Asia Market by Challis Capital Partners

Why real estate mezzanine debt in Asia is a good investment?

The real estate market in China and south-east Asia in the last decade has been risky and speculative because there has been a lack of availability of stock, but this is no longer the case. In the past, investors from abroad have flocked to China with the promise of optimistic returns, but delays, cost escalation and implementation problems have derailed projects and led to disappointing returns. While this has led to investor cynicism, the reality on the ground in China today is very different and mezzanine debt investment is now a very attractive proposition.

Buoyant markets

The situation in China has greatly improved in the past decade and occupational and commercial markets are both now very buoyant. This is particularly true in Shanghai and Beijing, where investment liquidity levels are also very high. Commercial real estate transactions in 2016 surged by 85% and reached a record level in the country. With the occupational market improving, there is now a huge demand for new property and people have the money to buy.

Anti-corruption drive

Another factor that has greatly strengthened China as a place to invest is the anti-corruption drive carried out by Xi Jinping. The crackdown on corruption has seen contract enforcement greatly improved and more projects being completed exactly as planned.

Mezzanine lending

Mezzanine lending is a combination of debt and equity financing that allows the lender to convert their investment type in the case of a default. This investment type can offer a very high rate of return in a relatively secure manner. In the case of mezzanine debt investments in residential housing, the investment is underpinned by a demand for nine million homes per annum to be built in China. While there are still risks to the investment, the demand for the product is there and you can see huge returns. Mezzanine deals can provide returns in excess of 15% per annum and the downside protection offering in Asia can make this option very attractive. Unlike in the US and Europe, the returns on this investment are significantly higher in developing markets.

Protecting your investment

Mezzanine debt investments have very attractive characteristics, but it is still important to protect your investment. You need to have complete visibility and negative control of the underlying project so that projects can be monitored on the ground. Many investment funds will put a person on the ground to oversee the project and ensure it is being carried out properly and effectively. If there is no clarity of the underlying project then the investment should be avoided.

An Asian mezzanine debt investment promises to be a good and effective investment for a number of reasons. Recent changes in China and more widely in Asia have seen increased support for building projects and increased accountability for completion. This is combined with extremely high demand for housing and buoyant markets, meaning that investment in Asian real estate makes excellent financial sense. With a mezzanine investment, you can choose how you withdraw your funds to protect yourself from failed projects too, meaning that you can keep equity or cash out on your profits as it suits you.

Asia Market by Challis Capital Partners

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