China – opportunity and strategy

Dr Richard Barkham MRICS

Grosvenor Group Research Director

March 2013

Why China?

Asia / China much less impacted by the crisis1

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Asia

OECD

China

Real GDP, quarterly percent change, year-on-year

Source: Global Insight, Grosvenor Research 2012

China is becoming the dominant country in global trade

Source: Global Insight, Grosvenor Research, 2012

Country share of world exports (%)

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In 20 years China will equal the US as the world’s leading consumer nation

Source: Global Insight, Grosvenor Research, 2012

Nominal Private Consumption billions US$

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China’s forecast GDP growth is high, by any standardU

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Source: Global Insight, Grosvenor Research, 2012

GDP growth 2012-2020 p.a.

A new and huge middle class is emerging

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Source: Oxford Economics

Household income of $10 to $100 dollars a day in PPP

Urban growth creates many real estate opportunitiesIn

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Source: UN, Grosvenor Research, 2012

Urban population (as a % of total)

A large number of sizeable markets

Source: UN, Grosvenor Research, 2012

Total population – 000’s people

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% of owner-occupied stock

Currency appreciation as well?

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Source: IHS Global Insight

Grosvenor’s strategy

AN INTRODUCTION TO

GROSVENOR

October 2012

www.grosvenor.com

ABOUT GROSVENOR

Grosvenor is a privately owned property group active in some of the world’s most dynamic cities.

300 acres covering Mayfair and Belgravia.

Creating exceptional places for people to live, work and relax.

Map to left: Grosvenor's Mayfair and Belgravia estate in Central London

ABOUT GROSVENOR

Figures as at 17 April 2012

One of the largest private real estate companies in the world

World-wide staff of over 560 professionals with interests in 12 countries operating from 18 local offices

We manage properties with a total value of £12.5bn (US$20bn)

560 staff worldwide

interests in 12 countries

operating from 18 local offices

We manage properties with a total value of £12.5bn (US$20bn) of which retail represents 43%

ABOUT GROSVENOR

A DIVERSIFIED PORTFOLIO

OUR HERITAGE

The origins of Grosvenor are in the development and management of London’s largest private estate dating back over 300 years

TIMELINE

1677: Mayfair and Belgravia came in to the Grosvenor Family

1720: Development began in Central London

1953: Started Americas business. First international acquisition

1956: First Joint Venture

1967: Started Australia business

1976: Launched our first Fund

1994: Started Asia business

1998: Started Continental Europe business

2005: Formally established Grosvenor Fund Management

Local presence and local partners key to success

■ Hong Kong, 25 September 2012 - Harvest Fund Management (“HFM”) and Grosvenor Fund Management (“GFM”) have joined forces to launch a dedicated real estate fund management business investing in Greater China to be led by Mr Rong Ren.

■ The business, named Harvest Real Estate Investments (“HREI”), will manage Greater China real estate strategies for investors globally, through the creation of both U.S. dollar denominated and Renminbi denominated funds. The business seeks to identify attractive real estate opportunities across multiple sectors within Greater China’s emerging real estate industry for both international investors and domestic investors in China. The business also plans to bring global real estate opportunities to domestic investors in China.

China risks

Future supplyL

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Source: brokers, Grosvenor Research, 2012

Completions as % of stock

Lack of transparencyU

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Source: JLL, Grosvenor Research, 2012

JLL Transparency index (the lowest the number, the more transparent the market)

The competition is very tough

■ Local players;

– Generally well capitalised, good local knowledge, poor asset management skills

■ Foreign players

– Direct investors

• Well capitalised, partner with the best local players (ADIA, GIC, CPP)

– HK / Singaporean listed developers

• Sophisticated, long term presence in China, big teams on the ground, can source land and build good product (Sung Hung Kai, Cheung Kong, New World Developers, Henderson Land, Capital Land, Swire)

The competition is very tough

■ Foreign players (Cont.)

– US / Australian developers

• Late comers, some difficulties in buying land (Tishman Speyer, Lend Lease), bring retail and asset management expertise

– Japanese developers

• Bring retail expertise, partner with Chinese developers, bring retail expertise, well capitalised

– Investment bank backed funds

• Some OK others came in at the wrong time, big and well capitalised, not always well run (MSREF, Whitehall, JP Morgan, Merrill Lynch)

The competition is very tough

■ US and European Fund managers

– LIM, CBRE, Pramerica, Invesco, Grosvenor etc.

■ Regional fund mangers

– MGPA, ARA (dragon Fund)

– Some debt players

Taxation and profit repatriation can be difficult

■ Check out ‘China real estate investment handbook’ by Deloitte, 2012

■ Situation is complex and ever changing

■ Presently it is difficult to dispose of an asset by any route and repatriate

■ Repatriation of income / dividend is easier

Three ways to repatriate – all are difficult

■ Option A – Disposition of the asset.

– This is the worst option in terms of tax efficiency.

– It will trigger one of the key taxes in China which is the land appreciation tax, which can range from 30-60% of the appreciation gain depending on the range of the gain. 

■ Option B – Disposition of the shares in the onshore company

– Reasonable in terms of tax efficiency

– A withholding tax on the gains need to paid when the money is repatriated offshore, typically 5-10% on the gain depending on the jurisdiction of the offshore company

■ Option C – Disposition of the shares in the offshore company

– This is the most ideal in terms of tax efficiency.

– Since the transaction occurs offshore, taxes are very minimal

– However, the Chinese government announced Circular 698, which basically says for all offshore indirect transfers, the Chinese tax authorities will still treat it as a transfer onshore hence the deal can be subject taxes like a onshore Chinese company.

– Nowadays, many investors tries to use different ways to mitigate the risk of circular 698 which include structuring multi-layer Cayman holding companies

Why China?

Conclusions

■ Growth and diversification are compelling arguments;

– Trend nominal GDP growth of 7.5% + 4% = 11.5%

– Currency appreciation

– Versus perpetual recession in Europe, tax and dollar weakness in the US

– A global real estate portfolio is overweight China

■ Pension savings need a home – China has huge capacity to absorb investment

■ Taking Chinese capital out, is also a motivation for fund managers