China – opportunity and strategy
Dr Richard Barkham MRICS
Grosvenor Group Research Director
March 2013
Why China?
Asia / China much less impacted by the crisis1
99
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19
96
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96
Q3
19
97
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19
97
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98
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09
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20
10
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10
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20
11
Q1
20
11
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20
12
Q1
20
12
Q3
20
13
Q1
-10
-5
0
5
10
15
20
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 (%)
US
Eu
rozo
ne
Ph
ilip
pin
es
Vie
tna
m
Ind
on
esi
a
Ma
lays
ia
Th
aila
nd
Ta
iwa
n
Jap
an
Ho
ng
Ko
ng
Sin
ga
po
re
So
uth
Ko
rea
Ind
ia
Ch
ina
0
5
10
15
20
25
30
2010
2030
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$
Au
stra
lia
Sp
ain
Ca
na
da
Italy
Fra
nce
Ge
rma
ny
UK
US
Ho
ng
Ko
ng
Sin
ga
po
re
Vie
tna
m
Ma
lays
ia
Ph
ilip
pin
es
Th
aila
nd
Ta
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n
So
uth
Ko
rea
Ind
on
esi
a
Jap
an
Ind
ia
Ch
ina
0
5,000
10,000
15,000
20,000
25,000
30,000
2010
2030
China’s forecast GDP growth is high, by any standardU
S
Italy
Sp
ain
Ge
rma
ny
Fra
nce UK
Jap
an
Ta
iwa
n
So
uth
Ko
rea
Ho
ng
Ko
ng
Sin
ga
po
re
Th
aila
nd
Ma
lays
ia
Ph
ilip
pin
es
Ind
on
esi
a
Vie
tna
m
Ch
ina
Ind
ia
0
1
2
3
4
5
6
7
8
9
Source: Global Insight, Grosvenor Research, 2012
GDP growth 2012-2020 p.a.
A new and huge middle class is emerging
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2009 2020
Middle East & North Africa
Sub-Saharan Africa
Asia Pacific
Central and South America
Europe
North America
Global middle classMillions
Source: Oxford Economics
Household income of $10 to $100 dollars a day in PPP
Urban growth creates many real estate opportunitiesIn
dia
Th
aila
nd
Ch
ina
Ind
on
esi
a
Jap
an
Ph
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We
ste
rn E
uro
pe
US
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010
2030
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
Da
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rt W
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ork
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on
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ai
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mb
ai
De
lhi
To
kyo
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2010
2030
Property owner-occupation ratio in Asia / China is highS
witz
erl
an
d
UK
Au
stra
lia US
Ho
ng
Ko
ng
Jap
an
Sin
ga
po
re
So
uth
Ko
rea
Ma
lays
ia
Ch
ina
Ta
iwa
n
Th
aila
nd
Ind
ia
0
10
20
30
40
50
60
70
80
90
100
Source: DTZ, Grosvenor Research, 2012
% of owner-occupied stock
Currency appreciation as well?
1980Q1 1982Q3 1985Q1 1987Q3 1990Q1 1992Q3 1995Q1 1997Q3 2000Q1 2002Q3 2005Q1 2007Q3 2010Q1 2012Q30
2
4
6
8
10
12
14
16
18
RMB/GBP
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
A O
ffice
Mu
nic
h O
ffice
Ma
dri
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ffice
Pa
ris
Offi
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Sa
n F
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ffice
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ffice
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ffice
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Historic
Next five years
Source: brokers, Grosvenor Research, 2012
Completions as % of stock
Lack of transparencyU
S
UK
Au
stra
lia
Fra
nce
Sw
ed
en
Ge
rma
ny
Sp
ain
Ho
ng
Ko
ng
Sin
ga
po
re
Ma
lays
ia
Jap
an
Ta
iwa
n
Ch
ina
Tie
r 1
Citi
es
Ph
ilip
pin
es
Ind
on
esi
a
Th
aila
nd
So
uth
Ko
rea
Ch
ina
Tie
r 2
Citi
es
Ind
ia T
ier
1 C
itie
s
Ind
ia T
ier
2 C
itie
s
Ind
ia T
ier
3 C
itie
s
Ch
ina
Tie
r 3
Citi
es
Vie
tna
m
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
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
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