Friday, October 26, 2012

Luxury housing bust stings JP Morgan


04:45 AM Oct 26, 2012

SHANGHAI - A luxury apartment building that is one of the most visible casualties of China's high-end property bust is up for auction in the north-east city of Dalian, after a bank foreclosed on the property.

The 48-floor Park Central was owned by a fund run by JP Morgan Asset Management, which invested US$80 million (S$97.7 million) in the property. But the US asset manager lost the property when UK-based lender Standard Chartered, which provided the majority of a roughly US$140 million loan, foreclosed over the summer after loan covenants were breached due to poor sales, according to people with knowledge of the matter.

Deloitte & Touche has been appointed as the receiver of the project, one of the sources said. CBRE Group, the broker hired to market Park Central, is working with Standard Chartered to seek potential buyers, the sources said.

The loss, which came after China tightened rules on buying luxury apartments, shows how exposed some European and US investors are to Chinese real estate. Several potential investors have been offered the property, but no deal has been reached, the sources said.

Standard Chartered and JP Morgan Asset Management, a unit of JP Morgan Chase, as well as Deloitte declined to comment.

China has recently shown signs of revival in its property market, yet problems remain evident. Property developers such as Greentown China Holdings and SPG Land Holdings that focused on high-end homes have been offloading some assets to other developers as cash flow tightened due to government moves to cool the market.

In June, debt-laden Greentown China raised US$657 million by selling stock and issuing convertible bonds to its shareholder, Wharf Holdings.

The Chinese government had moved in 2010 to slow construction of luxury housing - through credit curbs, limits on buying multiple properties and higher down payment requirements - and sought to push developers towards building for first-time buyers and those upgrading to bigger homes.

Like upwardly mobile Chinese, foreign investors have preferred luxury properties in China due to the higher margins they can fetch compared with the mass-market, cookie-cutter apartments.

But sceptics warn it will take years for the market to absorb an oversupply of fancy apartments and villas, many left empty by their investor buyers, and "ghost cities" of unoccupied blocks.

"Around three to four years ago, you could already see that the government was clamping down on the luxury sector, but some thought that the government was going to leave the top-tier residential sector untouched since it had nothing to do with the mass market. That was misguided," said one person with knowledge of the matter.

The overall level of foreclosure activity in China is unclear. There is little information in the country regarding the volume of distressed real-estate assets. But high-end residential projects such as Park Central, one of the top buildings in seaside Dalian, have been among the hardest hit since China launched its property tightening campaign.

JP Morgan Asset Management took over Park Central during its construction even as the market was showing signs of froth. The company had started a US$600 million Greater China property fund in 2008 and invested in projects across the country, including in Beijing, Shanghai and Nanjing. Its projects elsewhere in China do not appear to be in distress, the sources said.

The units in Park Central have not sold well since they went on the market in September last year.

Already hit by government tightening measures, sales were also weak because the units were too big and costly, according to the people with knowledge of the matter and real estate agents in the city.

The project offers 270 one- to four-bedroom units that are between 110 and 519 sq m each.

According to local property agency websites, at the time of its launch, the project carried asking prices of around 35,000 yuan (S$6,840) per sq m. Calls to the project's sales office went unanswered and brokers said there had been no signs of sales activity in the project for a number of months now. Other housing projects nearby are selling for around 19,000 yuan per sq m. DOW JONES


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