“China is one of the few places you can still buy real estate with growth”

Goodwin Gaw, chairman, co-founded Gaw Capital alongside his brother Kenneth Gaw, president of the group, in 2005. Here he examines the outlook for China's real estate sector, which has seen a serious slowdown since the economic crisis began.

China has seen massive cooling of its property sector in the last few months. How has this impacted on the private equity real estate industry?
The Chinese government began cooling its property sector in early 2007 with both fiscal and monetary policies, although these did not really bite into the over-heated sector until Q3 2007. This government-induced cool-down was then amplified by the liquidity crisis which has caused significant liquidity problems for most of the real estate firms in China today.

However, the crucial difference between China and most of the rest of the world is that China's banks have ample liquidity and, in fact, the government has now started relaxing the liquidity squeeze it instigated.

Nonetheless, the slowdown in exports caused by the worldwide recession is very real. The US consumes a disproportionately higher amount than any other country in the world, so the adjustment we are seeing now in US consumer spending habits ? from spending out of credit to spending out of savings – means the slowdown will be long and painful. However, China has significant capital reserves and is better equipped fiscally to cope with the economic crisis than almost any other large economy. While it may endure some tough times in the immediate future, China stands a good chance of using its growing domestic market and rising middle class to weather the storm.

Where do you see the opportunities in Chinese real estate in 2009?
We feel the current economic environment offers up some opportunistic investment opportunities in the retail and hospitality sectors, especially where properties are being sold by distressed foreign institutions or over-stretched local developers.

Looking to the long term, do you think the rapid pace of property development in China will recover, and if so, how sustainable will it be?
The speed of recovery will depend on the sector. The mass residential sector will likely return the most quickly given the genuine demand of end users.

Real estate accounts for a large percentage of fixed asset investment (FAI) as well as accounting for 10 percent of the employment base. With exports in retreat, China will have to rely on FAI and domestic consumption to sustain some form of growth. This is why many recent policies are geared towards stimulating mass housing ? it is fundamental to stimulating domestic consumption, sustaining employment, and reducing social unrest.

We will also likely see forced selling of Tier 1 city assets from over-stretched foreigners looking to repatriate cash, but those asset classes will benefit less from government stimulus policies.

For an institutional investor looking to invest in China for the first time, why should they choose real estate above the other asset classes?
It is likely both the US and Europe will be printing sizable quantities of money in the near future and real estate has historically performed well in an inflationary environment ? especially when money is depreciating on such a rapid scale.

China is one of the few places you can still buy real estate with growth, and even taking into account the perception that emerging market risk is higher, investing in growth offers a lot of leeway when it comes to making returns. As the saying goes; a rising tide lifts all boats.

China is a notoriously opaque market, how easy is it to do thorough due diligence around the property investments themselves?
It is an opaque market in that it is difficult to navigate. In most countries, signing a contract means you are 70 percent of the way to the end game. In China, executing after the contract is the difficult part. Holding the hand of the seller, guiding the deal through the approval process and then executing the value-add after the acquisition is far more important than the deal sourcing process. This is why we chose to build a large team on the ground when becoming a real estate operating company. We started out as an operating partner to an institutional capital partner before evolving into a fund management company. In a market like China, we feel having a large team is a key advantage in controlling our assets ? especially in the retail and hospitality space. However, we do believe in partnering with strong regional developers with the local knowledge and relationships to put them in a more competitive position than their national counterparts. We have a hybrid approach in partnering with the ?best of breed? regional developers on our residential investments and operating with our in-house operating companies for retail and hospitality assets.