In Shanghai, UBS is focusing on social housing.
UBS, a Swiss bank, has begun on a ground-breaking endeavor to invest in cheap housing in China, in a project that will house "important workers," such as firefighters and police officers.
UBS Global Asset Management will manage a fund investing in public rental housing in Shanghai, making it the first deal of its sort in China for an international investment bank. The fund's principal investor is the asset management arm of China Taiping Insurance Group, one of China's "Big Five" insurers. The fund will create houses valued roughly $100 million.
UBS is also in negotiations with other cities and insurers in China about developing public housing. It already has a joint venture fund with Chinese developer Gemdale, which has made traditional real estate investments in secondary towns like Shenyang, Hangzhou, Xian, and Yangzhou. A social-housing component is also included in the Hangzhou plan.
According to commentators, the potential for participation in China's big social-housing project is enormous. Private developers in China, on the other hand, have showed little interest in the sector, preferring to build higher-margin luxury apartments and mansions instead.
Former Prime Minister Wen Jiabao promised in 2011 that the government will develop 36 million affordable housing units in the next five years.
According to Mizuho Securities analyst Alan Jin, these aggressive plans translate to a target of 6.3 million social-housing units starting this year, with a completion target of 4.7 million units in 2013.
Chinese insurers are looking for long-term, steady income streams to meet their future obligations in terms of insurance claims, and public rental housing, with rents guaranteed by the Chinese government, could be a good match.
Chinese insurers can now invest in real estate for the first time, after previously only being able to own their own offices due to new laws. They can now put 15% of their US$1.2 trillion worth of assets into real estate. According to the brokerage CBRE, there is a pool of US$180 billion looking to be put to work in the asset class.
Foreign corporations, on the other hand, have showed little interest in the industry so far, owing to the fact that most property investors view Chinese real estate as requiring a high yield to be profitable.
"Local insurance companies are extremely comfortable underwriting a local government," said Trevor Cooke, UBS Global Asset Management's head of real estate in Asia Pacific. "It's been more difficult for foreign money. Coming into overseas markets has always come with a charge. Then there's the China surcharge."
In China, he predicts that institutional capital is rising at a rate of 20% each year. Cooke stated, "That capital will need to find a home."
The Shanghai project, which will create roughly 1,000 flats, is being constructed in collaboration with the Hongkou district's public-rental housing division. The government will keep track of the workers who are eligible for housing. The objective is that people live nearby to their places of employment, even if they can't afford market rentals.
The fund's investment manager is UBS Global Asset Management (China) Ltd., and the adviser is UBS SDIC Fund Management Co.
Local investors are mostly interested in inexpensive housing, according to UBS. However, Chinese towns and provinces can provide land at a reduced or no cost as an incentive for insurance companies like Taiping to support the initiative. propertyfinder
"Obviously, the opportunity is as huge as or bigger than what the private market has been creating," said Benjamin Cha, managing director of UBS Global Asset Management's Asia Pacific region. "The government is increasingly dictating that commercial developers must transform a component of their projects into social housing in land auctions and land grants."
There has been worry that not all of China's public housing funds are being put to good use. According to the National Audit Office, almost $1 billion has already been plundered from the program, with the funds being used to promote or initiate conventional housing projects and other building.
China's "Big Five" insurers, on the other hand, are likely to be reliable partners for foreign investment. Standard & Poor's has given China Taiping Insurance's Hong Kong-issued bonds an investment-grade rating, however at the lower end of the spectrum, at BBB+.