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CBRE Global Investors, the real estate investment management business of CBRE Group Inc. (CBG - Analyst Report), the world’s largest commercial real estate services company (on the basis of 2010 revenues), has recently unveiled its plans to invest heavily in the housing sector in China in the second half of 2012 in anticipation of the gradual easing of the government restrictions based on price corrections in the property market.
Earlier this year, the government had imposed strict housing purchase restrictions in about 40 cities in China besides raising the down-payment requirements and mortgage rates to help curb inflation and make housing more affordable to the masses. However, with home prices declining for the second month in October and a stabilization in inflation, the government is likely to re-adjust its housing market policies in the next year.
Housing sales at China Vanke Co., the largest Chinese homebuilder by market value, slumped by 33% in October, while that of Gemdale Corp., the fourth-largest developer in the country fell 29.4%. Furthermore, according to a report by Barclays Capital Research, home prices in China are expected to decline by as much as 30% in 2012.
Although the price corrections are likely to take place more in the bigger cities, a 10%-30% decline in property prices would have a ripple effect on the economy as a whole with about a 0.5%-1% dip in the gross domestic product (GDP) of the country. This in turn could eventually force the government to modify its policies or even reverse them.
CBRE Global Investors is mulling to capitalize on this investment opportunity and is currently under negotiations with Chinese partners and local governments to acquire a site for residential development by the second quarter of 2012. Since 1996, CBRE Global Investors had invested about $1.5 billion in 15 Chinese residential projects, the most recent being that in Shanghai and the southwestern city of Chengdu in 2007.
Historically, CBRE Global Investors had been jointly bidding for land with a local developer in China and then holding about 50% stake in the development ventures. Most of its investments were focused on smaller cities such as Changsha, Nanjing, Chengdu and Chongqing and not urban centers like Beijing and Shanghai, where steeper prices in recent years made housing less affordable. Going forward, CBRE Global Investors intends to focus more on mid-end housing markets, where price gains in the last 10 years have been outstripped by income growth.
CBRE Global Investors offers its clients an expanded global platform to meet their investment objectives in key markets across the world. Earlier in October, the Real Estate Investment Management (REIM) operations of Netherlands-based ING Groep NV (ING - Snapshot Report) in Europe and Asia were merged with CBRE Global Investors to offer a comprehensive range of real estate investment programs positioned along the risk/return spectrum. With the acquisition, CBRE Global Investors had $94.8 billion worth of assets under management on a combined pro forma basis.
CBRE Group, the parent company of CBRE Global Investors, is the global market leader in commercial real estate brokerage and advisory services for property leasing and sales, forecasting, valuations, origination and servicing of commercial mortgage loans, as well as project and real estate investment management. The company has hard-to-replicate intellectual capital and technology resources that develop and deliver superior analytical, research and client service tools to its professionals enabling it to meet diverse client needs.
Despite the continued debt-market crisis in Europe and uncertainty in the economic recovery in the U.S., management presently believes that CBRE Group is in the early stages of a cyclical recovery. The challenging macroeconomic environment and present market dislocations have further resulted in newer opportunities for CBRE Group, such as distressed assets marketing and service of failed commercial mortgage-backed securities loan funds, which in turn has fueled its growth engine.
Currently, we maintain our long-term ‘Neutral’ rating on CBRE Group, which presently has a Zacks #3 Rank that translates into a short-term ‘Hold’ recommendation.