Shares of Switzerland-based UBS AG (UBS - Free Report) rallied 1.6% since a Bloomberg report on Mar 16 revealed the company’s plans to tap the residential market of China’s second-tier cities. For this, the company is raising a second fund.
UBS’ intensive research in the housing market, specifically in second- and third-tier cities, and the rising demand in such markets have driven the company to deliberate over such investment opportunities. UBS has identified 50 cities that look promising for the prospective investment.
As a consequence of the restrictions imposed by the government of China to curb higher property prices and make them affordable to average income earners, investments are generating lower yields. However, UBS finds the new fund very lucrative even after targeting a lower return of 16–18% compared to 20% set for the first fund.
Figures Look Impressive
Though China’s full-year growth in 2013 hit the lowest at 7.7% since 1999, real estate investment accounted for 15% of China's gross domestic product (GDP) in 2013. The real estate market has been booming in the recent years. While some foresee this as another property bubble, others perceive it as a silver lining amid the slowing economy.
China’s new home sales hit more than $1 trillion for the first time in 2013. However, owing to the government measures, the market is showing signs of stability as property sales were down 5% in the first two months of this year.
Nonetheless, we believe that not only is the current tide responsible for luring companies like UBS, but the introduction of the two-child policy and rural land reforms will definitely augment investments in the property market.
UBS in China
In Jan 2013, UBS strengthened its footprint in China – one of the most important emerging markets of the world – by establishing a locally-incorporated unit, wholly foreign-owned bank in China. The company runs brokerage and mutual fund joint ventures in collaboration with local partners as well as a private equity unit.
With reference to the first fund, UBS has sold 2 projects in Shenyang, the capital of the northeastern province of Liaoning, while other 4 assets in the fund situated in cities like Xi’an and Hangzhou, are yet to be sold. Notably, the first fund is set to yield nearly the targeted return of 20%.
UBS currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the foreign banks space include Hong Kong-based Hang Seng Bank (HSNGY - Free Report) , South Korean Bank Shinhan Financial Group (SHG - Free Report) and Argentina-based Banco Macro S.A. (BMA - Free Report) . Both Hang Seng Bank and Shinhan Financial carry a Zacks Rank #1 (Strong Buy), while Banco Macro holds a Zacks Rank #2 (Buy).