“The path is not always straight, but it’s often well lit”

Published on: 12 January 2022

Is the Chinese housing market overheated? Evergrande, a major Chinese real estate company, is still struggling with heavy financial problems. APG also invests in Chinese homes, among other things. Why? And in which other Asian real estate does APG invest? Graeme Torre, Head of APG Asia-Pacific Real Estate, talks about the Chinese government’s housing policy, investment opportunities thanks to the booming e-commerce, and the crux of doing business with Asians: show respect, be patient and remember your table manners.  


This fall, investors in financial markets became very concerned about Evergrande, one of China’s largest real estate companies. It was about to collapse, with a debt burden of about EUR 260 billion. That concern was logical; collapse of Evergrande can cause a domino effect, first in the Chinese real estate world and then beyond. Because roughly a quarter of the Chinese economy consists of real estate-related activities. For now, it seems that Evergrande, with the support of the Chinese government and the sale of business units, is barely fulfilling its obligations.


APG has been investing in Asian real estate for many years, including in China. Briton Graeme Torre is Head of Asia-Pacific Real Estate and works from Hong Kong with his team of sixteen APG employees. What does he think about the bubble in the Chinese real estate market?

Graeme Torre: “People have been talking about this for about fifteen years now. I for one don’t think that this bubble is that big, let alone that it will burst. True, there are plenty of indicators that point to overheating. But the catastrophic collapse of the housing market, predicted by many, isn’t happening. The Chinese government wants to ensure that as many people as possible can own their own home. Many Chinese are still moving from the countryside, i.e. from western China, to the big cities on the east coast, in search of work. And they need to be housed. What we see now is that the Chinese government is not afraid to have a strong hand in the housing market.”


So how do they do that?

“They impose restrictions in various ways. They apply a policy of so-called three “red lines”. The gist of this is that real estate developers, like Evergrande, must deleverage and report to the Chinese central bank each month. As long as they don’t improve their debt position, they’re not allowed to take out new loans at the banks. With this strict policy, the government seems to be able to keep the Chinese real estate market on track. Incidentally, there are so many real estate companies in China that there are always a few in danger of collapse and which then becomes global news. But in my view, that doesn’t paint an accurate picture of the Chinese real estate market.”


What do these developments mean to APG’s investments in Chinese homes?

“It’s clear that the Chinese government wants to protect the affordability of houses as much as possible. Part of that policy is that in recent years they have focused on the development of rented housing. That’s why we have added rental apartments to our portfolio of investments in Chinese real estate. We mainly do this with the American real estate developer and manager Greystar. We focus on high-quality homes in city centers in the mid-price range. The main target group is the younger professionals, both singles and families, who have just moved to the city or who are still saving for the purchase of their first home.”

“Our investments are relatively safe, because we always aim to invest in line with the real estate policy of the Chinese government”

But still, all those images of ghost towns full of empty residential towers… is it still safe for APG to invest in Chinese homes?

“I certainly don’t want to downplay that, but there were different theories about those ghost towns. Most of these houses are bought by speculators. Sometimes with the aim of renting them out, sometimes to keep them as an investment. Yet many of those homes were built before there was any demand for them. Investing in housing usually pays off more than investing in stocks. And until recently, the investor paid no tax at all on both the ownership of real estate and the proceeds of speculation. The Chinese government is envisioning a very long-term master plan, based on the rationale that hundreds of millions of people will continue to move from the countryside to the cities in the coming decades. So the idea is to anticipate that and have your housing stock in order. This includes the logistics infrastructure, such as roads, railways, bridges schools, hospitals etcetera. Hence a lot of money is invested in that. The Chinese government has therefore encouraged private real estate developers, some of which used to be government-owned, to buy up land and build houses. Including the associated infrastructure. This was also encouraged from a tax point of view.

But yes, in the past we have seen too many houses being built in some medium-sized cities. Our investments are relatively safe, because we always aim to invest in line with the real estate policy of the Chinese government. Not that there are no risks at all, sometimes regulations about investing can change overnight. The Chinese have a fitting expression for this: “The path is not always straight, but it’s often well lit.”     


How much do you invest in Chinese real estate and what return does that yield?

“Of all our real estate investments in the Asia-Pacific region, we invest about 30 percent in China; both on the private market for rented housing and in listed real estate. In the coming years, in line with Chinese government policy, we will focus strongly on investing in rented housing, as well as in logistics, data centers and life sciences. In terms of return, over the last five years we’ve significantly outperformed the benchmarks. Although that’s not our main goal.” 


What does your total investment portfolio look like?

“We invest in many countries in the Asia-Pacific region, especially in developed markets such as Japan, China, Hong Kong and Australia. We invest relatively heavily in logistics. This includes, for example, distribution centers and industrial and logistics warehouses. These investments are doing very well. This has been reinforced by corona, which has forced consumers worldwide to shop online much more. Not only do all those web shops need a lot of storage space, they also need data centers. In any case, global data use has been increasing rapidly for years, so having invested in it is a good thing. We do this in China, Hong Kong, Japan and South Korea, among other countries. In addition, we recently started investing in real estate in the medical sector. In addition to housing and logistics, we also invest in offices and shops, but to a lesser extent.”


APG is increasingly committed to sustainability. How do you translate that to your portfolio?

“Sustainability is very important in our region. China has required data center owners to take measures to significantly reduce their massive energy consumption and to use renewable energy sources where possible. We and our logistics partners are working hard on initiatives such as installing solar panels on the roofs of our distribution centers, using more renewable energy and using more sustainable materials in the construction of real estate.”


Another trend is the increasing demand for health care real estate. Given the aging population in countries such as China and Japan, does that offer you any opportunities?

“Absolutely. Not only because people get older, they also have more money to spend; and so they’re also expected to spend more on health care. We're taking a serious look at all developments in health care. For example, we invest in Australian senior real estate, so that’s villas for retirees in separate villages, fully equipped to their needs. And together with CBC Group, Asia’s largest health care investor, we’ve launched a platform for health care real estate in China. With this we want to invest in, for example, hospitals, care homes and medical research and production facilities. China wants to be as self-sufficient as possible, and that also applies to health care. The Chinese government is making it increasingly attractive for private investors to invest in Chinese research into medical applications. We've invested $450 million in this platform, an amount that we can still increase later. We're now investigating with CBC whether we can also launch such a platform in countries outside China.”


You have been working in Asia for over two decades. Have you become accustomed to the cultural differences in doing business?

“Well, that took me some years, ha ha. Their table manners alone, for example… how do you eat with chopsticks, when do you start eating, is it polite to eat a lot or a little, and so on. But when you do business with Asians, the most important thing is that you show respect.

The enormous diversity of local languages is an altogether trickier matter. To communicate well and to understand all cultures and customs, you really need a local partner and a diverse team of colleagues.”


Do you mainly work with local people at your office in Hong Kong?

“My team consists of employees from China, South Korea, Japan, Singapore and Hong Kong, among others. We even have an employee from the UK. All we need now is an Australian. But I can pass for that myself, I’ve been told. The fact that you have to constantly adjust yourself here is what makes this work so exciting.” 

No domino effect

APG’s chief economist Thijs Knaap previously wrote that he does not expect a domino effect if Evergrande collapses, as was the case when Lehman Brothers collapsed. “The risk of a crisis in a certain sector spreading to the entire economy is much smaller than it is outside China, due to the dominant role of government in China.”


Torre’s view on the impact of Evergrande’s liquidity problems on the Chinese real estate market hasn’t changed, since the story broke in 2021: “In the current environment we expect to see the larger and better capitalized property companies fare better than the ones with weaker balance sheets. There is a slow down in activity in the residential sector but because of the sector’s significant share in China’s GDP, we expect government support. Consolidations of some of the weaker companies into the stronger  property groups and the consequent reduction in competition for land should create opportunity for higher growth and increased profitability. And from a demand perspective, the emergence of a cohort of bigger and stronger property developers should restore any lagging confidence in the buyers market.”