Warburg Pincus to set up $5bn distressed property manager in China

Jul 5, 2021 | News

Warburg Pincus is creating a Chinese asset management company to invest in distressed real estate opportunities, with plans to garner $5bn in assets in five years.

The US private equity firm will work with Wensheng, one of the largest special situation asset managers in China, to create Wensheng Special Situations Asset Management, a joint venture focusing on real estate special situation investments, including distressed assets. The two will commit as much as US$600m, according to a joint statement on Monday.

Warburg is tapping into a growing sector of distressed asset investment as more Chinese property companies feel the strain from tighter liquidity and policy curbs.

High debt levels and a government deleveraging drive are pushing more developers to sell assets.

“In light of the ongoing financial reform in China and the continued regulatory development, the real estate special situations sector is entering an accelerated growth trajectory,” Zhang Qiqi, Warburg’s managing director, said in the statement.

Warburg joins foreign companies such as Blackstone Group and Brookfield Asset Management in hunting for opportunities in China’s distressed real estate sector. Blackstone, for example, revived its pursuit of Soho China with a $3bn offer for the Chinese office developer, last month. At HK$5 a share, Blackstone will be buying Soho on the cheap, at about a 40 per cent discount on the group’s audited consolidated net asset value of HK$8.37 per share at the end of last year.

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Beijing is trying to maintain its grip over China’s debt-fuelled property sector. It wants to cool the sector and guard against systemic risks in the financial system stemming from excessive real estate lending and speculative buying, especially at a time when economic growth in China faces uncertainties arising from the coronavirus pandemic, despite four straight quarters of growth since the second quarter of last year.

By 2020, debt among developers had soared to a record high. This year, the total due will increase by another 36 per cent to $185.8bn, Beike Research Institute said.

Beijing rolled out “three red lines” last August, which represent three different limits on borrowing – a liability-to-asset ratio excluding advanced receipts of 70 per cent, a net debt-to-equity ratio of 100 per cent and cash to short-term debt ratio at one time. Those who cross all three are barred from taking on any new loans.

As a result, China Fortune Land, which missed a bond payment of 5.26bn yuan in February, is on a selling spree, disposing of its lands and properties at discounts. China Evergrande Group, which owed 670bn yuan as of the end of last year, has been offering sharp discounts on its properties since last year.

The new joint venture, Wensheng Special Situations Asset Management, will focus on acquiring single real estate projects from troubled owners. It has already prepared some in Shanghai, Zhejiang and Hainan.

Warburg is one of the largest private equity firms investing in real estate in Asia, with more than $6bn invested in 36 companies since 2005. It has been actively looking for opportunities in China’s property sector of late. In June, it teamed up with a local property asset management company and launched Golden Union Assets, a unit focusing on urban renewal projects in Shanghai and Beijing.

Wensheng established its distressed real estate practice in 2017. The company, founded 15 years ago, had 95.5bn yuan in assets under management as of last year.

Source: South China Morning Post

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