(SINGAPORE) Property fund manager MGPA plans to build malls in smaller Chinese cities as it sees opportunities arising from China’s rapid growth and international retailers planned expansion into the country’s interior.

MGPA is also looking to buy offices in Japan as values have fallen sharply and should recover even if rents remain flat.

Most of the investments in China and Japan will come from MGPA’s US$3.9 billion Asia Fund III, which is currently about 50 per cent invested, MGPA managing director and Asia portfolio manager John Saunders told Reuters in an interview.

But MGPA, which specialises in Asian and European real estate and is part owned by Australia’s Macquarie, intends to stay away from Beijing and Shanghai for now, Mr Saunders said.

‘I wouldn’t say bubbles as such but there is a lot of competition in these markets and they are fully priced,’ he said of China’s two main 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.’

By contrast, shopping malls in smaller Chinese cities offer good growth potential with international retailers keen to expand in a bid to tap the country’s growing affluence.

Rents in these Tier-2 cities are also high relative to property values, with many retail properties transacting at cap rates of around 6.5 to 6.75 per cent, which means there is potential for a rise in valuations even if rents stay flat.

Despite Beijing’s moves to cool the real estate market, property investors remain keen on developing malls due to strong consumer demand. Retail sales jumped 17.9 per cent in July from a year ago, led by luxury goods such as jewellery which jumped 44 per cent.

Mr Saunders said MGPA was looking to develop its own malls rather than buy existing properties because Chinese laws make it difficult for foreign investors to buy over existing projects.

Turning to Japan, Mr Saunders, who also manages MGPA’s fully invested US$921 million Asia Fund II, said prices of office properties had fallen by as much as 40 per cent and the sector represented an opportunity even if rents remained weak.

‘Largely the pain has already been taken and it’s largely unwanted and unloved at the moment which is the first place you look if you are an opportunity fund,’ he said.

‘The near-term economic outlook for Japan doesn’t look that fantastic. But as you start to see a normalisation of risk again, there will certainly be cap rate compression even if rents are flat.’

The Asia Fund II’s investments include several office buildings in Japan and the former headquarter building of Singapore investment company Temasek. — Reuters

Source: Business Times, 17 Aug 2010