Chinese Real Estate Market Under COVID-19 with Alicia Mou| Denzity Insights
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Real estate is not only one of the most important sectors of economy, but it also plays a crucial role in our lives. COVID-19 has put a break on many countries’ real estate industry.
In today’s episode, alongside Alicia Mou, we explore the effect of the global pandemic on Chinese real estate market and more.
- How did COVID-19 have any impact on the Greater Bay Area real estate market?
- What measures did the PRC government take?
- Has there been any changes in the overall market price?
- What should you look out for as a foreign investor?
- What alternatives are being utilized because of the travel restrictions?
As it can be difficult to catch some minor errors, transcripts may contain a few typos or inaccuracies.
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Alright, let’s get back to the transcript of the show. Enjoy!
Darren Wong: So hey, Alicia, thanks for joining in.
Alicia Mou: Hi, Darren.
Darren: Hey. So thanks for joining the show. And then First of all, please it’d be great if you could introduce yourself to the audience.
Alicia: Sure. Hi, everyone. My name is Alicia. I am the senior legal counsel at import Anna, and also the head of governance and also one of the cofounders of Prop tech Institute. So InfraRed NF is a joint venture real estate private equity fund between InfraRed Capital Partners, which is formerly HSBC specialist investments, and for Vervain resources, which was formerly an app in China. So our focus is on mezzanine financing and also value add investing in Greater China. So born and raised in Hong Kong, Real Estate has always been a very big part of my life and career. So prior to joining InfraRed NF, I was a solicitor at Woo Kwan Lee & Lo where I worked closely with many prominent Hong Kong based real estate developers, such as Cheung Kong Hutchison in their restructuring, and also New World in their privatization of New World China land.
Darren: Actually now think on it, I have known you for so long, almost like 10 years now. This is a really impressive list of things you have done already. Wow. That made me kind of insecure about my own career. But then this is exciting because like, I’ve always wanted to know about Chinese real estate. So we have talked about this before is that like, you know, you’re just someone that’s really close in the market. So it’d be great to have your one two and then tell the audience more about what’s going on and then something that they should be aware of? So the first question I have is that so something that even I don’t understand, really, for Chinese real estate markets, right? There is different zoning, what does that even mean?
Alicia: Sure, actually, this is a really big theme, and the Chinese real estate market in these past few years. And this is the concept of mega city clusters, or sometimes called mega hubs. This is typically defined as a group of two or more adjacent metropolitan cities. And a well known example to many of our Hong Kong viewers would probably be the Pearl River Delta greater Bay Area, which Hong Kong is a part of. The other city clusters that people may have heard of is the jjj (jing-jin-Ji), a bit of a mouthful out there, which is the bay bay region, so the northern part of China, the Yangtze River Delta, so that’s basically Shanghai and the surrounding region. And maybe less well known as the western parts, doesn’t have a very fancy name coining it yet, but sometimes people refer to the CC like Chongqing and Chengdu, which are the anchor cities of the western part of China. And also the central part of China with Wuhan actually as its core.
So it is particularly interesting, actually, when you look at China at night on a NASA satellite map, you see the city clusters I mentioned just now are the ones that shine the most brightly at night. So meaning they’re the most active cities, despite already after office hours time, so they’re the most active cities. So sometimes in terms of investment thesis, our focus is definitely on these mega city clusters. And we sometimes say we’re chasing the stars.
Darren: That’s cool. I hope I can find that.
Alicia: So actually, I just want to build on to that. I think the investing in these mega city clusters would continue to grow. And the really recent, the two sessions held in Beijing the “Lianghui,” it was announced that the PRC government will continue to drive, and leverage the role of these leading cities and city clusters and driving the overall development of the PRC economy and also driving urbanization. And from that increasing employment and also economic growth. And because this theme is continually mentioned, I really do believe that this theme urbanization and investing in Mega city clusters will continue to be a driving force in the Chinese real estate market.
Darren: That’s good. That’s very informative, because I get there’s a lot of things going on. So it was something that I was curious about too, because we’re in Hong Kong, and we’ve heard a lot of things about the greater Bay Area, and in the future, the potential of it. So I kind of want to pick your brain about like— what do you think of the real estate market for the greater Bay Area? And also, do you think it’s like, too early, is it too overly dramatic? And what are the activities like at the moment?
Alicia: Well, definitely, there’s a lot of interest surrounding the greater Bay Area. I think in particular, people based in Hong Kong were particularly interested in seeing how we could gain exposure to the Chinese real estate market in somewhat more familiar areas, because it’s a bit closer to us. So um, well definitely for our companies and areas that we are actively looking into. And we actually see a lot of activities there already. Whether one of them is tuition or even from private buyers. So off the 11 cities that’s from part of the greater Bay Area, I think, definitely Shenzhen is the hottest and I think the city that most investors would feel most comfortable with being a tier one city, and with also a lot of growth. In fact, this may be a surprise, but despite the COVID-19 situation, in April, the residential prices in Shenzhen continue to hike up by 10%
Darren: Wow. 10% Really?
Alicia: Yeah, yeah. So you would imagine like everything would haul or slow down or plummet with the COVID-19 situation in China, but I think in core tier one cities, the growth is so strong the demand is still there. But other cities that I think investors are also actively looking into would be Foshan, Zhongshan, and Zhuhai. I think these are all very familiar names with Hong Kong investors. And what particularly drives interest and also, on course, this whole developments of the greater Bay Area is infrastructure. So you notice all the cities I mentioned just now they’re very well connected to one another, especially connected to the stronger, higher tier cities like Shenzhen, whether by high speed rail or other railways, bridges, whatnot, and the continued growth of these infrastructures. I think these are the kind of the fundamentals that’s really popping the growth of the greater Bay. area, and I personally feel quite optimistic about the growth of this adequate area.
Darren: That’s cool. So going back a little bit to when you said something that in my mind was like, is Shenzhen having a 10% increase? Does that mean the asking price went up to 10% or the transaction went up by 10%?I just want to make sure I remember that.
Alicia: From my understanding it’s more B, I think it’s the overall market price. Partially apart from the I think demand is one thing, but also it’s actually slightly influenced by government policy. Because of the COVID-19 situation, as you may know, the government is unleashing a lot of measures to help many sectors of the economy, including developers, and there’s a bit of speculation there, where people think that “Oh, once these policies are in place, the price would spike even more.” And so it just kind of drove up the prices.
Darren: That’s crazy for someone who doesn’t understand Chinese real estate and understands real estate in a way. That’s crazy. That’s impressive. So speaking of virus, right, as you mentioned just now, how does the virus really affect the Chinese real estate market? And I know that that’s something that a lot of people talk about. But I want to know, like your point of view on that too.
Alicia: Sure. Well, definitely the COVID-19 situation was a shock to everyone. And, of course, China was at the epicenter of this at the very beginning of the global pandemic, and it has been severely impacted. So, one thing that I heard recently that I really like, and I think is applicable to these times is “the only certainty is uncertainty.” And even in the two sessions that I mentioned just now, China, the government has said that they won’t be setting GDP targets this year, which is the first time that the government has done so since 1990.
Of course, this is a period of great uncertainty for everyone and also especially Chinese market. In my experience, the activity restrictions and also the market sentiment in the earlier phase of the pandemic meant that the sales have slowed down, construction of progress of projects have almost halted. And even a lot of your resources are restricted to working from home but actually not a lot of companies, or at least at all levels of the company, have very sophisticated IP infrastructure. So in our experience, in dealing with PRC developers, we do find that we just can’t reach the guys on the ground or etc. We can only reach management.
So I think overall, there’s definitely a lot of impact on the Chinese real estate market here. And not only the operation perspective, but also the outbreak and also the shutdown has placed immense pressure on the real estate developers’ cash flows and their ability to practice operations. This is largely due to the slowdown in sales and also delays in obtaining permits from the government. But state support has played a very important role in averting an immediate crash of these developers.
Basically, the government has told all the local, state bank lenders to support businesses and help them and we have a lot of the developers are actually able to get extensions on loans, and also even press waivers. So for offshore lenders like ourselves, From discussions with our peers and also advisors, we find that not a lot of lenders are actually calling loans and like grabbing assets but rather they take a wait and see approach and how to take a more supportive and just have helping kind of roll out with their counterparties.
Darren: I see. Wow. So since then right, how has the Chinese real estate market been recovered since the virus situation being under control so far.
Alicia: Yep. Well, activities have begun to pick up and I see some residential sales flowing in and as I mentioned, just now the prices in Shenzhen are like crazy given all the circumstances, of course, but all our activities definitely have not fully recovered to pre virus pace but we still, we still see things picking up from our personal experience like for example local blog real estate type of transactions, we see site visits come in. So local potential buyers and sellers, they’re happy to meet and all that. But I guess for foreign investors, there’s still the travel restrictions. And I guess there’s a bit of worry about traveling so there’s less. So like for them, it’d be harder to contact on site dB. But then I think people are looking around this, for example, by doing video tours. So really, you could help in this respect to and in terms of prices, generally stable, if not growing. So, this is how we see, how the market has recovered recently.
Darren: Okay, wow. What do you see as a more long term impact of the virus situation?
Alicia: Yeah, well, I personally think that the COVID-19 situation will accelerate sector consolidation. Worry will become more of a, like a survival of the fittest. With higher quality and well established companies, developers being able to weather the storm, whereas the smaller players in the market may not be able to make it or get eaten up by the bigger players. Because I think the bigger players generally have better credibility. And also, they buy their power banks in terms of their lending, whereas these smaller guys, they’ve always struggled already, they’re already the banks don’t really like to lend to them so they often have to resort to financing by trust companies or other non banking sources and they’re paying in capital cost at like 8% to 15%. And with this crunch in the market, generally from the lending side of things, and also the cash flow, we probably would think that the bigger players would find this as an open opportunity to consolidate and take over some of the land banks from these smaller guys and really, you could see this sector consolidating. So I think the wheels of motion have already been set in place prior to the COVID-19 situation. But this virus really just increased that pace of the winds of evolution of the market.
Darren: I see. So what if smaller guys like me, you know, still brave enough to go into the Chinese real estate markets, what are some things to be aware, you know, like people like me like, or other investors I tend to make when investing in Chinese market.
Alicia: Yeah, I think for foreign investors, the first thing would be repatriation, you need to think about what currency are you investing into China? Are you for example, using US dollars, Hong Kong dollars? So for us, as an US dollar investor we always use an offer transaction structure. So, for example, when we buy a property, we would buy it through an offshore company rather than say buying an asset or buying a PRC holding company or for a lending business, we also always lend to an offshore entity like a Hong Kong company or BVI or Cayman company, which ultimately have presence in the PRC through its subsidiaries. So, yeah this is something that we’re very careful of. So if you’re a foreign investor, I think this is one of the big things that you need to be aware of.
Darren: Hmm, okay. So, are there any tips or tricks that you could share with our audience in terms of doing property sales and purchase in China because I think I remember this is something that you work really closely with in your company. So it would be great to have your insights on that.
Alicia: Sure, in terms of acquiring a property, the biggest thing you need to be aware of is title. So for what you have in mind for the property, make sure you have the right title for it, for example, if you want to make it a hotel, then make sure it has the hotel title or it has commercial title, or if it’s an office, make sure it has a commercial title, etc. So this is the first thing that you need to check. And the other thing I think you need to— oh and in relation to title is that if you think that you need to convert the title, you may need to make sure you have local counterparties that have the experience of taking up title conversion in that are area, because they would have experience with dealing with the local officials there and their processes. And this is something that’s very important. So you need to be aware of that.
As a seller, what you really care about is that the buyer pays you right, so I think the general I guess tip, is to make sure you get the buyer to show you a funds proof or even better is to get them to pay you in earnest money. So in Chinese it’s “____”so like get them involved and then make them put a commitment to it. I think this is not just China, I think it’s something universal, but it’s what I see a lot in our Chinese deals.
And whether you’re a buyer or seller, you would definitely want to do counterparty due diligence to make sure you’re not dealing with a fraudulent party. And I think maybe for companies, you would also have a part of compliance and the whole governance process. I think one thing that I found useful in doing deals in China is an app called Tianyancha. So this app would give you a brief overview of a company, director or shareholder or individuals— some basic information, especially whether this person has some lawsuits or blacklisted, for example, the (失信被執行人名單). For example, if they have some credibility issues. I think this would be an initial gloss of like, who this kind of party is, and if we want to dig deeper. But I think ultimately, of course, the best thing is to hire a third party investigator to look into this. There are a lot of companies that do these things but I think as a first step Tianyancha app is quite a useful app that we use.
Darren: Yeah, so is Tianyancha accessible for anyone because it seems like an universal credit score kind of checking then. Am I correct? for Chinese?
Alicia: Yeah, you can just download it off the App Store. Yeah it’s very easy, and I think you pay a very small fee if you want to access more information. But otherwise, I think just basic information is pretty much for free. I think one thing I would like to add is that in our experience, sometimes a lot of counterparties if they want to hide the ultimate beneficial owner, they would do so through a very complicated web of shareholdings and also nominees, like in Chinese authority. So that’s when ultimately, you want to find a third party investigator firm to look into this for you.
Darren: Hmm, I see. It seems like we’re doing advertising for the app. I think we should have some advertising fee for that. Well, so because like, obviously, like we’ve known each other for a long time, I kind of want the audience to know your background, because talking about due diligence is your background coming up to what you do right now. I think it’s all linked together. So it’d be great to tell the audience more about your role in the firm and what does is it like to be in your role?
Alicia: Sure. Well, as I mentioned, I’m the senior legal counsel at InfraRed NF. So my role is really to provide legal coverage to the full lifecycle of transactions from the deal origination to negotiation and execution, and also an asset management type of work.
Apart from the transaction specific, my role is also quite broad in a sense that also looks internally so from the fund establishment, from corporate to corporate governance and to compliance I also look into those as well.
Darren: I see. So how’s it like from serving other professional real estate firms from the outside to working at one in the moment? How do you feel? What’s something that if someone for example, someone that looked at this and went like “hey, I kind of want to get into your role. How’s it like? I just want to know.
Alicia:Well, I think definitely being in the real estate firm brings me much closer to the deal making process, which is something that I really, really enjoy. And also you get to appreciate more of the nuances of the commercial dynamics and also bring it closer to the market. And I think this for me has been a very fruitful experience. I think when I was in private practice, my main clients are a lot of big Hong Kong developers as I mentioned. So back then I served a lot of companies apart from real estate transaction needs, also capital market transactions. So why is it now that I’m in a private equity fund? Well, the type of transactions are slightly different in a sense and for me, especially the debt side is something that was new. So overall, I think it also brought me to a different spectrum of real estate and the type of companies that there are in this field. But overall it was very interesting. And I really enjoyed my current role.
Darren: That’s great, that’s great. Have your experience, working in the professional real estate firm, made you change the way you look at real estate?
Alicia: Not really, in a sense that one thing that attracted me to a real estate is that no matter how our needs as human beings change, whether we move to co working, co living, or working from home, I think as a human being, at least for the foreseeable future, we definitely need roofs over our head. So I think that sense, you always need real estate, and which in turn means that there will always be demand for this product, no matter how it develops, and transforms. And I think being from a law firm to a real estate firm didn’t really change that view for me. But being in the real estate firm means I’m much closer to the market than being the legal services provider. So which is a personal growth and personal professional development that I really appreciate.
Darren: That’s good. I remember a while at the property tech prop tech institute a video that we did with a brand consultant Tracy Ho. And she said that one thing people keep forgetting is that real estate is something that’s so close to our daily life. I mean, literally, we live in one, we interact with one. People forget how emotional it is. And he keep forgetting the industry because a lot of times we just see it as like stocks here and there. Back and forth. Trade, it’s yours now, it’s the other persons now. So when you talk about your thoughts about it, it reminded me of that moment as well. It’s kind of cool. Yeah. So what kind of take away would you like the audience to have from this video?
Alicia: In terms of takeaways, I think, um, well, let’s talk about the market side first. So I personally think that mega hubs would continue to be a key investment theme in the Chinese real estate market. And in terms of the COVID-19 situation, this has significantly impacted the Chinese real estate market, but it’s looking like it’s recovering. And from a long term perspective, perhaps it will accelerate the consolidation of the market. And in terms of tips and tricks for investing in China, for foreign investors, repatriation is a key risk that you should look into. And always be careful who your counterparty is, and be careful of your land title. And with a fear of this sounding more and more like an add for Tianyancha, you can use Tianyancha as an initial step of counterparty due diligence.
Darren: Tianyancha if you hear it, please give us advertising cost, that’d be great. Actually, um, I mean, like, I actually have so many things I want to ask you and I thought maybe next time we will have like a long discussion or mezzanine loan because something that a lot people don’t understand is why would real estate needs like different types of loan, and even our side projects project prop tech Institute I want to talk more about that next time. And something before that, if people want to reach out to you to find and talk to you more about real estate or you know about this whole industry and so on, how would you suggest people to find out more about you and talk to you about it?
Alicia: They can just give me a message over LinkedIn and Darren, if maybe you could share the link to my LinkedIn
Darren: Sure, that’d be great. Yeah, I really want you to join next time again, because I think just now like even for the first like 10 minutes I got so much out of it. Like wow, this is something that we wish at Denzity insights where everyone could share ideas. We just want to know what’s the best investment or best kind of insights out there. So I really want to say thank you folks for joining in. And I hope the audience took a lot out of this.
Alicia: Thank you Darren. Thanks for having me.
Darren: All right, until next time then. I’ll see you next time. Thank you.
Alicia: See you next time! Bye.
Alicia Mou：嗨，Darren 。
Alicia：好的。嗨，大家好。我叫Alicia。我是import Anna的高級法律顧問，還是治理負責人，還是Prop技術學院的聯合創始人之一。因此，InfraRed NF是InfraRed Capital Partners和Vervain Resources的合資房地產房地產私募基金，InfraRed Capital Partners是前HSBC的專業投資，而Vervain資源以前是在中國的應用程序。因此，我們的重點是夾層融資以及大中華區的增值投資。房地產在香港出生並長大，一直是我生活和事業的重要組成部分。因此，在加入InfraRed NF之前，我曾在Woo Kwan Lee＆Lo擔任律師，在那裡我與許多香港著名房地產開發商（例如長江實業和記黃埔重組）以及New World私有化New World進行了密切合作。中國土地。
Darren ：哇。 10％真的嗎？
Darren ：很好。我記得在房地產技術道具技術學院有一陣子，我們和品牌顧問Tracy Ho一起錄製了一段視頻。她說，人們一直忘記的一件事是，房地產與我們的日常生活非常接近。我的意思是，從字面上看，我們生活在一個之中，我們與一個世界互動。人們忘記了它有多激動。而且他一直忘了這個行業，因為很多時候我們只是把它看作是到處都是股票。來來回回。交易，現在是您的，現在是其他人。因此，當您談論自己的想法時，它也讓我想起了那一刻。挺酷的是的那麼，您希望觀眾從該視頻中獲得什麼樣的收穫？
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