With international retailers planning to venture into China’s interior, and with rapid growth in its property market, property fund manager MGPA intends to develop malls in smaller cities in China.
The property fund manager is also seeking to purchase offices in Japan, as values have declined sharply and are expected to recover even if rents stay flat.
Most investments in China and Japan will come from the US$3.9-billion Asia Fund III of MGPA, said John Saunders, managing director of MGPA and the Asia portfolio manager, in an interview with Reuters.
However, he noted that the company plans to avoid Shanghai and Beijing for now. “I wouldn’t say bubbles as such but there is a lot of competition in these markets and they are fully priced,” he said, citing the two main Chinese cities.
“Most of the international brands will tell you they feel fairly, fully represented in Beijing and Shanghai, particularly Beijing, where there was a real rush prior to the Olympics to get a presence there,” he added.
On the other hand, good growth potential is seen in shopping malls located in smaller Chinese cities, with international retailers eager to expand in an attempt to make use of China’s growing affluence.
Tier-2 cities are also seeing high rents in relation to property values. Many retail properties are transacted at cap rates of about 6.5 percent to 6.75 percent, which means that valuations may rise even if rents remain flat.
Due to strong consumer demand, property investors are still eager to develop malls in spite of Beijing’s measures to cool down the property market. Retail sales grew 17.9 percent in July from the previous year, led by luxury goods which saw a 44 percent increase.
MGPA was seeking to build its own malls rather than purchase existing properties since laws in China make it hard for foreign investors to buy existing properties, said Mr. Saunders.
Meanwhile, office property prices in Japan have declined up to 40 percent, said Mr. Saunders, adding that the sector presented opportunities even if rents stayed weak.