"Developers used to feast on bank loans and the stock and bond markets. Now they can no longer get the 'milk' as easily as before, so it is time to try the 'soy milk' of funds like us," Lu Lin of CURA Investment & Management Co Ltd said in an interview.

Shanghai-based CURA is a major Chinese property fund firm now with 4 billion yuan ($627 million) in assets under management, accounting for less than 1/10th of China's property fund industry. CURA's competitors include Star Capital and CDH Real Estate in China.

China has taken a series of steps in the past two years to rein in runaway housing prices. It has banned developers from accessing the domestic stock and bond markets or trust loans. Banks are also increasingly cautious about lending to developers, especially cash-strapped small ones.

"Under the background there will definitely be more opportunities for us as a fund provider, although the risk of investing in real estate projects is increasing as the industry is facing a lot of uncertainties," Lu said.

But the number of fund-raising channels for domestic property private equity funds is falling, said Lu, who used to work at the Chinese Communist Party's Central Propaganda Department and has been in his current role since 2004.

China has just banned private banking units of most domestic commercial banks from selling property investment products managed by private equity funds.

"By doing that, it's virtually halved the number of our sales channels," he said in an interview on the sidelines of a property conference in Shenzhen over the weekend hosted by the China Europe International Business School in Shanghai.

"Regulators have reached too far."

CURA launched an 800 million yuan property fund earlier this year with the private banking unit of China Merchants Bank , following two similar funds with the private banking arm of the Industrial and Commercial Bank of China .

Both products drew heavy demand from private banking clients, he added.

CURA wants to launch more such products with banks, but the terms from the latter are getting increasingly tough, Lu said.

"For example, if you are launching residential property funds, the banks will ban us from investing in cities placed under home purchase restrictions," he said. "They allow us to do commercial property but they attach lots of conditions."

China has placed home purchase restrictions on about 40 cities, limiting the number of apartments each individual or family can purchase or banning non-local residents from buying.

CURA funds usually aim for annual gross return of 20 percent through equity investment and debt financing for property projects. CURA charges an annual management fee of 2-2.5 percent and also shares up to 20 percent of returns, Lu said.

CURA, which counts major domestic developers such as China Vanke among its founders and shareholders, has managed property funds of more than 10 billion yuan, including one with property service company CB Richard Ellis since its establishment in 2002.

Lu attributed the limited size of the fund industry in China to suspicion among government officials toward private equity firms and what he said were unfavourable tax policies.

"Private equity has yet to take off in China as many don't understand or are even afraid of private equity," he said. "Some government officials view us as loan sharks. But we are not. We are investing in equities and taking a lot of risks."

Copyright Reuters, 2011