Shanghai: What Real Estate Bubble?

More and more big-name investors are buying up commercial properties

Property speculation is the hottest topic in Shanghai. From the cafés along the city's famous Bund riverfront to the karaoke joints of the Xujiahui entertainment district to the laundry rooms in the massive apartment blocs on the city's southernmost fringe, one question is on the tip of everyone's tongue: Is a bubble developing in the real estate market?

It's a reasonable point to ponder in a city where the price of residential property has risen nearly 20% over the past 12 months. But judging from the flurry of deals being done by some of the world's most sophisticated global investors, clearly not everyone thinks the boom has peaked. Morgan Stanley Real Estate Funds teamed with local developer Shanghai Yongye Enterprise Group and two Singaporean partners in June, 2003, to pony up $90 million for a high-end apartment complex in downtown Shanghai called Jinlin Tiandi. In January, Macquarie Global Property Advisors of Australia paid $98 million to buy 95% of Xin Mao Tower, a 20-floor luxury office building. And in April, developer CapitaLand Ltd. of Singapore announced that Goldman, Sachs & Co.'s (GS ) real estate division, Whitehall Funds, had paid it $107.6 million for Pidemco Tower, a 24-story commercial building in Shanghai's central business district. "The fundamentals in commercial property in Shanghai are very positive," says James Quille, CEO of Macquarie Global Property Advisers in Hong Kong. "And there is a well-trodden path in terms of how capital is structured and repatriated."

Unlike hot-money investors rushing in -- and out -- of emerging markets in search of a quick return, these white-shoe institutions say they're taking a longer-term view of Shanghai's real estate market. They aim to earn steady returns of 16% to 18% from rental income for their investors, which include pension funds and insurance companies. A handful of big names are already in the market. Other real estate funds looking at Shanghai property are sponsored by Deutsche Bank (DB ) and CSFB (CSR ). "Everybody is knock- ing on our door looking at deals," says Walker J. Wallace, partner at O'Melveny & Myer LLP's Shanghai law office.

The funds say that since they are investing mostly in commercial and retail properties, where the market is less frothy, the risk of a downturn is low. In fact, prices for top office buildings have only increased about 5% in the past 24 months, according to global property consultants Jones Lang LaSalle. Even if the market weakens in the next few years, these funds say they have a 5- to 10-year horizon. That of course assumes prolonged economic and political stability. Even the real estate investors acknowledge that in China's volatile market, anything can happen.

By Frederik Balfour in Hong Kong

Before it's here, it's on the Bloomberg Terminal.