Post by Sapphire Capital on Jul 29, 2012 1:03:28 GMT 4
Tiptoe Past the Dragon: Replicating and Hedging Chinese Direct Real Estate
Patrick Lecomte
ESSEC Business School
May 31, 2012
Abstract:
Over the last 30 years, Chinese commercial real estate markets have joined the global universe of investable assets, as exemplified by vibrant skylines and the construction of startling new buildings in megacities such as Beijing and Shanghai. However, international investors who are often mesmerized by the Chinese economy’s historical growth and potential size might not have a clear understanding of the nature of the risk they face in China. Notwithstanding the focus on operational and legal risks whose need was emphasized by some highly publicized cases of international investors being caught in the complex system of Chinese guanxi, international investors venturing into the Chinese direct property markets are faced with many macro risks that have to be addressed. Surprisingly, despite the large volume of foreign direct investments in Chinese commercial real estate markets in recent years, there has been little academic research done to analyze and characterize the risk structure of Chinese commercial properties. Using a database never applied before in academic literature, this paper fills in the gap by studying the risk characteristics of direct property investments in Chinese first-tier cities. It applies macro-variable models to analyze the risk structure of office properties in Beijing, Shanghai, and Guangzhou. It then tests a selection of instruments that could be used by international investors to hedge the risk of investing in these three sub-markets. It concludes by making a series of recommendations that could help international investors deal with the risk of direct investments in China’s property markets.
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