Brookfield gets ready for Shanghai rental project as China's property distress creates opportunities to pick up discounted assets

Brookfield Asset Management plans to launch its first rental property in Shanghai after picking up assets on the cheap from distressed developers, as China pushes on with an aggressive act to control excessive debt in the industry.

The Canadian firm is preparing to offer 413 flats and 144 hotel rooms in the next six to eight months in China's biggest commercial hub to capitalise on "really attractive risk-adjusted returns" in the current market cycle, it said.

"This opportunity really presents us with an initial beachhead to bring our multifamily business and expertise to China," Stuart Mercier, managing partner and head of Asia based in Shanghai, said in an interview. The move was made possible by "the opportunity to acquire land and existing properties in more attractive cost bases," he added.

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The Toronto-based firm manages about US$750 billion of alternative assets, including US$106 billion in Asia-Pacific across real estate, infrastructure, renewable power, private equity and credit strategies, according to its filings.

Stuart Mercier, managing partner and head of Asia at Brookfield Asset Management. Photo: Handout alt=Stuart Mercier, managing partner and head of Asia at Brookfield Asset Management. Photo: Handout>

Brookfield paid 1.3 billion yuan (US$178.5 million) in September for three towers in Yangpu district, where the country's top universities like Fudan and Tongji are located, from KWG Group and Guangzhou R&F Properties, according to a local media report. It translated into a 60 per cent discount to the price the two developers paid for the assets in 2010.

Mercier declined to comment on the report or transacted price. JLL, the property consultancy which brokered the deal, also declined to comment when contacted by the Post.

Despite recent misgivings about China's real estate industry, Brookfield is focusing on the upside potential. Policy support from Beijing for long-term rental asset market to lessen affordability burden has turned one corner of the market into a bright spot for global opportunistic funds.

Cheap assets and policy support combined have established an entry point of Brookfield's business in China, Mercier said, allowing the group to duplicate its successful approach elsewhere.

"In key gateway cities, we observed this trend in the last couple of years where housing affordability has been a challenge," Mercier said. "We just copy things we established elsewhere into Shanghai, where the young people are finding it difficult to buy homes."

Shanghai's citywide serviced apartment vacancy rate fell to 20 per cent last quarter from 21.3 per cent in the preceding three months, according to Savills. A year earlier the vacancy rate was about 12.7 per cent. Rent declined 1.4 per cent to an average of 262.2 yuan per square metre from the second quarter.

"Shanghai remains a firm choice of foreign companies for their staff secondment, hence the gradual lifting of travel restrictions will encourage the return of more expatriate demand," Savills said in a report last month. Quality and pricing have become key considerations in the rental market, it added.

Brookfield's approach follows a slump in the broader property market, as private developers from China Evergrande to state-backed CIFI Holdings struggled for cash flow to reduce debt. China's "three red lines" policy to stem systemic risk has forced developers to default on more than US$20 billion of offshore debts.

KWG completed a US$1.5 billion bond exchange programme in September to extend its debt maturity, while foreign creditors consented to R&F's US$4.94 billion debt restructuring in July to give it another three to four years of lifeline, according to exchange filings.

The crisis has sidelined the weakest companies from state land auctions. Chinese local governments sold 11,105 plots of land across 1oo cities in the first 10 months this year, according to Centaline Property, a 10 per cent drop from a year earlier. The sum collected shrank by 30 per cent, it added.

"While some global funds, especially US-based firms, hesitated due to economic uncertainties and geopolitical reasons, some regional ones are picking up discounted Chinese assets which can generate stable revenue returns," said Jason Ho, Asia head of capital solutions for corporate finance and restructuring at FTI Consulting.

Singapore-based CapitaLand acquired an office tower in Beijing for 2.04 billion yuan via an auction on JD.com's online platform on October 17. The reserve price was set at 30 per cent below its valuation. The Temasek-backed property group earlier bought two plots of land in Wuhan and Chengdu for 3.49 billion yuan in April.

Brookfield, for example, has not jumped on the opportunities randomly as long-term rental has been its major focus in the residential market globally, Mercier said.

"Our approach with China in the longer term is to add more and more of our business lines here," he added. "We will be more active here with more opportunities."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2022. South China Morning Post Publishers Ltd. All rights reserved.