Macquarie's China shopping malls to go into wholesale fund

Decision rules out listing of these properties as REIT in medium-term.
Macquarie Bank has decided to set up a wholesale fund that will be backed by nine shopping malls in China that it bought together with other investors in July 2005 and will invite new institutional investors to participate.

Macquarie had earlier said it was looking at different options of what to do with these assets - which the investor syndicate acquired from Wanda Group, a Dalian-based property developer. Those options included the possibility of setting up a real estate investment trust (REIT) for a listing in Hong Kong, but the decision to go with a wholesale fund instead suggests a listing will now likely not happen for another 1.5 to 2 years.

The investors ôwonÆt be looking for a listing in the short-term, but they are quite excited about the potential of that as a liquidity-event in the medium term,ö said James Hodgkinson, co-head of MacquarieÆs property investment management group.

ôThe advantage of the wholesale route is that we will be able to facilitate the funding of further acquisitions with more certainty than were we to list in the market,ö he told FinanceAsia in a telephone interview. ôWe will also be able to build a portfolio with more critical mass which will potentially be more attractive to list after a period of time when there is a trading history for the assets.ö

According to Macquarie, there it ôhuge demandö for Asian real estate from the wholesale sector in particular, while the investment opportunities for those wanting exposure to a geographically diversified portfolio of core Chinese real estate are few.

The fund is expected to be set up within a few months and professional investors such as pension funds will be given the possibility to invest in the vehicle to provide funding for subsequent acquisitions. In connection with that, some of the original six investors (not counting Macquarie and Wanda Group) are expected to exit.

The size of the upcoming fundraising is still confidential, but based on the acquisition possibilities it could be substantial.

ôAt the moment we have a portfolio of approximately $400 million to $500 million that was basically drawn-down (last year). We also have access to another pipeline of properties which would double the size of that portfolio,ö Hodgkinson said.

MacquarieÆs initial investment consisted of $65 million in cash and $38 million of senior debt, which represented about 24% of the total equity raised.

The existing nine shopping malls are located in what Maquarie describes as ôprime locationsö in ChinaÆs coastal provinces. The cities, which include Nanjin, Dalian and Wuhan, all have populations of at least 5.5 million people and growing disposable incomes.

The malls have also been completed quite recently and are well-leased with Wal-Mart and Parkson Retail û both well-recognized department store brands in China û as the key tenants. The occupants also include the likes of KFC and MacDonaldÆs.

The potential future acquisitions will be similar type properties, which are currently under development by Wanda Group.

ôThe strategy of the fund is to make core real estate investments, and by core I mean properties that have been built and also mainly leased to the market. We don't want to expose investors to development risks or extraordinary leasing risks,ö Hodgkinson said.

The rental profile of retail properties is typically less volatile than for office properties with lower peaks and troughs. However, the fundamentals of these particular properties in terms of the catchment area and the disposable income growth within that area do bode well for further rental growth beyond the fundamentals of the booming Chinese economy, he noted without specifying any specific return targets.

On top of that, the total return from this portfolio of assets can be expected to reflect a premium for investing in China as opposed to in more established markets.

Macquarie Bank currently has more than A$10 billion ($7.91 billion) in property assets under management through six listed and 10 unlisted property trusts and wholesale development funds globally.

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