China's property market may be mellowing, but the Canada Pension Plan Investment Board is looking for plenty more deals in the region.
The fund said Monday that it would team up with Beijing-based developer Longfor Properties Co. Ltd. to build a residential, office, retail and hotel space for $234-million. Investment in the joint venture will be split nearly in half, with CPPIB putting up 49 per cent of the capital.
"We have been looking to expand our base in China for some time," said Graeme Eadie, global head of real estate investments at CPPIB.
The deal comes amid a softening in the Chinese real estate market and slower growth in property investments in the region. Weakness in the residential housing sales prompted the Chinese government to relax mortgage rules, and some developers have cut prices on homes, The Wall Street Journal has reported.
But CPPIB is confident that it has the right partner to ride out China's new normal, and says the cooling could have a positive effect.
"What tends to happen when things slow down is the weaker players fall by the wayside," said Mr. Eadie, adding that this will separate the companies for whom real estate investment is a peripheral activity from developers committed to the business. The remaining group will make fewer mistakes, he says.
Longfor met CPPIB's criteria of being a large, stable partner to grow alongside. The company started out as a residential-focused real estate group, expanding into commercial property development to reach a market capitalization of $9.8-billion. Co-founder and chair Wu Yajun is one of the richest women in China, according to Bloomberg reports.
CPPIB opened a Hong Kong office in 2008 and has partnered with other developers on construction in China in the past. But acquiring existing buildings in the country is expensive and has been for years, Mr. Eadie says. "Everything we've done in China, except for a couple small things, has been to actually build them."
Mr. Eadie says what makes this deal interesting is its location. The site is located in the downtown area of the city of Suzhou, which has a population of 10 million people, is located near Shanghai and is poised for growth. Much of the upfront development risk, such as acquiring permits, has already been dealt with since Longfor has already got the project under way.
Longfor said in a statement Monday that joint venture partnerships are an important part of the company's strategy. Such relationships provide a source of capital in an environment where the government has tightened debt markets for property developers.
"We believe partnering with organizations like CPPIB in these types of joint ventures will provide significant advantages in that it allows us to be more flexible in our resource allocation, improve capital efficiency and strengthen financial stability," Zhao Yi, finance general manager at Longfor, said in a statement.
CPPIB may have the opportunity to team up with Longfor again before long. "We would like to develop a bigger relationship, and they have a pipeline of deals that they would like to move forward on, so we hope everything will come together and we can continue," Mr. Eadie said.