a surge of interest in developing and operating rental apartments in China, a country where an estimated 90 percent of the population currently own their own home, but rising prices have pushed both Shanghai and Beijing into the ranks of the world’s least affordable cities according to the Bloomberg Global City Housing Affordability Index.
In April US investment bank Morgan Stanley jumped on the rental housing bandwagon by joining a $100 million fundraising round for rental apartment operator Qingke, and in January, the real estate arm of Chinese financial giant Ping An partnered with mainland developer Landsea Green Properties to set up a $1.5 billion fund to support the development of rental apartment projects in major Chinese cities.
In the US, where nearly 37 percent of households live in rental housing, the multi-family sector is valued in the trillions of dollars, and institutional investors are rushing to join what could rapidly become a $1 trillion asset class in China, according to an industry analyst who spoke with Mingtiandi.
“As one of the most active and experienced private equity investor in China’s real estate sector, we are a firm believer in the long-term apartment rental industry driven by continued urbanization and demand for high-quality rental properties in China,” Joseph Gagnon, Warburg Pincus’ Asia real estate head said in the statement today.
Nova Aims to Lead China’s Multi-Family Market
“Our vision is to become a leading investment and asset management platform in the urban renewal and rental apartment sector, to deliver the best-in-class investment, renovation and operation services,” said Nova co-founder Qian Wang in the same statement.
Company insiders say that Nova achieves a meaningfully higher rental from its projects than is typically achieved by commodity apartments. In 2016 Nova became the second-largest shareholder in Warburg Pincus’ Yicheng Asset Management affiliate, which operates a chain of serviced apartment complexes under the “Base” brand in China’s first tier cities.
Nova was founded in Shanghai in 2015 by Wang and Warburg Pincus, with the US private equity giant initially committing $170 million to the project. Warburg, which also co-founded warehouse developer e-Shang (now part of e-Shang Redwood) in 2011, injected another $183 million into Nova last September.
The rental housing startup, which follows a strategy of acquiring and renovating aging buildings in China’s urban centres rather than building new housing, secured an additional RMB 20 billion ($3.2 billion) in funding in March when it set up an investment fund with mainland developer Sunac China aimed at acquiring and redeveloping commercial properties, including office buildings, hotels and shopping centres, in China’s first and second-tier cities.
For its joint venture with GIC, Nova will be focusing on residential projects, although the company also redevelops properties for commercial use.
Government Ramps Up Support
Developers such as Nova and its competitors are capitalising not only on demographic shifts in China, but also on central government support for the development of the long-term rental housing market as an alternative to increasingly unaffordable home purchases.
In March, China’s Minister of Housing and Urban-Rural Development Wang Menghui said the government would implement more measures to stabilize housing prices and boost the rental apartment markets. “We will encourage the rental market and speed up the transformation of shanty towns,” Wang commented on the sidelines in the 13th National People’s Congress.
The government is also speeding up the rental housing development by encouraging the securitisation of rental housing projects. In late April, the China Securities Regulatory Commission (CSRC) and the Ministry of Housing and Urban-Rural Development said they would “promote the securitisation of rental housing assets, which will help to revitalise the stock of rental housing, increase the efficiency of capital use, and promote the development of the rental housing market.