A US $700 million property fund raised by HSBC expects returns of 20-25 percent from buying offices in China's major cities and building housing in up-and-coming provincial cities, its manager said on Thursday.
Borrowing should lift the fund's war chest to some US $1.5 billion, according to Stephen Yuen, who played down predictions by some analysts that the Chinese government will come down hard on the property market in an effort to stymie inflation.
The fund, a joint venture unveiled this week between the property and infrastructure arm of HSBC and Hong Kong developer Nan Fung Group, has already snapped up a Beijing office and a logistics centre in Dalian.
Yuen said meeting the target net internal rate of return (IRR) would be tough, but possible through a mix of low-risk investments in Beijing, Shanghai and Guangzhou, and riskier housing development in places like Dalian, Wuhan and Suzhou.
"It's not easy to achieve at this point in time, because so many Hong Kong developers and investors are putting large amounts of money into the China market," he said. "We face strong competition, which jacks up prices."
Hong Kong developers are rushing into the mainland market to give their profits an extra kick, with the likes of Kerry Properties, Sun Hung Kai Properties and Cheung Kong (Holdings) to the fore. They are joined by global property funds, including those run by ING Real Estate, Citigroup and Invesco.
But some analysts believe rising inflation will persuade the government to introduce tougher measures to cool the property market because previous steps, including interest rate rises and taxes to discourage speculation, have had little impact.
Yuen said he doubted the government would harm the economy and shoot itself in the foot by clamping down too hard on the property market. "If they squeeze the market tightly no-one benefits, including the government," Yuen said.
"I don't think they will be very harsh," he said. "They'll do something to keep the property market healthy and growing, but also help people who can't afford housing." Property prices rose an average 8.2 percent nation-wide in the year to August, but that average masks hot spots such as the 12.1 percent rise in Beijing and a 20.8 percent jump in the southern city of Shenzhen.
Beijing, thought to be worried by the risk of social unrest, has introduced rules on developers in the last year that seek to encourage more construction of smaller and cheaper apartments at the expense of luxury homes. "These policies and laws are subject to frequent changes, so we'll have to watch closely," Yuen said.
HSBC and Nan Fung each invested $100 million in the eight-year close-ended fund, which drew institutional investors from Europe and Asia. Yuen said the fund would draw on Nan Fung's development expertise and could build on land owned by the developer in China.