Shui On Holdings Ltd, Hong Kong's top property developer in the Chinese mainland, is forming an alliance with international real estate investors to expand the mainland market.

"We will sign a contract with our international investment partners this week in Shanghai to help them expand the mainland market," Vincent H. S. Lo, chairman of Shui On Holdings, told China Business Weekly.

Lo made the remarks last week on the sidelines of a conference, called Winning City, hosted by UK-based Royal Institution of Chartered Surveyors, which is the world's largest organization of property professionals.

"Our international partners will invest heavily, while Shui On can help them steer the money into profitable projects," Lo said.

Lo refused to provide specific details, but he expressed confidence in the project.

The international investors are not familiar with the Chinese mainland's property market, but they have been attracted by the potentially high profits, Lo said.

As a result, they have turned to Shui On as a partner, Lo added.

The deal comes as China's real estate market is looking for new sources of capital.

The People's Bank of China (PBOC), the nation's central bank, released tighter housing loan regulations last June.

Under the new policy, interest rates on loans for luxury apartments, office buildings and villas have been increased and mortgages have been limited to finished housing.

Purchasers of unfinished homes cannot qualify for a mortgage.

Meanwhile, commercial banks are permitted to lend money only to real estate developers with good credit histories, and only when developers provide at least 30 per cent of the capital.

PBOC officials have said the policy is designed to control the increasing number of bad loans, but the policy might also cut off the capital flow to most of China's developers.

An estimated 70 per cent of the capital for real estate developments in China comes from bank loans.

The mortgage policy was strengthened again in late August after the State Council issued a circular.

With dwindling sources of capitall, domestic real estate developers have closely eyed Hong Kong and international funds, and numerous Hong Kong real estate developers are reportedly seeking mainland investment projects.

The Closer Economic Partnership Arrangement (CEPA) between the Chinese mainland and Hong Kong, which was signed last June and implemented on January 1, gives Hong Kong developers greater opportunities to expand in the mainland.

Under CEPA, the Chinese mainland's management and consultation, exhibition, architecture and real estate sectors will be opened to Hong Kong's entrepreneurs.

Not all of Hong Kong's developers are eligible to expand in the Chinese mainland.

"Real estate development is a highly localized market. In the short term, Hong Kong firms might still need to overcome some barriers in the mainland, such as high administrative costs and lengthy registration and ratification procedures," said Winnie Yip, managing director of DTZ Debenham Tie Leung International Property Advisers' Beijing branch.

Shui On might be different. The company, originally small in Hong Kong, began developing projects in the Chinese mainland in 1985.

Shui On has built a sizable portfolio of property developments and investment projects - including office buildings, residential apartments, commercial complexes and hotels - in Shanghai and Beijing.

Major projects completed include Shanghai Xintiandi, Taipingqiao Lake and Park in Shanghai, Hua Wei Centre in Beijing and Xihu Tiandi in Hangzhou.

As a result, Lo has come to be known as "Mr Hongkong-In-Shanghai," or "Shanghai's son-in-law."

Lo is vice-chairman of the All-China Federation of Industry and Commerce, the major organization that represents merchants' interests in the Chinese mainland.

Last August, on the heels of its successful ventures in Shanghai and Hangzhou, Shui On signed an agreement with the Yuzhong District government in Chongqing to launch the Hualongqiao Redevelopment Project.

That deal was worth more than 10 billion yuan (US$1.21 billion), and involved more than 2 million square metres of floor space.

With 20-per-cent interest in the project, Shui On is part of a consortium developing Riverside South Development in Manhattan, New York. That is the largest ongoing residential project in the city.

"Shui On's good mainland business, its fine international image and, most important, its good government links give the company a unique role in attracting international investors, as compared with its Hong Kong and mainland counterparts," said Samson K. T. Chan, vice-president of Stanley Partners, a leading property consultant based in Hong Kong.

Most international investors are not familiar with domestic developers, and most domestic developers are not familiar with international norms in real estate financing.

As a result, Shui On is an ideal partner for international investors seeking to enter the Chinese mainland's real estate sector, Chan told China Business Weekly.

(Business Weekly 02/25/2004 page8)