The real estate opportunity in China

The Chinese government recently agreed to allow domestic insurance companies to invest in the country’s real estate, one of several recent regulatory and enforcement changes that have increased investment opportunities in China. However, while such moves have increased China’s attractiveness to foreign asset managers, those looking to establish a presence by setting up a joint venture private equity or real estate fund should act quickly.

The new regulations could lead to tens of billions of dollars being poured into China’s high-end property market. Although no details have been released yet about investment limits, the government in 2006 allowed Chinese insurers to invest up to 10 percent of assets in equity and 10 percent in equity investment funds.

In the last several years some of the world’s top private equity firms such as Bain, TPG and Carlyle have invested in Chinese companies, while the Blackstone Group and First Eastern Investment Group have become the first international private equity firms to set up RMB-denominated funds in Shanghai. The city has been increasing incentives as it vies with Beijing, Shenzhen, Tianjin, Hangzhou and Hong Kong to become China’s private equity hub.

Fund products are also being introduced to the market at a faster rate since the China Securities Regulatory Commission (CSRC) began speeding up its new product approval process, with 97 new funds launched this year as of late August. It is also believed that the CSRC will relax its current restriction of two new funds per year per fund manager, while new rules will also provide for more opportunities for performance-based fees for mutual fund managers.

Foreign asset managers can currently establish a presence in China by setting up a foreign asset management joint venture, although they may own no more than 49 percent of the equity. However, according to a recent report by law firm Dechert, there are several things that foreign managers should keep in mind before making a decision.

For one, they have to find a suitable local partner, and this is becoming more difficult as some of the most well known have already entered into joint ventures with foreign asset managers. Each qualified Chinese bank and domestic fund management company can only have one joint venture in which it can own a controlling stake.

New entrants may instead need to partner with smaller players like regional banks and securities firms. But as there already are more than 30 such joint ventures in China, the firm says foreign managers should not delay in finding a suitable local partner as the pool is drying up quickly.

Second, the negotiating phase can be difficult as local partners often have different corporate governance structures, and can demand technology and expertise that a foreign manager may not want to part with. Finally, with commercial banks and securities companies beginning to favour distribution of their own proprietary funds, joint ventures need to develop new distribution channels for products.

Dechert also recommends finding a partner with strong local brand recognition, as this will help the approval process with the CSRC, and being able to clearly describe the value the joint venture would add to the Chinese fund management industry.