• 1 André Orléan, Le pouvoir de la finance (The power of finance), Paris, Odile Jacob, 1999; Robert Boy (...)
• 2 Michel Aglietta, “New Trends in Corporate Governance: The Prominent Role of the Long Run In- vestor (...)
• 3 Koichi Mera, Bertrand Renaud (eds.), Asia’s Financial Crisis and the Role of Real Estate, New York, (...)
• 4 Eddie C.M. Hui, Yue Shen, “Housing Price Bubbles in Hong Kong, Beijing and Shanghai: A Compar- ativ (...)

1Over the last two decades, property markets have undergone a process of “financialisation” brought about by the global expansion of market finance. This change is characteristic of the new regime of capital accumulation that emerged in the 1980s, establishing the predominance of finance over industry1 and favouring the rise in power of institutional investors.2 A crucial stage in this process was the deregulation of the financial markets, the effects of which proved spectacular in Asia, namely the explosion of a gigantic “property bubble” in Japan, followed by the triggering of the Asian crisis on the Thai property markets in 1997.3 Up until now, China has been spared systemic crises, as its resilience in the face of the subprime mortgage debacle shows. Nonetheless, it has not escaped speculative mechanisms in the property market, or even bubbles,4 which encourage it to exercise caution in the face of the penetration of foreign financial capital. The penetration of such capital has admittedly been timid with regard to the deployment of multinationals in industry, but has been steadily increasing for the last ten years or so.

• 5 I would mention in particular the work of the following authors: Thierry Theurillat, José Corpataux (...)
• 6 Thierry Theurillat “La ville négociée, entre financiarisation et durabilité” (The negotiated city, (...)

3This article falls within the scope of recent research in the field of financial geography that seeks to shed light on several distinctive aspects of financialised investment channels. Upstream of the channel, research has focused on the discriminatory nature of the risk-return coupling and time horizon in the spatial and sectoral strategies of investment funds.5 Downstream of the channel, the accent is on the role of mediator assumed by certain local urban operators in the anchorage of transnational capital.6 Basing our observations on semi-directed interviews conducted with property operators in Hong Kong and Guangzhou, supplemented by exploiting the plentiful “grey literature” taken from the official sites of these companies, I show that differences in the investment strategies of the funds are accentuated by a split in the geographical origin of the sponsor groups. I also take account of the role of public policies in the full-scale urban restructuring that foreign financial investment allows as well as of the many changes resulting from this in urban life.

• 7 Gordon Clark, Pension Fund Capitalism, Oxford, Oxford University Press, 2000, and Gordon Clark, Eur (...)
• 8 Morag Torrance, “Forging Glocal Governance? Urban Infrastructures as Networked Financial Products,” (...)
• 9 Joseph Ooi, Graham Newell, Sing Tien Foo, “The Growth of REITs Markets in Asia,” Journal of Real Es (...)
• 10 Graham Newell, Woo Peng, “The Impact of the Global Financial Crisis on A-REIT Risk,” Pacific Rim Pr (...)
• 11 Michael Quek, Seow Eng Ong, “Securitising China Real Estate: A Tale of Two China-centric REITs,” Jo (...)

4The penetration of finance capital into the property sector is a response to the need felt by institutional investors, notably the pension funds of industrialised countries, to diversify their investments to cope with the increased demand for savings and retirement services emanating from ageing societies.7 They generally allocate between 5 and 10% of their capital to property investment.8 This presents two main advantages: on the one hand, its performance is often only weakly correlated with that of the other categories of assets, which limits the overall risk to which institutional investors expose themselves in their portfolios, and on the other, it offers attractive return/risk couplings, notably in Asia.9 However, the integration of property into finance is not automatic. It requires property rights to be transformed into securities, listed or not, and exchangeable on the financial market. This operation removes the constraint of illiquidity that is a characteristic of property with its high “entry cost” (initial high investment, high taxation, and various expenses), fragmented markets, opacity of information, and long transaction times. The integration of property into finance implies the creation of institutional systems to cover the entire chain of operations involved in foreign investment, bringing global and local spheres into contact. How are these networks of players organised, and what channels do they develop to make Chinese property investment accessible to global finance capital? Academic literature provides little information on this point. In the field of financial economics, the few existing research projects relating to property investment in China are angled exclusively from the point of view of the institutional investor, giving an account of the added-value offered by this category of asset in the management of a portfolio10 or the regulatory obstacles that hinder the creation of listed funds.11

• 12 Xing Quan Zhang, “Urban Land Reform in China,” Land Use Policy, Vol. 3, No. 14, 1997, pp. 187- 199.
• 13 Fulong Wu, “China’s Changing Urban Governance in the Transition Towards a More Market-oriented Econ (...)
• 14 Jiang Xu, Anthony Gar-On Yeh, Fulong Wu, “Land Commodification: New Land Development and Politics i (...)
• 15 Jiang Xu, J. Anthony Gar-On Yeh, “Decoding Urban Land Governance: State Reconstruction in Con- temp (...)
• 16 This is the case in particular for several founders of Hong Kong property groups who arrived from m (...)

6As we know, China introduced a market of limited land rights for foreign companies in 1979. This practice was regularised by an amendment to the Constitution in 1988, generating a dual land market where market mechanisms coexist alongside an administered segment reserved for the public sector.12 Wu notes the persistence of administrative channels in the attribution of land, an observation he links to the theory of the “persistence of power” characteristic of economies in transition.13 A 2009 inventory of the various channels by which land may be accessed confirms the abundance of administrative channels within a highly fragmented land market.14 With regard to the sale of land rights, the regulations stipulate three possibilities: negotiation, adjudication, and auction. Local authorities favour the least transparent formula, negotiation, thereby perpetuating endemic corruption. From 2002 on, the government tried to advance market mechanisms by urging local authorities to practice the other two methods,15 but it cannot easily impose constraints after reducing grants to local authorities to a bare minimum. This strong institutional embedding of land constitutes a major obstacle to foreign intervention on the Chinese property markets. Only operators with guanxi, or failing that, who can fall back on partnerships with Chinese firms, can hope to have direct access to land resources. It takes a long time to build up guanxi, giving an advantage to operators from Hong Kong, Macao, Singapore, and Taiwan, some of whom were born on the mainland.16

• 17 Zhigang Li, Fulong Wu, “Socioeconomic Transformations in Shanghai (1990–2000): Policy Impacts in Gl (...)
• 18 Jiang Xu, Anthony Gar-On Yeh, “Decoding Urban Land Governance: State Reconstruction in Con- tempora (...)
• 19 Anthony Gar-On Yeh, “Dual Land Market and Internal Spatial Structure of Chinese Cities,” in Laurenc (...)
• 20 David Dowall, “Establishing Urban Land Markets in the People’s Republic of China,” Journal of the A (...)

7Foreign capital only became interested in Chinese property from the 1990s, after a decade devoted to industrial investment, in particular in the Special Economic Zones. It initially concentrated on the largest cities, Shanghai, Beijing, and Guangzhou,17 before moving on to other large cities, accompanying the migration of industrial capital to the country’s interior regions. This capital has a very strong influence on the urban sphere in China. Firstly, foreign investment allows local authorities to finance their infrastructure expenses with income from the sale of land rights,18 leading to a virtuous circle by which the proliferation of infrastructure then increases investment opportunities.19 All cities are not in the same situation, however. Guangzhou and Shanghai, for example, are better adapted to negotiation over the price of land rights than other cities such as Tianjin.20

• 21 Fulong Wu, “The Transformation of Urban Space in Chinese Transitional Economy: With Special Referen (...)
• 22 The floor area ratio is a ratio of authorised building volume on a given land parcel. For example, (...)
• 23 Fulong Wu, “China’s Recent Urban Development in the Process of Land and Housing Marketisation and E (...)

8Another effect has been to stimulate the diversification of the urban structure. In the past, Chinese cities followed a principle of cellular organisation based on danwei (work units), characterised by a highly diversified use of the land with a low density of buildings and many industrial installations in urban areas (factories and warehouses). Foreign capital has guided the “invisible hand” of the market by privileging sites in central districts, accelerating the migration of unprofitable activities towards the outskirts.21 Land use plans have adapted to this new situation, significantly raising floor area ratios.22 This has led to the functional specialisation of districts, distributing the value of the property in a more coherent and legible manner, once again to the great benefit of foreign investment, which has consequently stimulated the emergence of a luxury residential market segment. Originally considered a niche market intended above all for expatriates, luxury housing developed with the gradually increasing wealth of the Chinese middle classes, becoming a highly lucrative sub-sector all the less risky since the clientele was solvent.23

• 24 Fulong Wu, 2002, op. cit.
• 25 Fulong Wu, “The Global and Local Dimensions of Place-making: Remaking Shanghai as a World City,” Ur (...)
• 26 Fulong Wu, “The Transformation of Urban Space in Chinese Transitional Economy: With Special Referen (...)
• 27 Guangzhong Cao, Changchun Feng, Ran Tao, 2008, op. cit., pp. 19-30.

9With spatial differentiation comes the means to practice a more localised form of urban governance. In the newly created districts – free zones, technological parks, and commercial complexes – local authorities can implement targeted policies to attract mainly foreign investment or even experiment by drawing on the regulatory and fiscal toolboxes.24 The capacity of foreign capital to mobilise very large sums in a very short time makes it particularly attractive for the realisation of large-scale projects.25 Local authorities encourage in particular the construction of big business complexes, whose tax revenues (tax on added-value and profits) now constitute the main component of their budgetary resources.26 Their strategy consists of limiting the land supply in this sector – as in the residential sector, moreover – in order to maximise income from land rents. On the other hand, in the industrial sector, they concede land at far lower values since the performances of municipal officers are judged on their ability to increase the local Gross Domestic Product (GDP).27

• 28 Fulong Wu, “Globalization, Place Promotion, and Urban Development in Shanghai,” Journal of Urban Af (...)
• 29 Jieming Zhu, “Local Growth Coalitions: The Context and Implications of China’s Gradualist Urban Lan (...)

10Several authors have underlined the significant impact these major flagship operations financed by foreign investors are having. With their prestigious architectural design, most often the work of well-known Western architects, these big projects appear to be the bearers of a new urban order.28 They introduce new city lifestyles, in particular in residential and retail districts (air-conditioned shopping malls where strolling about has become a form of entertainment), and these tend to prevail as models for ordinary urban production. The formal and cultural standardisation they produce constitutes an additional factor for attracting global finance capital, since investors’ familiarity with programmed urban objects allows them to evaluate return/risk profiles more easily. Local authorities therefore spare no effort to amass vast supplies of land within central and peri-central areas. Operating in sites with high potential, they gradually gain control of the land through “land banks” within complex, diversely regulated markets. According to Zhu, these “growth coalitions” between local authorities and foreign operators are being formed to the detriment not only of users but also of the central government. They prevent the transition towards a competitive land market and encourage construction at the risk of overproduction of property in certain localities.29

• 30 Chien Shiuh-Shen: “Chinese Eco-Cities, a Perspective of Land-Speculation-Oriented Local Entrepreneu (...)

11The state is well aware of the social and environmental risks these entrepreneurial practices on the part of the local authorities carry and which place the very survival of the regime on the line. Several solutions have been tried, such as the introduction of a land tax in several large cities, the introduction of an obligatory quota of agricultural land to be preserved, and the extension of the ecocities model to 200 sites. But these initiatives have so far proved ineffective in creating social and environmental durability.30

• 31 JLL: Jones Lang Lassalle; CBRE: CB Richard Ellis.
• 32 C.Y. Leung was already operating in China, where he was director of a company called C.Y. Leung & C (...)

12Foreign investors need a thorough knowledge of the Chinese property market in order to understand risk, evaluate performance, and choose between the innumerable opportunities that present themselves. International property consultancies have therefore been present in China since the late 1980s to offer a local staging-post. The market is shared mainly between five companies: Savills, DTZ, JLL, Colliers, and CBRE.31 The first two have been in China the longest and have the greatest number of branches. Savills set up in China in the late 1980s, followed by DTZ in 1993.These two companies are now present in 12 and 16 cities respectively. The current chief executive of Hong Kong, C.Y. Leung, was one of the great artisans of the development in China of DTZ, of which he was a director until 2011.32 As for the three other consultancies, although they have less extensive cover in China, they are nonetheless very important players at the international level, which allows them to offer their clients – as far as CBRE and JLL are concerned, at least – investment opportunities in addition to their basic services.

• 33 Liu Mei Hong Amy, David Zweig, “Hong Kong’s Contribution to Mainland China’s Property Sector, Helpi (...)

14At first, training Chinese salespeople to work for these companies was no small matter. They had to be inculcated with Western “codes of good conduct,” i.e., they were no longer allowed to charge for putting people in contact with one another and had to respect contracts, not to mention the indispensable upgrading of their technical skills. In the beginning, training courses in Guangdong Province were organised by DTZ in partnership with the Hong Kong Chamber of Commerce, at the initiative of C.Y. Leung.33 Training was then taken over by the universities, both in Hong Kong (Hong Kong University, Hong Kong Polytechnic University) and on the mainland (Tsinghua and Beida universities in Beijing, and Zhejiang University in Hangzhou).

• 34 These 50 cities were selected from a sample of 280 cities and hierarchised by means of a statistica (...)
• 35 Jones Lang LaSalle, “China 30, China Rising Urban Stars,” 2007.
• 36 JLL, “China 50, China Rising Urban Stars, Fifty Real Estate Markets that Matter,” 2012.

16In 2007, JLL, which produces reference documents based on a series of economic, demographic, and property indicators,34 drew a map of the 30 Chinese cities considered to be “urban stars,”35 from which emerged three major centres along the coast around cities said to belong to “Category 1.” These were Beijing, Shanghai, and Guangzhou. A recent update, enhanced by a further 20 cities (map 2), shows the reinforcement of the previous centres along with the arrival of Shenzhen in the first category, the emergence of a new axis in the north-east from Shenyang to Harbin, and the rapid rise of the big regional capitals of the interior (Chengdu, Chongqing, and Wuhan) on their way to joining the top-ranking cities. Other cities in the interior such as Xi’an, Changsha, Zhengzhou, and Ji’nan have been noted as “booming” (Category 2), and the network is completed by cities in the 3^rd and 4^th category designated as “emerging”; Haikou, Kunming, Nanjing, and Guiyang to the south and Lanzhou and Hohhot in the north. Unsurprisingly, the whole of the western part of the country remained untouched, with the exception of Urumqi, a town that appeared on the investors’ radar in 2009.36

• 37 The description of the categories of cities that follows comes from JLL’s document “China 50.”

17The orientations of the 12th Five-Year Plan (2011-2015) were a strong determining factor in the hierarchisation of this urban network, whose economic weight has been estimated by JLL at US$ 2.9 trillion – or the equivalent of the GDP of Germany – and its share of world production at 12% in the course of the next decade. The spatial hierarchy defined by JLL allows investors to identify urban profiles more easily and thus select the most suitable property products.37

• 38 DTZ, “High-end retail investment, ranking the opportunities,” 23 May 2011, p. 9.

18Category 1 consists of the “core cities,” grouping together Beijing, Shanghai, Guangzhou, and Shenzhen. It represents the most liquid and transparent of the country’s property markets, characterised by a very outward-looking economy, a concentration of big companies and high-quality property stock. Although foreign property operators do not refuse to invest in it, this category, considered mature, is of secondary interest at a time when opportunities are available in the emerging cities, and especially now that the land offer has reached saturation point. Nonetheless, the rarity of areas where investment is possible presents the advantage of stabilising the returns on property held by investment funds in these urban areas. In particular, Beijing is in a strong position at the national level with regard to the estimated growth of income from retail sales over the next four years.38

• 39 Four big Chinese cities have this status: Beijing, Shanghai, Chongqing, and Tianjin.
• 40 DTZ, “Research, Money into Property, Asia Pacific 2011, Engine of World Growth,” 24 May 2011, pp. 1 (...)

19On the other hand, the nine cities or “transitional cities” in Category 1.5, which include the main economic centres in the northeast and central regions as well as the cities included in cluster city networks, are those that present a major attraction for investors. They have benefited from the state’s industrial policies and their transport infrastructures have been extensively developed, stimulating the growth of direct foreign investment (DFI). Their diversified industrial base has enabled property development in all sectors. Five cities in particular emerge from this group: in first place is Chengdu, a large centre in the western provinces and anchored in what is historically the country’s most fertile province, Sichuan. With strong growth and a centuries-old historic heritage, it is a city that is particularly attractive to multinationals, to whom the local authorities extend their warmest welcome. Chinese companies also develop quickly there, however, greatly increasing the demand for grade A property. The property markets of Shenyang and Chongqing have also been stimulated by the development of the big technological zones (an eco-industrial energy park and biotechnology industries, respectively) provided for in the 12^th Five-Year Plan. Moreover, Chongqing and Tianjin benefit from city-region status,39 exercising their authority over a very extensive region, which makes investment easier. As for Hangzhou, this metropolis currently holds the national record for per capita consumption as a result of a concentration of prestigious shopping facilities near its celebrated lake that attract both tourists and wealthy residents from surrounding areas.40

• 41 Some, such as Quanzhou, have fewer inhabitants (400,000), whilst others, such as Luoyang, are much (...)

22Lastly, the “early adopter cities” most often have between 2 and 4 million inhabitants,41 and are identified as being likely to join the third category in the near future. Most are part of conurbations (in particular the Yangtze and Pearl River deltas), often near the coast, but some are regional centres such as Guiyang, Lanzhou, and Urumqi. Foreign pioneer companies position themselves here to benefit from the advantages of being a precursor, mainly in retail, but the demand for property comes mostly from Chinese companies. Contrary to categories 2 and 3, where great efforts have been made to increase the transparency of the property markets, the “early adopter cities” are characterised by a high degree of opacity. Investing there is therefore more risky, but the capital gain on the land is potentially more advantageous.

• 42 According to JLL’s “Office Statistics New York” data, this city has 248.5 million square feet, or 2 (...)

23Over the next decade, this “China 50” network will concentrate on property investment in the upper segments, the preferred target of financial capital. In 2011, grade A corporate property stock stood at only 23 million square metres in this urban group, that is to say, equivalent to that of an American city such as New York.42 According to JLL estimates, this stock is expected to expand by some 30 million square metres over the next decade. The demand in other sectors is seeing even faster development. In supermarket outlets, consumer habits will be radically altered by the rising living standards of the middle classes. The “China 50” network has a market of 370 million consumers, including 260 million city-dwellers. Amongst the latter, 20% now have an income of 30,000 yuan (i.e., 3,700 euros at the current exchange rate). However, their number is expected to double over the course of the next three years, whilst the median income per household will exceed 50,000 yuan. This development is a strong driving force for the big commercial complexes, where foreign investment is concentrated to the detriment of the big traditional shops run by local tradespeople. Unlike corporate property that needs to be centrally located, supermarkets can operate within in a vast perimeter that extends to the towns in the lower categories, which according to JLL represent a potential for construction of 80 million square metres in the next decade (that is to say, double the property stock in this sector in 2011).

• 43 Urban Land Institute, “China Cities Survey,” 2011.

25It should be noted that residential property, which was very promising in recent years, has ceased to be an object of interest for finance capital. The Chinese authorities have tightened up on credit and have imposed highly restrictive regulations on the acquisition of second homes, at a risk of causing many small local development companies to go bankrupt. Therefore, all that remains are niches such as serviced apartments, but these properties are more closely related to hospitality than residential accommodation. With the impending acceleration of the ageing of the population, a new niche market might nevertheless develop in the form of residential accommodation for the elderly, in particular in the tropical regions of the south (the island of Hainan), which are already attracting retirees.43

• 44 The direct property market corresponds to traditional investment in the form of purchases of proper (...)

26Once the potential of the big Chinese cities in the various property segments has been evaluated, finance capital can be deployed towards China through various channels. It is a movement that is nonetheless very recent. Although indirect investment – through investment funds – in Chinese property appeared in the late 1990s, it has only really taken off since 2003. Its progress comes after a long and difficult period of direct investment by foreign operators.44

• 45 Liu and Zweig, 2011, op. cit.
• 46 Poon, 2010, op. cit.
• 47 Liu and Zweig, 2011, op. cit.

27Hong Kong property developers were the first to get a foothold in mainland China towards the end of the 1980s, initially crossing the frontier to Guangdong. Urged by the Chinese authorities to penetrate further into their territory, several conglomerates (New World, Henderson Land, and Sun Hung Kai) dared to build in the biggest Chinese cities, but without great success until the late 1990s.45 These efforts were nonetheless transformed into lucrative social capital (guanxi with the authorities) and into abundant land reserves in Category 2 cities, advantages that are now proving primordial.46 The strategy of the Hong Kong developers has been to position themselves in the upper segments of the commercial and corporate property market. In this way, they avoid competition with local developers and can display their know-how in the construction of large urban features that serve to mark their territory, whether these be skyscrapers or prestigious shopping malls. Without their contribution to the construction of property stock that meets international standards in Shanghai, the city would not have been able to achieve its current status, an ascension that was made, moreover, to the detriment of Hong Kong.47 As we will see later, groups from Singapore have also made a remarkable entry into the Chinese property market, followed more recently by the Australians. However, the Hong Kong groups are far more numerous and have been present for much longer, which strengthens their privileged position in the sector.

• 48 DTZ Research, “Money into Property 2012 Asia Pacific,” pp. 5-6.

28It is a different matter when it comes to property investment that mobilises other channels involving operators that are more varied in character and geographical origin. Let us begin by evaluating its size: according to a DTZ estimate, in 2010, the total value of property assets held by investors in China amounted to US$ 1.1 trillion – in second regional position just behind Japan – that is to say, one third of total investment in Asia and almost 10% of that in the world (Graph 1). Only one third of this amount involves property, while the rest is in debt portfolios. This is not a specific characteristic of China; out of the ten principal countries/regions selected by DTZ in Pacific Asia, seven attract financial capital mainly to property debt rather than to property.48

• 49 Investment in the stock exchange is said to be “public” because it is accessible to all types of in (...)
• 50 JLL, “The Role of Private Equity in Real Estate Markets in Asia Pacific,” October 2011, p. 3. This (...)
• 51 Two categories of listed property companies exist: property development groups and REIT investment (...)

29On the other hand, China stands apart from other major countries in the region such as Japan and Australia by virtue of its low level of so-called “public” property investment – property that is the subject of stock market transactions.49 A recent report by JLL estimated at US$ 121 billion the overall value of the property held by listed Chinese companies in 2011, out of an overall amount of US$ 310 billion.50 The low level of listed property testifies not only to the low level of internationalisation of the Chinese financial system and the inadequacy of the “institutional” property offer (upper segments), but also to regulatory obstacles to the development of property securitisation.51

• 52 China Investment Corporation (CIC) is a public company founded in 2007 to invest China’s US$70 bill (...)
• 53 Asia Times, 2 September 2007.

33The biggest of these selective fund managers by a wide margin is the New York group Blackstone, world leader in property investment with assets worth a total of US$ 49 billion (property and debt). Besides pension funds, this group attracts sovereign wealth funds, financial groups (banks, insurance companies), as well as various public and private institutions – including educational establishments – for whom these alternative investments are part of a strategy of global capital allocation. The most recent fund, Blackstone Real Estate Partner VII, has managed to attract Chinese government money – through CIC52 – to the value of US$ 3 billion,53 i.e., 10% of the amount raised. It goes without saying that this major contribution from the Chinese government has given the American group considerably easier access to land in China.

• 54 Merrill Lynch has fallen back on North America and Europe. Its holdings in Asia included an opportu (...)
• 55 Private Equity Real Estate. The PERE 30 ranks managers in order of the amount of capital raised dur (...)
• 56 Series of funds.
• 57 The eight managers of the PERE 30 operating in China are Blackstone (world, multisectoral) Tish- ma (...)

34Blackstone has been present in Asia since 2007. Although it invests in companies in difficulty and in doubtful debt portfolios in India, Australia, and Japan, this is not yet the case in China, where its operations take the form of large-scale development projects. To this end, it has entered into joint ventures with Hong Kong and Chinese developers covering a variety of property sectors including offices, residential accommodation, and logistics. Its projects generally try to take advantage of the new transport infrastructures on the outskirts of Category 2 or 3 cities. For example, its flagship operation is a big business complex in the eastern port zone of Dalian set up in partnership with the Hong Kong group Great Eagle Holdings for a value of US$ 630 million. For a group such as Blackstone, all the stages of the property cycle promise high returns: upturns bring capital gains on land in new projects, and downturns offer an occasion to take over the portfolios of operators in difficulty at little cost. The crisis in the Chinese residential sector is, in this respect, a new Eldorado for opportunistic funds. In an ironic twist of fate, funds such as this belonging to American investment banks were eliminated by the subprime mortgage debacle. This was the case with Lehman Brothers and Citibank, as well as for Merrill Lynch, whose holdings in Asia were sold to Blackstone in 2010 for a total value of US$ 4.5 billion.54Nevertheless, there is no lack of competitors in Asia. The exceptional dynamism of the region attracts big institutional investors. Amongst the thirty biggest managers of property equity funds in the world (those listed by the PERE 30),55 eight hold investment “platforms”56 in Asia, totalling a dozen funds in all.57 Funds dedicated to a single country are rare, but China is involved in almost all the pan-Asian platforms. The JLL and CBRE groups are to be found once again amongst the big opportunistic equity fund managers. CBRE is noteworthy in particular for its wide range of Asian funds covering all the reward/risk categories. Another world fund manager that has recently established itself in China is Angelo Gordon. This New York operator has managed to acquire vast tracts of land in the biggest Chinese cities (Guangzhou, Shanghai, and Tianjin) on which to mount development operations. Its second opportunistic investment fund in Asia is mainly dedicated to China and covers a wide range of sectors.

• 58 The only manager in the PERE 30 not to have a head office in the United States is MGPA, based in Lo (...)

35Alongside the big managers in the PERE 30 ranking, all but one from the US,58 certain Asia-Pacific operators also manage opportunistic funds in the region. Two Australian groups, Macquarie and Goodman, have created a Hong Kong-based joint venture, “Macquarie Goodman Asia,” to develop a fund specialising in industrial property in China. The Singapore groups CapitaLand and ARA use opportunistic funds as incubators (“CapitaMall Development” and “CapitaMall incubator” for CapitaLand, and “Asia Dragon Fund” for ARA) in order to build property portfolios that they then transfer to their other core or value-added funds (unlisted funds or REITs, see below).

• 59 This is the “Al-Rhaji China Real Estate Growth Fund” worth US$500 million.
• 60 Property Investor of the year, The Asset Magazine, www.harvestcapital.com.hk/en/index.php (ac- cess (...)

36However, the most involved in opportunistic investment in China is the fund manager Harvest Capital, a subsidiary held entirely by the prominent Chinese conglomerate China Resources Group. Harvest Capital manages four opportunistic funds exclusively centred on China – including one dedicated to Muslim investors59 – totalling US$ 1.38 billion, 80% of whose unit-holders live outside the country. Here again, a multi-sectoral strategy is being pursued, limited to the biggest urban agglomerations. Thanks to the privileged relationships it has with the Chinese authorities, Harvest Capital has performed better than its foreign competitors, showing a rate of return of 30% in a little more than a year between 2010 and 2011 for the acquisition of four portfolios of shopping malls.60

• 61 José Corpataux, Olivier Crevoisier, “Increased Capital Mobility/Liquidity and its Repercussions at (...)
• 62 Ewald Engelen, “The Logic of Funding European Pension Restructuring and the Dangers of Financialisa (...)

38Unlisted funds are intended for institutional investors of all sizes as well as for wealthy individuals able to make an initial payment of around half a million US dollars. It is no longer a question here of benefiting from a windfall effect by taking risk, but of investing one’s capital in asset portfolios that offer good returns and that are held in the medium and long-term. The same performances are expected from these unlisted funds as from direct investment in property without having to invest large amounts of capital. Amongst the measured risk investments, direct property is the one where performance is the least correlated with that of other financial assets. It can therefore improve the overall performance of portfolios made up of a variety of categories of asset. However, it also ties up the heaviest capital investment, which is why investors now tend to avoid it in favour of units in investment funds. These unlisted property funds are nonetheless just as opaque and have the same low liquidity as the equity funds, since shares are often only transferable after several years, provided a taker can be found. However, institutional investors are increasingly searching for liquidity.61 This is due to several factors, including the increasing gap between the evolution of the life cycles and the maturity of the savings instruments of the pension funds,62 and the need to arbitrate permanently between the various financial instruments to improve performance.

• 63 REIT funds rarely invest in residential property. Japan and the United States are exceptions in thi (...)

40REITs belong to the core category because their property portfolios present the least risk: high-quality buildings, long-term (non-speculative) investment, and central locations in top-category towns. Like unlisted funds, they specialise in a variety of property sectors so as to allow investors to arbitrate in accordance with the risk/return profiles and specific dynamics of the various industrial sectors. Only residential property is not represented in REIT funds63– except in the form of serviced apartments that count as hospitality – on account of the high cost of managing the buildings, which erodes returns.

• 64 Forbes, “The World’s Billionaires,” 2012.
• 65 Michel Aglietta, “Internationalisation de la monnaie chinoise” (Internationalisation of Chinese cur (...)
• 66 Value in December 2011, exchange rate in December 2012.

46Unlike the preceding groups, ARA Asset Management is purely a fund manager. Listed on the Singapore stock exchange, it is in reality affiliated with the Hong Kong property conglomerate Cheung Kong, whose director is the tycoon Li Ka-shing, possessor of the biggest fortune in Asia and ninth largest fortune in the world.64 With its 16 funds, ARA is the only Asian manager to come close to the PERE 30 rankings. Amongst the five REITs that it manages, Hui Xian, listed on the Hong Kong stock exchange, is the only foreign REIT entirely devoted to China, and what’s more, in RMB so that investors can benefit from the internationalisation of China’s currency.65 Unlike other REITs that try to limit risk by spreading their properties over a large number of sites, Hui Xian concentrates its asset portfolio in just two places: the centre of Beijing with the “Oriental Plaza” complex (several office blocks, serviced apartments, shopping malls, and a hotel), and in Shenyang with the Sheraton Lido Hotel. In both cases, ownership of the land and buildings, estimated at US$ 5.2 billion66 at the end of 2011, belongs to a local Chinese operator in JV with the ARA group. This atypical concentration on just two sites can be explained by the tightening up of regulations concerning foreign investment in securitised real estate since the subprime mortgage crisis, which penalised the acquisition of new properties by REIT funds.

• 67 According to a high hypothesis estimate by APREA, a think-tank that brings together Asia-Pacific in (...)
• 68 APREA, ibid., p. 40.

47The excellent performance recorded by the various investment funds will attract an increasing amount of finance capital to China over the next few years. The overall value of institutional property in the country, currently standing at US$ 1,900 billion (7% of the global value) could, in some estimates, reach US$ 9,700 billion in the course of the next decade.67 Not only will increasing numbers of institutional investors from Western industrialised countries want a share of this maturing market (those from the United States taking up a position in Asia currently represent 47%, and those from Europe 34%),68 but their Asian counterparts will become more powerful and also wish to increase their share.

• 69 Jones Lang LaSalle, “The Role of Private Equity in Real Estate Markets in Asia Pacific,” October 20 (...)

48Despite all this, the road ahead is not without obstacles. The experience of recent years shows that finance capital does not always find investment for lack of a big enough offer in the higher segments of the property sector. According to an estimate by JLL, out of the US$ 22 billion raised abroad by private funds between 2007 and 2010 for allocation in China (equity funds or unlisted property funds), only $ 9.2 billion were used in a transaction at the end of the period.69 The Chinese authorities therefore tried to accelerate the production of institutional property by stimulating the activities of Chinese developers. National property champions were already emerging. Groups such as Vanke, Evergrande, Poly Real Estate, and Wanda showed their capacity to rival Hong Kong and Singaporean developers, but their expansion was curbed by difficulties in obtaining credit from national banks. As far as possible, therefore, they had to fall back on financial capital.