Real estate PEs need clear rules

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(China Daily) 08:38, September 16, 2013

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As China urbanizes, more domestic private equity real estate funds have emerged, but the absence of strong institutional investors and the lack of a regulatory framework pose challenges to their development, the Zero2IPO Group and China Minsheng Banking Co said in a report on Friday.

As of the end of 2012, the nation's urban population was 711.8 million, accounting for 52.6 percent of the population - 1.3 percentage points higher than in 2011, government figures show.

As of that point, there were 141 Chinese PE real estate fund management companies, along with 31 foreign ones and six joint ventures.

The report said that 94 PE real estate funds that are investable in the Chinese mainland market finished financing in 2012 and the amount totaled $5.96 billion, showing that Chinese PE real estate investment was becoming popular.

The funds' founders were property developers, independent fund managers or professional PE firms.

But Chinese PE real estate funds face the dual challenges of a lack of institutional investors and the absence of relevant laws and regulations.

The main institutional investors in the Chinese property market are trust companies and foreign industry-based investment funds. No securities firms, insurance companies or social security funds in China may directly participate in property investment.

That's a marked difference from the PE real estate market in the United States, where insurers and pension funds are the main investors.

The major investors in Chinese PE real estate funds are affluent households and individuals, but they invest relatively small amounts and they aren't sophisticated long-term investors.

Thus, cultivating institutional investors in China is urgent. Enterprise annuity funds pension funds should be allowed into the market, said Ni Zhengdong, chairman of the Zero2IPO Group.

Ni added that the return on investment of real estate investment funds in China in the first half of 2013 was as high as 19.6 percent.

No law in China has authorized PE real estate investment funds, so it is difficult for them to operate.

The report said that the scale of PE real estate funds in China has become large, and it urged regulators to enact related laws and rules soon.