UBS Plans New China Property Fund Even as Returns Fall on Curbs

UBS AG, Switzerland’s biggest bank, is raising a second fund that will invest in Chinese residential properties to meet demand that remains “extremely strong” even amid government curbs that are lowering returns.

The company is talking to existing investors for the U.S. dollar fund, which will focus on second-tier cities, said Trevor Cooke, the head of global real estate for Asia Pacific at UBS Global Asset Management (Australia) Ltd. The bank’s first such fund, set up in 2008 with a $300 million target and scheduled to be fully divested in 2016, potentially will yield “very close” to its targeted 20 percent return, he said.

China’s new home sales exceeded $1 trillion for the first time in 2013 as Premier Li Keqiang refrained from adding nationwide property curbs. Investors poured $10.7 billion into new real estate funds in China last year, almost 80 percent more than a year earlier, according to consultancy Zero2IPO Group.

After a “very detailed, forensic look at the residential market, particularly in second, third tier cities, we’ve come back feeling pretty confident there’s a very strong and compelling case” for a second fund, Cooke said in an interview March 12 in Beijing.

Housing sales fell 5 percent in the first two months of this year, after at least 10 cities stepped up local measures to calm the markets at the end of 2013 following double-digit price gains.

‘Very Attractive’

While UBS is targeting a lower return between 16 percent and 18 percent for the new fund, compared with the first one, partly due to stronger competition, “that’s still a very attractive return,” Cooke said.

The government will curb demand for housing among investors and will regulate the property market “differently in different cities,” Li said at a press conference in Beijing on March 13. Shanghai, Shenzhen and Guangzhou, all among the four biggest so-called “first-tier” cities, all raised the minimum down payment for second homes to 70 percent at the end of last year, following the precedence of Beijing. Some provincial capitals also tightened property measures.

UBS has already sold two projects from the first fund in Shenyang, capital of northeastern province of Liaoning, and still holds the other four assets in the fund located in cities including Xi’an and Hangzhou, Cooke said.

Supply, Demand

All the projects, which mainly target middle-income buyers, were built by Gemdale Corp., a Shenzhen-based developer that jointly started the first fund, whose investors include European, Japanese, Middle Eastern and other Asian institutions, he said.

There were 10 cities in China with average annual residential property yields of 20 percent or more in the five years ended Jan. 31, according to a report by Zhongjin Standard Data Research Ltd., a Hong Kong-based data provider covering 116 Chinese cities. Beijing topped the list at 29 percent, while homes in some cities including Hangzhou, Ningbo and Wenzhou have lost value in the past three years, it said.

“We feel confident that from a supply and demand dynamic at a headline level, demand will still remain extremely strong relative to supply,” Cooke said, adding the bank has identified about 50 cities that could provide potential investment opportunities.

— With assistance by Dingmin Zhang

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