Tycoon Finds Opportunity In China Property Slump - WSJ.com

Tycoon Finds Opportunity In China Property Slump - WSJ.com: "Tycoon Finds Opportunity
In China Property Slump
By JONATHAN CHENG
August 19, 2008; Page C1

Tycoon Finds Opportunity
In China Property Slump
By JONATHAN CHENG
August 19, 2008; Page C1

CHONGQING, China -- Hong Kong property tycoon Vincent Lo made his name and fortune riding China's real-estate boom. These days, with China's property market in the dumps, he sees opportunity.
[photo]
Vincent Lo expects his bet on the Ruiqi Building in Chongqing, shown here in its partially finished state, to be profitable.

Mr. Lo's newest investment vehicle, China Central Properties Ltd., has spent roughly $700 million in the past year acquiring at least a dozen big real-estate projects left unfinished by cash-strapped developers. He predicts even more opportunities over the next year as China's commercial real-estate market struggles through one of its most difficult patches in the past decade. Other big-name investors who see the same favorable situation are investing billions in distressed real estate.

"Last year, when the market was hot, everyone thought they could make a pot of gold. But this year, they see that isn't true," the 60-year-old Mr. Lo says. "This shaking out is going to move the industry in the right direction."

One of his latest projects is the Ruiqi Building, an office, luxury-apartment and retail complex in the middle of the fast-growing central Chinese city of Chongqing. CCP bought the half-completed, building of approximately 925,000 square feet in July of 2007 for 413.7 million yuan (US$60 million). When the project goes to market in the fall of 2009, he expects a significant profit.

Since China's real-estate market began to slow late last year, Mr. Lo and a growing number of foreign funds and cash-rich domestic developers are finding opportunities all around. Many are coming at the expense of China's estimated 50,000 small developers, which borrowed heavily last year to purchase land. Now, many are folding or seeking aid as the overall market sputters and some cities in China's southern provinces see outright slumps.
[illustration]
A rendering of the Ruiqi Building.

In part, the slowdown is the result of Beijing's efforts to rein in torrid growth, a development that has made lenders stingier. Property brokerage DTZ estimates that bank loans to the industry will fall by about 25% this year to 880 billion yuan compared with last year.

Meanwhile, drooping domestic stock markets have eliminated another source of funds, with the amount raised by initial public offerings for property firms down by more than 80% in the first half of this year to US$569.8 million compared with a year earlier, according to Thomson Reuters.

So far, China's overall real-estate slowdown pales compared with the slump in the U.S., as continued urbanization fuels China's appetite for apartments, offices and shopping centers. But the young, freewheeling market also has been prone to sharp jumps and sudden slowdowns.

China's larger and better-positioned players and outside investors have been pouncing. J.P. Morgan Chase & Co. plans to invest more than $1 billion in Asian real estate over the next three years. Office developer Soho China spent about 5.5 billion yuan, or half of a US$1.65 billion war chest from its IPO last year, to scoop up a 5.2 million-square-foot piece of distressed property in central Beijing on the cheap from a developer that was deeply in debt.

Soho China Chief Executive Zhang Xin says the company set up a department last year to take calls from small developers trying to unload projects. "The phone's been ringing off the hook."

Charles Lam, regional managing director for Prudential Financial real-estate arm Pramerica, says prime properties in key second-tier cities that were unattainable last year are now on the table, and even boasting favorable terms -- from flexible deal structures to discounts of as much as 30% from peak valuations.
[Vincent Lo]

Mr. Lo isn't the biggest player dealing in problem properties, but he is the best-known in China and closely watched as a sign of the next hot thing.

The son of a Hong Kong property tycoon, he struck out on his own in 1971 to set up a construction and property-development company called Shui On Holdings. China opened itself to foreign investment in the late 1970s, and soon after Mr. Lo joined the first wave of Hong Kong developers to enter the mainland, joining with a rising political star named Han Zheng to open a hotel in Shanghai at a time when few overseas investors were willing to pour money into the country.

In 1997, his friendship with Mr. Han, who is now Shanghai's mayor, helped him secure the downtown Shanghai site that hosted the Chinese Communist Party's first meeting in 1921 and develop it into Xintiandi -- literally, "New Heaven and Earth" -- a cluster of ritzy retail, dining, office and residential space in a throwback setting that combines al fresco dining with traditional Chinese architecture. The project made Mr. Lo a celebrity across China -- where uninspiring Soviet architecture once dominated -- and earned him a reputation as "King of Connections."

Mr. Lo says China Central Properties, which raised about US$300 million last year in its IPO on London's Alternative Investment Market, typically seeks return on capital of 25%, including construction costs, from the troubled projects it buys. Because they are in various stages of completion, they also offer a shorter time horizon than a typical new project.

CCP represents Mr. Lo's bet that China's real-estate slowdown is temporary rather than a sign of systemic trouble.

CCP finished yesterday at 65.25 British pence ($1.22) down 35% from the 100 pence it fetched on its June 8, 2007, listing, as part of a broader market slump. But Mr. Lo sees the overall trends of urbanization, strong economic growth and higher disposable income overcoming market difficulties. "I'm happy about the outlook for the market," he says.

"Consolidation will take place over the next one or two years," he says. "We will see some bigger developers expanding."

Write to Jonathan Cheng at jonathan.cheng@wsj.com