Building on a Bright Future in China

The real estate sector in China looks promising. That was the general tenor of Deputy Chief Executive Officer and Chief Investment Officer, CapitaLand China, Lucas Loh’s assessment of the impact of China’s capital market reforms on the country’s real estate sector. Mr Loh was speaking at the plenary session of the FutureChina Global Forum 2014 organised by Business China. Entitled ‘China at the Crossroads: The Way Forward’, the session focused on the next steps forward following the announced changes.

In November 2013, the Chinese Communist Party’s Third Plenary Session shared plans to reform its capital markets in a general blueprint called ‘A Decision on Major Issues Concerning Comprehensive and Far-reaching Reforms’. A number of areas were highlighted including fiscal reforms such as reforms of the stock listing and liberalization of interest rates, anti-corruption efforts, and integrated rural-urban development. Since then, China has released more details of his future forward plans in the financial sector. Mr Loh weighed in on what the changes will mean for real estate in general and CapitaLand in particular.

More Avenues for Investments

The opening up of the capital market will provide an “additional funding source”. That was the first positive impact Mr Loh highlighted.

This is significant to CapitaLand given the importance of the China market to its business. Outside of Singapore, China is CapitaLand’s biggest market. In the 20 years since its foray into the country, the Group has established itself as one of its largest foreign-funded real estate developers. As of end March 2014, it has S$15.8 billion in assets in China, making up 38 per cent of CapitaLand’s total assets.

Even before the announced intent to reform, CapitaLand had already managed to set up two REITs (Real Estate Investment Trust) – CapitaRetail China Trust and Ascott Residence Trust – in addition to 12 private equity funds. Together these have raised investments for its developments in China. These, however, represent only a fraction of what is possible.

“Capital market and the real estate market in China are fairly distinct, unlike in Singapore where CapitaLand has been in and out of the capital market through real estate securitisation products as well as issuance of bonds,” stated Mr Loh.

Given that capital market development is still “in its infancy” in China with only about 150 real estate companies listed in either the Shanghai Stock Exchange or the Shenzhen Stock Exchange, developers in China have always had to rely on borrowing and other sources to fund their projects.

“Most developers get 15 per cent of their funding from banks or bank-related borrowing, 40 per cent from the shadow banking industry such as unit trusts that are sold through wealth management products, and from sales proceeds,” cited Mr Loh.

Over time, as developers moved into developing commercial buildings; and, increasingly, integrated developments, there was a realisation that such strata sales would affect the eventual management and value of the developments.

“With the opening up of the capital market, developers can tap on capital market for funding. It will also serve as an exit option for developers in terms of holding on to commercial assets to recycle their capital,” said Mr Loh.

Local governments that have, thus far, relied on land sales for funding which account for 25 per cent of their revenue will also have “another avenue to raise capital”, noted Mr Loh.

“[With these reforms], there is a lot more that we can do. The stimulus will help the real estate market to grow.”

Sustainable Growth for the Market

From the market’s perspective, liberalisation of the market will mean better prospects for continued growth and sustainability.

“Supply and demand dynamics will allow for sustainability and growth of the market,” Mr Loh said.

Changes will also draw more developers into the country which will then stimulate the real estate industry to grow.

More Options for Retail Investors

“Retail investors have a limited range of investment products,” observed Mr Loh.

Apart from speculating in stock markets, their other option to grow their money is to buy wealth management products since savings rates are very low in China.

“With the opening up of the capital market, such retail investors will have an indirect way of getting into real estate market,” said Mr Loh.

“With the value of real estate getting larger, such securitisation of the real estate sector will also get more people to participate indirectly in the real estate market and this will help to maintain sustainability of the real estate market.”

Test Bed for Change

In September 2013, the Shanghai Free-Trade Zone or China (Shanghai) Pilot Free-Trade Zone was launched. The first of its kind in mainland China, the zone was created to test several economic and social reforms. Mr Loh was asked to comment on the efficacy of the zone.

“From the real estate perspective, we hope that there could be experimentation of real estate securitisation products,” he said.

“The zone, the liberalisation and reforms are the ways to go forward.”

China is at a critical juncture in its financial evolution. All signs point to positive developments as the government shows determination to open up the market. With its track record, CapitaLand is well-placed to ride the wave of this change to build a bigger, better future in China.