What are your assets under management and what is your investor profile?
We manage $850 million across two funds. Both funds invest in real estate, including residential, office, malls and serviced apartments in the Greater China region.
Our first fund is a $350 million five-year global fund. It closed in early 2007. We raised $100 million from China Resources, which is our sponsor and anchor investor, and the balance from institutional investors in Europe and Asia. Liberty International, one of the UKÆs largest retail developers and investors, invested into the fund and is a co-sponsor.
Our second fund is a $500 million ShariÆah-compliant fund. China Resources invested $50 million and Al-Rajhi Investment Corp is a co-sponsor.
What are your investment parameters?
Our minimum investment size is around $30 million per deal though this has increased to around $100 million for some deals. WeÆve completed nine investments, seven from the global fund and two from the ShariÆah-compliant fund.
How would you characterise your investment model?
We see three models in the real estate sector. The first is where an investor commits only money to a project and shares in the returns, i.e. the financial investing model. This is a challenging model to succeed with in a market like China where the investor could be the last to know when things start going wrong.
The second is where investors do everything themselves like developers, including raising money, conducting development works, seeking all governmental approvals and thus retain 100% of the upside. This creates a capacity constraint as the investor cannot spread himself across too many projects.
We adopt a hybrid model, where we invest capital but are also involved in the actual development and asset management. We see ourselves as partners, not only investors. We add value and thus drive decisions.
How do you source investments?
China Resources, which has 12 years experience in development, is our parent and this is an asset for us. We enjoy government support. Last year we had the luxury to select nine deals out of 130 that we evaluated. My team of 31 people knows the market well and keeps in close touch with developments. In addition to this, we have the benefits of an in-house asset and construction management team. We believe we have the strongest pipeline in the industry.
How do you decide where to deploy resources?
We are very selective. Our criteria for selection are beyond financial û 90% of the deals we rejected were not rejected for financial reasons. We have the expertise to spot the non-commercial issues which could prevent a project from succeeding.
Can you elaborate a little on such issues?
For example, inflation in ChinaÆs construction sector was estimated at 29% last year due to price increases in inputs like steel bars. This has destroyed the IRR [internal rate of return] on many projects for investors. We have been able to contain our increase over the same period to single digits; we were early to notice the increase because of our presence on the ground and we entered contracts and locked in prices of key inputs.
How will you exit investments? What is your target IRR?
The residential projects are self-liquidating as they are pre-sold. The non-residential projects we could explore exiting through financial products or selling the projects to other investors. We are targeting an IRR of 20%.
What is your outlook for real estate in China?
We believe over a five- to six-year horizon, real estate in China will outperform the rest of the world. The only other market which will deliver similar returns is India.
A number of players have been attracted by the opportunity to invest in real estate in China. What differentiates you from the rest?
We have invested time and resources to create asset construction capabilities, which gives us a competitive advantage over most investors. Our business model is to actively add value to our investments. We also commissioned a US company to develop a proprietary portfolio model to help us track on a real time basis how our investments and assets are performing. Sales are extremely critical to the IRR calculation thus itÆs important for us to be on top of them.
Can you explain how the ShariÆah fund operates?
To ensure we are ShariÆah compliant, we have clear documentation on what we can and cannot invest in. We also have an advisory team of three ShariÆah scholars. The entire process of the investment has to be ShariÆah compliant. We are one of the few managers to be managing a ShariÆah fund dedicated to real estate in China.
What are the challenges with the product?
Structuring ShariÆah investments in a highly regulated market like China is challenging as there is little manoeuvring space within the regulatory framework. Such funds may find it easier to invest in economies like the US and UK where there is less regulation.
What are your growth plans?
We are currently formulating our growth strategy. Obvious choices are we could either increase our assets under management or raise dedicated end-use funds. But we intend to stay a boutique firm, i.e. stay at a size where our unique selling proposition of hands-on involvement in all our projects is still manageable. I think a few billion dollars would be our ceiling.
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