PE Players See Opportunity in China’s Real Estate Credit Crunch

There has been an onslaught of bad news for China’s real estate market this year, but that appears to be good news for many private equity investors as tighter credit and slower sales provide opportunities that would not have been available in the boom years.

Speaking as part of a panel discussion at a conference in Shanghai last week a group of real estate fund investors – including managers from Metropolitan Real Estate Asia, CDH Investments, and BlackRock agreed that the current downturn, while scary for many investors, provided a window of opportunity for private equity firms that had previously struggled to find attractively priced deals during China’s frothier years for real estate trading.

Big Correction But Not a Crash

Although debt-level among China’s real estate developers has climbed significantly in recent years, it is still not at the critical levels that triggered crises in the US and western Europe in the previous decade, according to the real estate fund managers joining a panel at Private Equity Real Estate Forum held in Shanghai.

However, just because the situation is not critical, doesn’t mean it isn’t causing problems for local developers.

Commenting on the current difficulties facing the market, John So, Managing Director for Metropolitan Real Estate Asia said, “When we talk to some of our partners, what we hear is that, in previous downturns, the major players were basically exempt and could always get financing.”

However, So was still confident that the current difficulties represent a cyclical downturn, even if it is a steeper drop-off than the China market had experienced in recent times.

More Interesting Opportunities

Among the fund managers represented, however, the current downturn appeared to be a welcome event, as the absence of financing from the traditional banks and the slowdown in China’s shadow banking sector has created opportunities for foreign funds.

For private equity firm Blackrock, 2014’s slowdown is a much better market than 2013’s boom year. “China today actually presents a lot more interesting opportunities than 2013 when the market was perhaps a bit beyond our reach,” said Jeremy Choy, Head of Real Estate, Greater China & South East Asia for BlackRock.

In explaining the appeal of the current bull market, Choy elaborated that, “I think the main difference now is that pricing has become a lot more realistic and it’s becoming more similar to how you underwrite investments in more developed markets like Singapore or Japan.”

Tighter Credit and Slower Sales

In a report last month that downgraded the outlook for China’s real estate industry to “negative” credit rating agency Moody’s found the industry to be suffering from weaker sales growth this year, driven mainly by tighter onshore liquidity, increased mortgage rates, buyer expectations of further easing of property prices and slower GDP growth in China.

The real estate sector has also suffered from the tightening up of bank lending, as the government attempts to gently deflate the nation’s housing bubble.

The drop in sales, coupled by the disappearance of mainstream credit sources, appears to be opening a window for private equity firms, even if it isn’t yet providing the flow of distressed assets that many investors have been hoping for.