Private Equity Investment in Chinas Real Estate Industry

Published: 08:34, September 19th, 2007

From Victor Chu, Zero2IPO Analyst

With the transfer of the global economic focus and industry, more and more foreign capital is rushing to Chinas real estate market in various forms.

At present, it has become a trend of foreign private equity investment in real estate projects in Chinese mainland. The expectation of Beijing 2008 Olympic Games, World Expo Shanghai, and Renminbi appreciation (the three opportunities) accelerates the foreign private equity investment in China. Undeniably, the increasingly deepening of economic globalization, the improvement of the investment environment in Chinese mainland, and the constant macro regulations leave more and more real estate enterprises or projects suffering from capital insufficiency. However, it makes it possible for foreign private equity investment in Chinas real estate market; on the other hand, huge consumer market arising from the large population and fast and stable economic growth provides dramatic opportunity for foreign private equity investment in China’s real estate market.

Real estate plays a pivotal role in Chinas private equity investment.

Our statistics reveal that in Chinas real estate market in 2006 there were thirty-one (31) private equity investment deals with their investment amount totaling US$3.04B, accounting for 42.5% and 46.6% of the total deals and total investment amount of the traditional industry in 2006, and 24.0% and 23.4% of the total deals (129) and the total investment amount (US$12.97B) of Chinas private equity investment market in the year.

In addition, our statistics show that in Q1 2007, investment in real estate industry outstripped other industries in terms of investment deals and investment amount in the private equity investment in traditional industry. Private equity investment in Chinas real estate industry in Q1 2007 numbered nine deals with total investment amount up to US$966.22M, accounting for 39.1% and 51.6% of the total deals and total investment amount of the deals in traditional industry in Q1.

In terms of the types of foreign private equity investment, our statistics showed that three types of funds were invested in real estate industry from 2006 to the first quarter of 2007, namely real estate fund, growth capital fund, and buyout fund.

In terms of the strategy for private equity investment, there were a total of 40 PE investment deals in real estate industry in five forms, namely real estate projects, PIPE, growth capital, buyout and bridging capital. Of these deals, 25 real estate projects garnered an aggregate US$2.39B from real estate funds. Nine real estate investment deals were backed by growth capital funds with US$354.99M. Three real estate investment deals were completed in the form of PIPE, but the investment amount reached US$684.28M. There were two deals of investment in the form of bridging capital with investment amount of US$560.36M.

As shown in Figure 1, in terms of the deal number, the period from Q1’06 to Q1’07 witnessed the greatest number of investment in real estate projects, totaling 25 deals, accounting for 62.5% of the total number of investment deals in real estate industry. Growth capital numbered 9 deals, accounting for 22.5% of the total. The analysis showed that real estate fund and growth capital funds become two major fund types of private equity investment.

As shown in Figure 2, in terms of the investment amount, the investment in real estate projects from Q106 to Q107 was the greatest with US$2.39B closed, followed by PIPE with US$684.28M. However, in terms of average investment amount, bridging capital investment in real estate projects was the greatest, hitting US$280.18B, and real estate projects ranked the third with the average investment amount of US$95.71M after PIPE.