A rising number of China-focused, often Hong Kong-based investors have been selling large property developments in the mainland, as the market shows increasing signs of stress. The catalyst has been a drying up of credit, as well as the country's slowing growth.
At the same time, Chinese developers, while not giving up on their home business, have shown a desire to move capital out of the country into developed markets. Their rapid diversification is another way of insulating themselves from a potential downturn.
The most notable move by investors is from Asia's richest man, Li Ka-shing, who has been selling down assets in both Hong Kong and China. Last October, companies he controls sold the Oriental Financial Center office tower in Shanghai for US$1.2 billion. A month earlier, he offloaded the Metropolitan Plaza shopping mall in Guangzhou for US$387 million.
Li earned his nickname "Superman" for his deal-making ability and for trading into assets that in retrospect turned out to be unappreciated and available at very attractive prices. He has been redeploying his money in Europe.
He clearly sees the opportunity to sell high in greater China and buy low. Investors would do well to heed that move.
"He's always been savvy. He's always been ahead of the curve," Todd Pallett, a wealth-management adviser with Hong Kong-based EXS Capital said. "People catch up a year later."
His younger son, Richard Li, has followed suit. His property subsidiary Pacific Century Premium Developments Ltd. has sold the Pacific Century Place project in Beijing's upscale Sanlitun neighborhood for US$928 million.
Pacific Century Place has two towers each of office and apartment space, as well as a shopping mall.
Soho China, a prominent mainland developer of upscale office space, sold two office projects in Shanghai in February for a total of US$837 million.
Soho China is run by the mainland power couple of Pan Shiyi and his wife Zhang Xin. Zhang is one of China's most recognizable female executives - so much so that she had a cameo as a skeptical Asian investor in the Michael Douglas sequel "Wall Street: Money Never Sleeps." After being offered what she considered an unattractive solar-power investment by a U.S. investment bank, she dismissively said, "Do you have any other investment opportunities? Because we came a long way."
Many such conversations may be occurring about property projects right now. Rental yields in cities such as Shanghai and Beijing have diminished as the markets have become more developed, and with a large amount of domestic capital chasing deals at home. Yields in China's top office markets run 4 to 4.5 percent, while similar buildings in other global gateway cities are 6 to 7 percent.
In the real world, Soho China's Zhang noted at a recent conference that while she could achieve yields of 5 percent from her projects in China, borrowing costs are 7 percent. "I lose 2 percent," she said. She bought a personal stake in the General Motors building last year. Rents in New York may also be yielding 5 percent - but the borrowing cost is just 2 percent.
As a result, the value of outbound investment from China into international real estate has risen from US$69 million in 2008 to US$16 billion last year, according to Colliers International. Colliers forecasts at least US$32 billion will flow offshore in 2014.
Though Li father and son are both based in Hong Kong, they do not appear to view their home market as an attractive place to redeploy the money raised by sales in China.
Many analysts and investment banks have forecast that prices in the Hong Kong residential market need to fall 30 percent before they become affordable.
Even brokers, who typically talk the market up, are coming around to that likelihood. Most recently, Joseph Tsang, the managing director of Jones Lang LaSalle's Hong Kong office, said the 15 percent tax that foreign buyers must pay, as well as restrictions on borrowing and quick sales that make it hard for Hong Kong buyers to enter the market or upgrade, will bite painfully.
"I expect home prices to drop 10-15 per cent this year and fall another 10-15 per cent next year if the measures are not removed," he told the South China Morning Post.
Of course, one man's sale is another's purchase. Hong Kong-based private equity property company Gaw Capital is the acquirer of Richard Li's project.
Gaw Capital last year raised US$1 billion for its Gateway Real Estate Fund IV, a China-focused, core-plus, opportunistic and value-added fund.
Founder Goodwin Gaw sees now as the opportunity to put money to work in China given the lack of liquidity, with China cracking down on shadow banking and bad loans. That has resulted in banks cutting back or stopping loans to developers.
The situation flushes out sellers, at a time there is less competition than there has been in recent years for good projects.
"Usually when the market is being liquidity constrained by the government putting in place austerity measures there are more opportunities," Gaw said shortly after his fund closed. "In this cycle, because of the liquidity situation, there are high-quality assets in Tier 1 cities that you can get your hands on."