Cashed-up banks, insurers and other domestic companies are expected to be the engines of growth for Shanghai's investment property market as interest from foreign firms wanes amid the global financial crisis.

"While overseas investors continue to be a dominant force in the local real estate investment market, there is no doubt that domestic players are much more aggressive in wanting to acquire buildings," said Edward Cheung, chief executive officer of DTZ's Chinese mainland operations, which helped conclude more than 70 percent of major commercial property transactions in Beijing and Shanghai last year.

"The central government's recent approval for domestic insurance companies to invest in real estate will definitely underscore the trend for the rise of Chinese players," Cheung said.

He said he expects domestic investors to account for 40 percent or more of activity in the commercial market this year and double their previous share.

Shanghai Lujiazui (Group) Co Ltd, a state-owned real estate giant, broke a six-month drought in transactions involving large commercial buildings last month when it acquired the 34-story POS Plaza office building in Pudong New Area from South Korea's Posco Engineering & Construction Co Ltd for 1.76 billion yuan (US$257.68 million).

Lujiazui Finance & Trade Zone Development Co Ltd, a listed subsidiary of Lujiazui Group, announced the purchase in a statement to the Shanghai Stock Exchange last month.

The price was about 40 percent lower than the original asking price, said industry insiders, who expect the purchase to trigger even more activity in the sector.

CITIC Capital Holdings Ltd, an investment arm of CITIC Group, China's largest financial conglomerate, is in talks to acquire a high-end residential project in downtown Jing'an District from Macquarie Group, Australia's largest investment bank.

CITIC Capital might pay 250 million yuan for the 16,000-square-meter City Apartments, a serviced-apartment development located at the intersection of Yan'an and Shaanxi roads.

Good chance

"The deal has been under discussion for quite a long time and has very good chance of being finalized," confirmed one industry insider who declined to be identified.

Macquarie Group bought the 90-unit residential project in September 2005 for 400 million yuan and was reported earlier to have slashed its asking price to about 300 million yuan to attract buyers, mirroring the tougher credit pressures on many global institutional investors.

A decline in the Australian dollar in recent months may help Macquarie trim some losses for its exit, industry analysts said.

If the deal goes through, it would be the second major building complex acquired entirely by a Chinese investor in the city this year.

"Transactions involving domestic players are expected to increase as domestic insurance companies enter the market and cash-rich investors take a long-term view and look to acquire assets," echoed Greg Hyland, head of investment for Jones Lang LaSalle's Shanghai operations.

An industry source told Shanghai Daily last week that a major Chinese bank is also close to purchasing an office building under construction in the city. Many Chinese insurers are already on the prowl for properties after receiving the green light from the central government to invest in real estate assets.

"It could take as soon as six months for such deals to be concluded since detailed rules guiding insurers' real estate investments haven't been published yet," said the source, who declined to be identified because of the sensitivity of the negotiations.

Insurance firms will be looking to buy modern office buildings in prime locations to boost their corporate images. They are expected to rent out space they don't occupy.

The state of play marks a turn for a property market long dominated by overseas firms.

Last year, overseas investors spent 16.3 billion yuan on real estate investments in Shanghai, down 26 percent from 2007, according to Jones Lang LaSalle statistics released in January.

Indeed, DTZ predicted earlier that Shanghai will likely suffer a decline in overseas real estate investment this year, with acquisitions expected to decline to about 5 billion yuan.

In terms of preferred asset types, most industry officials told Shanghai Daily that they expect commercial properties, such as office buildings and retail outlets, as the most preferred types.

"Prime office buildings in the city will continue to be one of the major investment targets in 2009, while retail properties will also find favor," said Andrew Zhu, senior managing director for China operations at CB Richard Ellis.

Prime offices accounted for 21.8 percent of major purchases by overseas investors in Shanghai last year, said the real estate consultant.

(Shanghai Daily April 29, 2009)