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China Real Estate Growth and Investment Strategy
- 1. China – opportunity and strategy Dr Richard Barkham MRICS Grosvenor Group Research Director March 2013
- 2. Why China?
- 3. Asia / China much less impacted by the crisis 20 Real GDP, quarterly percent change, year-on-year 15 10 5 0 Asia -5 OECD China Source: Global Insight, Grosvenor Research 2012 2013Q1 2012Q1 2011Q1 2010Q1 2009Q1 2008Q1 2007Q1 2006Q1 2005Q1 2004Q1 2003Q1 2002Q1 2001Q1 2000Q1 1999Q1 1998Q1 1997Q1 1996Q1 1995Q1 -10
- 4. China is becoming the dominant country in global trade 30 Country share of world exports (%) 2010 25 2030 20 15 10 5 Source: Global Insight, Grosvenor Research, 2012 China India South Korea Singapore Hong Kong Japan Taiwan Thailand Malaysia Indonesia Vietnam Philippines Eurozone US 0
- 5. In 20 years China will equal the US as the world’s leading consumer nation 30,000 Nominal Private Consumption billions US$ 2010 25,000 2030 20,000 15,000 10,000 5,000 Source: Global Insight, Grosvenor Research, 2012 China India Japan Indonesia South Korea Taiwan Thailand Philippines Malaysia Vietnam Singapore Hong Kong US UK Germany France Italy Canada Spain Australia 0
- 6. China’s forecast GDP growth is high, by any standard 9 GDP growth 2012-2020 p.a. 8 7 6 5 4 3 2 1 Source: Global Insight, Grosvenor Research, 2012 India China Vietnam Indonesia Philippines Malaysia Thailand Singapore Hong Kong South Korea Taiwan Japan UK France Germany Spain Italy US 0
- 7. A new and huge middle class is emerging Global middle class Millions Household income of $10 to $100 dollars a day in PPP 3,500 3,000 2,500 Middle East & North Africa Sub-Saharan Africa 2,000 Asia Pacific Central and South America Europe 1,500 North America 1,000 500 0 2009 Source: Oxford Economics 2020
- 8. Urban growth creates many real estate opportunities Urban population (as a % of total) 100% 90% 2010 80% 2030 70% 60% 50% 40% 30% 20% 10% Source: UN, Grosvenor Research, 2012 US Western Europe South Korea Malaysia Philippines Japan Indonesia China Thailand India 0%
- 9. Source: UN, Grosvenor Research, 2012 Tokyo Delhi Mumbai Kolkata Shanghai Manila Beijing Shenzhen Guangzhou, Guangdong Chongqing New York Los Angeles Paris Chicago London Miami 2010 30,000 Philadelphia 35,000 Madrid 40,000 Toronto Dallas-Fort Worth A large number of sizeable markets Total population – 000’s people 2030 25,000 20,000 15,000 10,000 5,000 0
- 10. Property owner-occupation ratio in Asia / China is high 100 % of owner-occupied stock 90 80 70 60 50 40 30 20 10 Source: DTZ, Grosvenor Research, 2012 India Thailand Taiwan China Malaysia South Korea Singapore Japan Hong Kong US Australia UK Switzerland 0
- 11. Source: IHS Global Insight 2013Q1 2012Q1 2011Q1 2010Q1 2009Q1 2008Q1 2007Q1 2006Q1 2005Q1 2004Q1 2003Q1 2002Q1 2001Q1 2000Q1 1999Q1 1998Q1 1997Q1 1996Q1 1995Q1 1994Q1 1993Q1 1992Q1 1991Q1 1990Q1 1989Q1 1988Q1 1987Q1 1986Q1 1985Q1 1984Q1 1983Q1 16 1982Q1 1981Q1 1980Q1 Currency appreciation as well? 18 RMB/GBP 14 12 10 8 6 4 2 0
- 14. ABOUT GROSVENOR Grosvenor is a privately owned property group active in some of the world’s most dynamic cities. 300 acres covering Mayfair and Belgravia. Creating exceptional places for people to live, work and relax. Map to left: Grosvenor's Mayfair and Belgravia estate in Central London
- 15. ABOUT GROSVENOR One of the largest private real estate companies in the world World-wide staff of over 560 professionals with interests in 12 countries operating from 18 local offices We manage properties with a total value of £12.5bn (US$20bn) Figures as at 17 April 2012
- 16. A DIVERSIFIED PORTFOLIO 560 staff worldwide interests in 12 countries operating from 18 local offices We manage properties with a total value of £12.5bn (US$20bn) of which retail represents 43% ABOUT GROSVENOR
- 17. OUR HERITAGE The origins of Grosvenor are in the development and management of London’s largest private estate dating back over 300 years TIMELINE 1677: Mayfair and Belgravia came in to the Grosvenor Family 1720: Development began in Central London 1953: Started Americas business. First international acquisition 1956: First Joint Venture 1967: Started Australia business 1976: Launched our first Fund 1994: Started Asia business 1998: Started Continental Europe business 2005: Formally established Grosvenor Fund Management
- 18. Local presence and local partners key to success ■ Hong Kong, 25 September 2012 - Harvest Fund Management (“HFM”) and Grosvenor Fund Management (“GFM”) have joined forces to launch a dedicated real estate fund management business investing in Greater China to be led by Mr Rong Ren. ■ The business, named Harvest Real Estate Investments (“HREI”), will manage Greater China real estate strategies for investors globally, through the creation of both U.S. dollar denominated and Renminbi denominated funds. The business seeks to identify attractive real estate opportunities across multiple sectors within Greater China’s emerging real estate industry for both international investors and domestic investors in China. The business also plans to bring global real estate opportunities to domestic investors in China.
- 19. China risks
- 20. Source: brokers, Grosvenor Research, 2012 Shanghai Office Shanghai Retail Tokyo Office Hong Kong Office Calgary Office Sydney Office Washington DC Retail City - London Office San Francisco Office 7.0 Paris Office 8.0 Madrid Office 9.0 Munich Office LA Office Future supply Completions as % of stock 10.0 Historic Next five years 6.0 5.0 4.0 3.0 2.0 1.0 0.0
- 21. Source: JLL, Grosvenor Research, 2012 Vietnam China Tier 3 Cities India Tier 3 Cities India Tier 2 Cities India Tier 1 Cities China Tier 2 Cities South Korea Thailand Indonesia Philippines China Tier 1 Cities Taiwan Japan Malaysia Singapore Hong Kong Spain Germany Sweden France Australia UK US Lack of transparency 4.0 JLL Transparency index (the lowest the number, the more transparent the market) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
- 22. The competition is very tough ■ Local players; – Generally well capitalised, good local knowledge, poor asset management skills ■ Foreign players – Direct investors • Well capitalised, partner with the best local players (ADIA, GIC, CPP) – HK / Singaporean listed developers • Sophisticated, long term presence in China, big teams on the ground, can source land and build good product (Sung Hung Kai, Cheung Kong, New World Developers, Henderson Land, Capital Land, Swire)
- 23. The competition is very tough ■ Foreign players (Cont.) – US / Australian developers • Late comers, some difficulties in buying land (Tishman Speyer, Lend Lease), bring retail and asset management expertise – Japanese developers • Bring retail expertise, partner with Chinese developers, bring retail expertise, well capitalised – Investment bank backed funds • Some OK others came in at the wrong time, big and well capitalised, not always well run (MSREF, Whitehall, JP Morgan, Merrill Lynch)
- 24. The competition is very tough ■ US and European Fund managers – LIM, CBRE, Pramerica, Invesco, Grosvenor etc. ■ Regional fund mangers – MGPA, ARA (dragon Fund) – Some debt players
- 25. Taxation and profit repatriation can be difficult ■ Check out ‘China real estate investment handbook’ by Deloitte, 2012 ■ Situation is complex and ever changing ■ Presently it is difficult to dispose of an asset by any route and repatriate ■ Repatriation of income / dividend is easier
- 26. Three ways to repatriate – all are difficult ■ Option A – Disposition of the asset. – – ■ It will trigger one of the key taxes in China which is the land appreciation tax, which can range from 30-60% of the appreciation gain depending on the range of the gain. Option B – Disposition of the shares in the onshore company – – ■ This is the worst option in terms of tax efficiency. Reasonable in terms of tax efficiency A withholding tax on the gains need to paid when the money is repatriated offshore, typically 5-10% on the gain depending on the jurisdiction of the offshore company Option C – Disposition of the shares in the offshore company – This is the most ideal in terms of tax efficiency. – Since the transaction occurs offshore, taxes are very minimal – – However, the Chinese government announced Circular 698, which basically says for all offshore indirect transfers, the Chinese tax authorities will still treat it as a transfer onshore hence the deal can be subject taxes like a onshore Chinese company. Nowadays, many investors tries to use different ways to mitigate the risk of circular 698 which include structuring multi-layer Cayman holding companies
- 27. Why China?
- 28. Conclusions ■ Growth and diversification are compelling arguments; – Trend nominal GDP growth of 7.5% + 4% = 11.5% – Currency appreciation – Versus perpetual recession in Europe, tax and dollar weakness in the US – A global real estate portfolio is overweight China ■ Pension savings need a home – China has huge capacity to absorb investment ■ Taking Chinese capital out, is also a motivation for fund managers