Mulling a Play by Superman

By ASSIF SHAMEEN | MORE ARTICLES BY AUTHOR

Billionaire Li Ka-Shing has packaged some Beijing holdings into a new REIT, Hui Xian, with both currency and real-estate plays. What's the outlook?

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Emerging Markets

Hong Kong property billionaire Li Ka-Shing has been dubbed Superman for his daredevil feats of turning seemingly dud investments into gold. He is also known for an incredible sense of timing―pouncing on bargains at the bottom of the cycle and selling, trimming his stakes or raising cash for his firms just as a bull market is maturing. So last week when he packaged his Beijing retail, office, hotel and residential complex, Oriental Plaza, into a real-estate investment trust, Hui Xian REIT (ticker: 87001.Hong Kong), and raised US$1.6 billion, there were bound to be raised eyebrows. Was Li seeing something that others were missing? Was the IPO a sign that Asia's savviest investor had sniffed a real-estate bubble in China?

Not quite. If indeed he has sensed anything, it's the start of the new boom―in Chinese yuan-denominated equities. Hui Xian REIT's IPO in Hong Kong is the first offering outside mainland China denominated in yuan. Investors are getting a double play: exposure to prime Beijing real estate at decent yields and a chance to ride on the coattails of the undervalued yuan, which is likely to gradually appreciate against major currencies over the next few years.

The Hui Xian IPO is a key milestone in the development of an offshore yuan market. In recent years, China has moved toward greater use of its currency, one of the world's most tightly controlled, for global trade and some types of finance. Beijing began allowing cross-border-trade yuan settlement in 2009. Chinese banks can settle yuan trades in Hong Kong and are expected to begin doing so in Singapore soon. London is expected to be next international financial center where large Chinese banks will be allowed to settle yuan trades. "Offshore yuan centers are likely to help speed up the eventual process of the Chinese currency's internationalization," notes Aaron Boesky, CEO of Marco Polo Asset Management in Hong Kong.

THOUGH LI RAISED $1.6 BILLION from the sale of near 40% in Hui Xian REIT, investors' response was tepid. While investors were hot on the IPO's "yuan exposure" aspect, they were decidedly lukewarm on the Beijing property exposure. In recent months, Beijing has tried to curb real-estate speculation through a slew of measures including regulating land supply, imposing property taxes, bank lending restrictions and higher interest rates. The measures have made little dent. Average nationwide property prices in 70 major Chinese cities rose 5.2% in March from a year earlier, down from 5.7% year-on-year growth in February.

While China is serious about reining in runaway real-estate prices in major cities like Beijing and Shanghai, where there has been some speculative buying, it doesn't want to destroy real demand for housing in second- and third-tier cities. "The long-term structural trend for China's real estate is up, so long as its economy continues to grow at 8% to 10% per year," says Kevin Gin, a veteran Asian real-estate analyst, now head of Greater China Property Research at Yuanta Securities in Hong Kong. He adds that "1.3 billion people, increasing affluence and more rural-to-urban migration can only mean higher demand for housing and generally higher real-estate prices."

While investors may get their short-term timing wrong, says Gin, those who take a long-term bullish view on Chinese real estate are unlikely to go wrong. "At any given time, some areas may be overpriced or have an element of speculation, but is there is no nationwide real-estate bubble in China."

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ASSIF SHAMEEN covers Asian capital markets from Singapore.