CHINA REAL ESTATE INVESTMENT: PROFIT AND PITFALLS

 

Contents

 

 

Foreword

 

Chapter 01    China Property: Return on vs. Return of Investment

By John F. Tsui, Managing Principal, Peninsula House, LLC; Adjunct Visiting Professor, Columbia University; and Visiting Lecturer, Tsinghua University

  • Chinese economic growth – another leap forward
    • Property development in China – an overview
  • Potential pitfalls
  • Chinese land use rights – build it or lose it
  • Residential real estate development and local joint ventures
    • Joint ventures with local developers
  • Real estate investment trusts
  • Private to public: pre-IPO private equity investment in Chinese property companies
    • Convertible bonds
  • Top down vs. bottom up: valuation methodologies
    • Buy high and sell low?
    • The global land bubble
    • Land residual value °V the top-down approach
    • The bottom-up approach
    • Calculating fair value
  • Sale leaseback: how to monetise Chinese corporate-owned real estate
  • Tapping offshore capital markets: black hole or goldmine?
    • Drawbacks of listing for a property company
  • Offshore and onshore leveraged mortgage financing
    • China onshore bank loan facility
    • Onshore/offshore acquisition loan facility
  • Mortgage lending and borrowing
  • Renminbi-denominated property funds
  • Zero energy green buildings

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Chapter 02    Opportunity in Crisis

By Richard Middleton, Managing Director, Greater China, Cushman & Wakefield

  • Introduction
  • Impacts on the real estate market
    • Low sales volumes
  • Where are the opportunities in this crisis?
  • The office property market
    • Office investment opportunities
  • The residential property market
    • Residential investment opportunities
  • The retail property market
    • Retail investment opportunities
  • The hotel market
    • Hotel opportunities
  • The industrial property market
    • Industrial investment opportunities

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Chapter 03    Structuring Private Equity Investments in China Real Estate: An Investor’s Perspective

By Dennis Yow, Senior Vice President, and Mark Ho, Assistant Vice President, Pacific Star Group

  • Overview of the real estate private equity (REPE) sector in China
    • Long-term growth drivers underpinning the mainland real estate sector
    • Improving transparency
    • Fragmented industry with numerous growth opportunities
  • Emerging opportunities
    • Relatively cheap(er) asset valuations
    • Immense appetite for funding
    • Prospects of less stringent restrictions on foreign investment
  • Structuring of REPE deals
    • Investment holding structure
    • Capital structure
    • Investment terms
    • Coupon
    • Convertibility
    • Redemption vs. conversion
    • Mezzanine risk-return characteristics
  • Covenants and shareholder rights
  • Other considerations
    • Asset valuation
    • Qualitative factors
    • Managing the exit

Case study: Shui On Land – combining private equity and real estate investing

  • Background
  • Investment structure
  • Valuation issue
  • Strategic partnership
  • Exit
  • Looking ahead

 

Chapter 04    Restructuring and Recapitalisation of Chinese Property Companies

By Russell Platt, Managing Director and Chief Executive Officer, Forum Partners

  • General background
  • Why is restructuring necessary for investments in the Chinese real estate sector?
  • Is restructuring the only solution?
  • How to prepare for a potential restructuring process?
  • When restructuring comes, what to ask for and what to consider?
  • Case study: Chinese real estate company restructuring
  • What to consider for future offshore investments in the Chinese real estate sector?

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Chapter 05    Distressed Investments in China: A Foreign Investor Perspective

By Benjamin Fanger, Managing Director, Shoreline Capital Management Ltd

  • Overview
  • Historical loan issuances – too hot
  • Capital restraints – too cold
  • Efficient capital markets – just right
  • Valuing distressed assets
    • Typical valuation
    • Experience-based valuation
    • Geographic and policy considerations
  • Structuring distressed investments
    • Direct offshore acquisition of NPLs
    • Issues with taxation
    • Special situations
  • Exiting distressed assets
    • Best case exit – borrower/sponsor adherence to contract
    • Most common exit – mix of pressure and negotiation
    • Last resort – court attachment of assets and auction
    • Difficulties in asset liquidation
  • Distressed opportunities going forward

 

Chapter 06    Tapping Global Capital Markets for Chinese Property Entities

By Gregory Wang, Managing Director, Co-Head of China Investment Banking, Collins Stewart LLC

  • Reverse mergers – a new alternative to IPOs?
  • Restructuring to go offshore – common structures
  • PIPEs – the financing solution for reverse mergers
  • Case study: China Housing & Land Development Inc.

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Chapter 07    China Property Investments: Legal Landmines and Covenants to Watch For

By David Meredith, Partner, Weil, Gotshal & Manges

  • Overview of China property investment market
  • Structuring at a glance
  • The market’s choice – investment grade or high-yield
  • The high-yield market
  • Principal covenants at a glance
  • Liability management, deal management and the private market
  • Convertible debt
  • Know the convertibles code
  • Strategic review under the bankruptcy law

 

Chapter 08    Tier 2 Cities – The Next Goldmine

By Hei-Ming Chen, Chief Executive, and Esther Zhang, Head of Research, Kailong REI Project Investment Consulting (Shanghai) Co

  • Introduction
  • Literature review
    • Comparative analysis of the Top 100 Chinese cities
    • Emerging city winners: the China 30
    • Top commercial cities in mainland China
  • Analytical framework
    • Overview
    • Methodology
    • Limitations
  • Supply factors
    • Land acquired and land developed
    • Real estate development
  • Demand factors
    • Population
    • Economy
    • Household wealth
    • Property market conditions
    • Policy
  • Conclusion

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Chapter 09    Investing in Chinese Shopping Malls

By Kelvin Ng, CEO and Founder of Synergistic Real Estate and Network, Singapore

  • Sharing China’s mall development and investment experience
  • Common mistakes by mall developers in China
    • Short-term focus and lack of experience
    • Mistakes at the research, planning and design stages
    • Mistakes at the leasing stage
    • Mistakes at the management stage
  • Developing profitable malls
    • Location
    • Market positioning
    • Design and layout
    • Financial viability
    • Leasing and marketing issues
    • Functionality
    • Successful tenants
    • Happy shoppers
  • Summary

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Chapter 10 Structuring Budget Hotel Investments

By Andrew Yao, Chairman, Van Shung Chong Holding Limited

  • The budget hotel industry in China
  • Budget hotel operation models
    • Renovate/lease/manage
    • Renovate and own (own management or contract out)
    • Franchise
  • Growth drivers
    • Leisure travel
    • Business travel
  • Risk factors and constraints facing the industry
  • Conclusion

 

Chapter 11    Investing in Serviced Apartments in China

By Elaine Young, Chief Executive Officer, Shama

  • Why serviced apartments?
  • What is a serviced apartment?
  • The benefits of a serviced apartment over a hotel
    • Lower capital expenditure
    • Enhance mixed-use developments
    • Fewer staff
    • Few public areas
    • Refurbishment costs
    • Provide a lifestyle
    • Tenants’ activities
  • Which city?
    • Increase in population
    • Land sales
    • Tier 1 cities
    • Tier 2 and Tier 3 cities
  • Foreign direct investment
    • Investment structure
    • Land use rights
    • Funding requirements
    • Local joint ventures
  • Challenges
    • Zoning and licences
    • Lack of transparency
    • Taxation
    • Business tax
    • Deed tax
    • Urban real estate tax
    • Land value appreciation tax
    • Stamp duty
    • Enterprise income tax
  • Local operator vs. international brand
  • Case study: Shama Luxe Xintiandi, Shanghai
  • Conclusion

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Appendix 01 Offshore/onshore bank loan facility – terms and conditions

Appendix 02 Convertible bond notes – terms and conditions

 

LIST OF TABLES AND FIGURES


Table 2.1: Major listed Chinese developers
Table 2.2: Landmark office investment transactions, 2008
Table 2.3: Gross yields for office property, 2008
Table 2.4: Cities with the most significant price decreases, 2008
Table 2.5: Major residential investments, 2008
Table 2.6: Gross yields for residential property, 2008
Table 2.7: Major retail investments, 2008
Table 2.8: Retail investment gross yields, 2008
Table 2.9: Hotel transactions, 2008
Table 2.10: Industrial investment gross yields, 2008

Table 4.1: Potential factors leading to need for restructuring
Table 4.2: Common terms asked for by investors in a restructuring process
Table 4.3: Selected terms to pursue in new investments

Table 6.1: Selected publicly listed Chinese real estate companies in the US
Table 6.2: Pros and cons of a reverse merger
Table 6.3: Examples of company restructuring

Table 8.1: Top China cities by location, 2007
Table 8.2: Major policy relaxations in Chinese cities
Table 8.3: Summary and comparison of property supply and demand conditions by Tier 2 city, 2008

Table 9.1: Retailer survey results on sales turnover per sq m
Table 9.2: Trade mix and value proposition for the Qingdao mall development

Table 10.1: Hotel industry market segment definitions
Table 10.2: Average RevPAR, 2005°V07 (Rmb)
Table 10.3: Non real estate property FIEs
Table 10.4: Real estate property FIEs

Table 11.1: Land value appreciation tax

Figure 1.1: Urban population growth
Figure 1.2: Urban population as a % of total population
Figure 1.3: Scarcity of premier grade properties
Figure 1.4: Typical REIT structure
Figure 1.5: REITs and the real estate developer lifecycle
Figure 1.6: Advantages of REIT sponsorship
Figure 1.7: Illustrative structure of a convertible bond
Figure 1.8: Illustrative structure of an equity bond
Figure 1.9: Chinese companies listed outside China by number and market cap, 2008
Figure 1.10: Acquisition loan capital structure, pre- and post-crisis

Figure 2.1: House price growth, selected cities, by month, 2008 (%)
Figure 2.2: Residential floor space sold in Beijing and Shanghai, 2007, 2008 (sq m °•000)
Figure 2.3: Loan interest rates, Apr 2006°VOct 08 (%)
Figure 2.4: Business Confidence Index, Mar 2007°VDec 08
Figure 2.5: Major chain store sales as % of total retail sales, 1999°V2010(f)
Figure 2.6: Tourism in China, 2000°V2015
Figure 2.7: Number of star rated hotels in China, 2000°V2015(f)

Figure 3.1: Real estate equities, 2007°V08
Figure 3.2: Withdrawn or postponed mainland-domiciled IPOs, 2006°V08 (US$m)
Figure 3.3: Investment holding structure
Figure 3.4: Capital structure
Figure 3.5: Shui On investment structure
Figure 3.6: Two examples of Pacific Star°¶s investment in China

Figure 4.1: Property prices, 1996°V2008 (Rmb/sq m)
Figure 4.2: Land acquisition, 1996°V2008 (m sq m)
Figure 4.3: Typical structure for offshore pre-IPO investments in PRC companies

Figure 5.1: NPL supply vs. total loans, 2004°V08
Figure 5.2: Growth in new bank lending, 2004°V08 (%)

Figure 6.1: CHLN stock price, 2006°V08

Figure 8.1: Framework to analyse Chinese cities
Figure 8.2: Acquisition of land by cities, 2004°V08
Figure 8.3: Real estate development investment, 2006°V08
Figure 8.4: Real estate development as % of GDP, 2008
Figure 8.5: Housing starts, 2006°V08
Figure 8.6: Residential property under construction, 2006°V08
Figure 8.7: Population trends, 2000°V07
Figure 8.8: Economy size and growth, 2006°V08
Figure 8.9: Indicators of cities°¶ openness
Figure 8.10: Household wealth indicators, 2005°V07
Figure 8.11: Residential property market indicators, 2006°V08

Figure 9.1: Eight factors determining success of a shopping mall
Figure 9.2: The Huafeng Century Plaza, Shenyang
Figure 9.3: Brand synergy
Figure 9.4: Retail development process milestones

Figure 10.1: Facilities/hardware required by budget hotel customers
Figure 10.2: Customer breakdown by gender, age, income level and occupation
Figure 10.3: Budget hotel distribution by region, 2007 (%)
Figure 10.4: Market share of major operators, 2007 (%)
Figure 10.5: Average room prices, 2006, 2007 (Rmb)
Figure 10.6: Average occupancy rates, 2006, 2007 (%)
Figure 10.7: Formation of joint venture
Figure 10.8: Taxes on hotel operations and distributions
Figure 10.9: Tax implications for JV and consortium investors
Figure 10.10: Tax commentary on future expansion plans

Figure 11.1: Inflows of foreign direct investment, 1993°V2008 (US$m)
Figure 11.2: Serviced apartments vs. hotels and residential units

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