ING Plows an Additional $700 Million Into Chinese Real Estate

 By Jason Simpkins
Associate Editor

While the sickly U.S. housing market drains the economy, real estate on the other side of the world is booming.

The world's biggest property fund manager ING Real Estate recently laid plans for a second China fund.  The company has already spent most of the $350 million raised for residential development in China in 2006, and now a fund twice that size is in the works...

ING plans to spend an additional $700 million on Chinese real estate. Combined with a new Japan fund, ING will be spending $1.6 billion on Asian real estate in 2008.

"On the one hand you see part of the world slowing down, triggered by the credit crunch," ING Real Estate Chairman and Chief Executive, told Reuters. "And then you see another part of the world - China, Japan, and even Australia - where there are lots of opportunities."

Throughout Korea, India, even Singapore, and particularly China, upwardly mobile families are embracing their newfound middleclass lifestyle by seeking out homes.  As a result prices in the region have skyrocketed. New apartments in Shanghai are selling for as much as $17,000 per square meter, the Associated Press reported.

And it's not just the locals scrambling to scoff up real estate either. The U.S. slump has driven real estate speculators abroad - and they too are driving up home prices throughout Asia.

India: Home to the World's Most Attractive Real Estate

While opportunities can be found throughout Asia, it's become clear that the best opportunities are in India and China, the region's two strongest economies.

China's annual economic growth is likely to mirror the 11.5% growth rate it has experienced over the first three quarters. India's economy grew 8.9% in the third quarter after posting a 9.3% increase in the second. For that reason, India and China have to be all the more vigilant if they intend to preempt any possible bubbles.

In India, housing prices have been rising 30% to 40% annually over the last several years, but authorities have responded by raising interest rates and cutting back lending.

"The Reserve Bank of India has been keeping a tight lid on banks' exposure to real estate," Ritesh Maheswari, a credit analyst with Standard and Poors's in Singapore, told the International Herald Tribune. "We don't foresee large-scale defaults."

Stability in the Indian market has been highlighted by ongoing trouble in the United States. An increasing number of investors now see the Indian property market as a safer bet.

"The region is enjoying sound property fundamentals. To date the credit crunch has not significantly impacted the markets here. Liquidity levels are still high, and both local and foreign investors have maintained their allocations to real estate," said a report by real estate consultancy Jones Lang La Salle Inc. (JLL).

"Some bigger funds, which entered 2-3 years ago, are now very comfortable with the Indian market. Their experiences have become an attraction for many smaller as well as some non-institutional investors from U.S. to put money in the Indian property market to minimize risks," JLLM senior manager Abhishek Kiran Gupta told the Economic Times.

China: More Risk for the Buck

Unfortunately, nothing in real estate is slam-dunk any more - and that goes for China, too. Because of more lenient lending restrictions and higher speculation, some consider housing loans in China riskier than those in the United States.

Yi Xianrong, an economist at the China Academy of Social Sciences, believes China's lack of a comprehensive credit data system lets borrowers falsify information when applying for mortgages. Yi estimates the overall quality of property loans in China is even worse than the risky mortgages that have wreaked havoc on the U.S. market.

Regardless, housing price inflation on China's mainland hit a new monthly high of 9.5% in October, with prices rising nearly 18% in Beijing alone.

"I found prices rose too fast and I didn't know why," Sun Chunming, a technician in Shanghai told IHT, "But I was worried if I didn't buy it now, I might not be able to afford one later."

China's biggest property lender, China Construction Bank Corp., recently issued a report that warned banks to beware of falsified credit data and tighten their lending practices. The bank sees this volatile time as a high-risk period for personal housing loans.

Beijing Clamps Down

As expected, the Chinese government has also stepped in by taking increasingly severe actions to regulate banking and lending practices. China has raised both interest rates and reserve requirements, and now, gone as far as freezing lending all together for the remainder of 2007. It has also issued "guidelines" for banks to follow when allocating capital for loans next year.

Earlier this month, regulators quietly ordered China's commercial banks to freeze lending through the rest of the year, the Wall Street Journal reported.

A China Banking Regulatory Commission official described the request to the WSJ as "guidance aimed at supporting the macro-control measures being implemented." But bankers say that to comply they must cancel loans and credit lines with businesses and individuals alike.

Also, CBRC quietly instructed banks not to loan money to industries known as "Two Highs, One Surplus," Forbes reported in September. The "two highs" are industries consuming high levels of energy and producing excessive amounts of pollution. The "one surplus" refers to industries saturated with excess capacity, notably real estate developers. The CBRC has denied imposing a blanket freeze on lending, something it has done in the past. The last time China instituted such a policy was April 2004.

Curbs on lending may prevent Chinese banks from inflating their loan books temporarily but most analysts expect pent up demand to be unleashed in the beginning of the new year.

That may be why China already has its sights set on 2008, a year the government in Beijing has begun regulating in advance. Dow Jones cited a memo detailing a meeting between bank executives and Chinese authorities in which lenders were told to submit lending plans for next year. The government also recommended quarterly lending quotas.

"Next year is a special year with the change in government and Beijing Olympic Games. If loans get out of control that could lead to harsh macro-controls and the biggest losers would be commercial banks," the memo read.

Banks have been instructed to allocate 30% to 35% of their full-year loan allotments within the first quarter, 60% to 65% by the end of the first half, and 80% to 85% by the end of the third quarter. Any remaining quarter is to be made available in the fourth quarter. Banks should have some breathing room beyond those figures, but anything deemed as excessive loan growth will result in penalties.

News and Related Stories:

  • Forbes:
    China Clamps Down Further On Bank Lending
  • Reuters:
    ING plans $700 mln China property fund