The property market in China is going through something of a consolidation phase, after an extended bull run that he was led many to question whether it could undermine economic stability. For specialist real estate managers who have good local connections, this scenario presents some attractive investment opportunities. Patrick Boot is managing director of Pacific Alliance Real Estate. With a focus on China through its subsidiary Pacific Alliance China Land, what does he make of the current state of the market?

“We believe the government’s tightening measures, on both the supply and demand fronts, will have longer term benefits for the continued development of China’s property market,” says Boot. “We could see some softening in momentum, with prices adjusting and stabilising in the short term. However in the medium to long term, with its burgeoning urbanisation and fast growing income, China has the right ingredients for a sustainable upward cycle in the property sector.

For real estate investors with sufficient liquidity, there have been some attractively ‘distressed’ opportunities in the last two or three years. The tightening in the market now is creating a similar scenario and Pacific Alliance is looking closely at a number of investments currently. Boot says, “It is the Chinese government’s intention to cool the real estate market. Bank lending for property developments has been reduced. The government has recently raised the bank reserve ratio again and we may see even more rigorous tightening in the future. The government is doing this to shield the market from a potential oversupply, and is therefore likely to diminish the possibility of a large price correction in the future.

“However, in doing so we may also see more small to mid-sized players, who are caught in the middle of development projects without ongoing financing, and therefore need to either obtain some sort of short-term financing or dispose of their assets quickly.”

Many institutions are sitting on their hands in this consolidation phase, on the view that there is not much value to be had. But Pacific Alliance takes the view that institutions with an opportunistic strategy should be active in the market now: “We agree that institutions who are interested in a core fund, traditional real estate investment approach should take a wait and see approach, until the real effects of the Chinese government’s tightening measures have fully emerged. However, if they are able to be a bit more opportunistic, institutions should look at special opportunity real estate type funds, that can take advantage of the potential downside and distressed opportunities.

Although residential property prices in China have increased noticeably, retail property prices have not risen nearly as fast and this is a sector where Pacific Alliance expects to make some opportunistic plays in the short term. Boot says, “We expect to see opportunities to acquire existing or nearly completed retail properties with poor track records or ineffective management that have high value-add potential. The fund can deliver a mix of repositioning, recapitalisation, and operating efficiency improvements to enhance the value of these retail properties.”

Like a lot of specialist managers in this area, Pacific Alliance China Land has an investment and development discipline that ensures costs are kept firmly under control. Boot comments, “We follow an opportunistic multi-strategy investment approach, which allows us to achieve capital protection and asset appreciation in different phases of the market cycle. The strategies which we follow include a mix of debt and equity investment strategies: bridge financing, co-development, pre-IPO, asset acquisition and distressed platform investments.”