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What slowdown? ARCH Capital is still upbeat on China’s property market

Richard Yue, co-founder of boutique real estate private equity management company ARCH Capital, was formerly a director of Investment at AIG Global Real Estate, which had a real estate portfolio of over US$6 billion across Asia. While with AIG, he was in charge of the HK$3 billion acquisition of Hotel Furama in Hong Kong in 1999. Prior to AIG, he was at Citigroup (Real Estate Banking and Asian Debt Capital Markets).

Yue experienced political and economic instability in Hong Kong in 1989 when he came back to the city after completing studies in Canada. He made his first property investment in April that year, just two months before the Tiananmen event in China. “I almost wanted to go back to Canada,” Yue recalls. Yue has since witnessed ups and downs in Hong Kong and mainland China’s property markets for 26 years, and has learnt how to survive the market’s mood swings.

When is the right time to invest?

I always tell investors that whenever there are a lot of negative news in newspapers, there are a lot of investment opportunities. You cannot be an opportunistic investor if you are scared reading negative news. For us, we take medium- and long-term views. Once we identify the market, we follow and wait for opportunities. The most important thing is that when there is a downward cycle, you have liquidity to invest.

What made you set up your own firm?

I noticed that many real estate funds were owned by either global banks or insurance groups. Their buying decisions had to go back to their global headquarters, which is time consuming. If you do not understand Asia real estate and cannot make quick decision, you cannot win. On the other hand, in 2006, there were lots of global capital entering Asia. I grabbed the opportunity to set up the company.

What is your company’s investment strategy?

Our focus is direct real estate investments across asset classes including residential, retail and commercial, as well as distressed and situational opportunities focusing on Southeast Asia and Greater China. We are specialists in executing development and repositioning strategies. In China, we focus on the Pearl River Delta region and the Yangtze region. There is always demand for mainland housing.

For opportunistic funds, the life span is just five to seven years – with a schedule for deploying capital and exit. We like investing in residential units as turnover is fast. We invest in commercial and retail, and we cash in by selling them to individual investors. We also have separate accounts to serve long-term investors.

Housing demand in mainland China is expected to rise with the country’s urbanisation rate.

What is the outlook of the mainland China market?

Market drivers are still strong; urbanisation, growing middles class, rising income and growing consumption. The current urbanisation rate in China is about 52-54 per cent. There will be a big increase in home demand when the rate grows to 60-70 per cent, the usual ratio in well-developed countries.

Unlike Europe, China has a lot of home demand. The government is suppressing demand through austerity measures. Once the measures are removed, the market will turn around. In the past eight months, the residential market has been bottoming out gradually as the Chinese government is easing curbs to boost the economy.

Many people are now talking about an economic slowdown. But even if the country achieves a 6 or 6.5 per cent economic growth, it is a lot,” said Yue. “The GDP (gross domestic product) in China was US$10.36 trillion in 2014. Even if the annual growth is just 6.5 per cent, its an increment of US$673 billion. That is comparable to the GDP of some European countries, like the Netherlands.

Do you develop projects on your own?

We always team up with local partners. Now how do you find the right partner? We have been in the industry for 26 years, we get partners through long-term relationships and referrals by friends. They will also come to us. If you now have money and want to look for right partner to invest in China, you will not make it. You cannot do it that way.

Has any of your partners become a big company on their own?

Sure. Top Spring International was once our partner. It has a good team. But once it successfully listed in Hong Kong, it did not need our money. Then we had to look for other partners.

Your company only focuses on second- and third-tier cities in China?

I also want to invest in first-tier cities, but prices are too expensive. It is good to invest in second- and third-tier cities in residential, retail and mixed-use properties which can benefit from new major infrastructure enhancing transport links. There are a lot of good second- and third-tier cities, but just do not pick new towns as they will take time to draw people.

Other than China, where do you see growth opportunities in Asia?

We like Macau. Supply is limited, demand is strong and people have money. We are not into gaming. We bought a large plot and have been developing it into a high-class residential development, One Oasis. It turned out to be our best investment so far, with an investment return of seven times.

We have only one project in Macau but I am confident of the outlook. The Hong Kong-Zhuhai Macau bridge will promote the integration of the Pearl River Region.

We also like Thailand. We have five or six investments in the country. We were attracted by the political stability and good infrastructure. Prices are relatively cheap compared with other Asian countries.

Many investors eye Japan. What is your view?

We have no plans to invest in Japan at this stage. We would need a local team if we wanted to start investing there. We prefer to invest in China. In our first fund, we had invested in India. But we realised we needed to develop a local team for further development. As most of our team members are Chinese, we prefer the China market.