Tuesday, March 29, 2011

Interview: Mr Rong Ren, Managing Director & CEO, Harvest Capital

Currently managing about $1.8 billion in five funds and generating returns of over 20% IRR, Harvest Capital Partners brings together an unparalleled cross-border and cross-disciplinary team of property investment professionals. With the backing of its majority owner, it is uniquely positioned to identify and capitalize on prime and off-market transactions in China’s dynamic property development market.
The company was named “Asia Firm of the Year” by PERE magazine in the Global PERE 2010 Awards and "Property Investor of the Year - China" by The Asset magazine in the 2010 Triple-A Investment Awards. These awards are among the most prestigious accolades for the global private equity real estate industry.
Mr Rong Ren, Managing Director & CEO, Harvest Capital, spoke to us about the company’s goals and his perspective on the Chinese property market.

Could you give us a brief background on your company?
Harvest Capital Partners is a boutique investment firm that specializes in real estate investment funds focused on Greater China. We have a solid track record in the full property investment cycle, from raising capital and developing properties to managing these assets, exiting from our investments and returning capital. We are one of the few China real estate investment managers that can say that we’ve delivered 20% IRRs for our investors since 2006.
The approach we take is based on a disciplined investment model, incorporating an absolute return, value-driven strategy, to achieve medium- to long-term capital appreciation for investors. What makes us different is our hybrid-business model, in that we not only invest capital but also get actively involved in developing and managing properties. This allows us to add significant value to our projects, which we would not be able to do if we were simply passive investors.
Our portfolio of real estate funds is focused on selected regional cities, which have a large population base, high economic growth and rapidly increasing per capita disposable income.
Based on these criteria, we invest in the Bohai Gulf Region, Yangtze River Delta, Shandong Peninsula, and the Pearl River Delta, including Hong Kong. We are committed to creating maximum value for all of our investments by providing expertise from land acquisition, project development through to asset and portfolio management.
Our investments cover a focused array of asset classes, covering residential and retail properties, office buildings, hotels and serviced apartments. Specifically, we target assets that are unique either in terms of location or where significant value can be created and enhanced through refurbishment, repositioning, development or redevelopment, thereby capitalizing on the strong demand for asset dispositions in China.
Another strong advantage we have is the full support of China Resources Group, which gives us unparalleled access to a strong network in both first and second tier cities in China, where demand is fuelled by urbanisation and strong fundamentals in a rapidly growing economy.
Our entire team is passionately committed to these principles, and we all take our fiduciary responsibilities to our LPs very seriously. Being a member of ANREV is also important as it helps us pursue best practices in the funds management industry and increase transparency for our LPs. We manage capital on behalf of others, so we understand the need to manage our investment risks carefully in order to achieve the best possible returns.

What is your investment strategy and what asset classes do you think are providing the most promising returns? What cities have the biggest upside potential?
It is sometimes misleading to think of China as one market. Depending on our investors' risk appetite, investment horizon and objectives, we look to tailor specific investment strategies for them.
For example, while there is a lot of media attention on the government’s efforts to cool down the residential market, we feel this is a good time to invest. Various developers are facing liquidity constraints because of the government measures, and we are starting to see good deal flow in the residential sector.
Based on our market read at this point in time, we are looking at:
Mid-market retail in Tier 2 and Tier 3 cities in China, which are benefiting most from the urbanization trends and supported by strong retail consumption
The affordable housing sector, which is currently being supported by governments at all levels
Selected office investments in Tier 1 and Tier 2 cities, which will benefit greatly from the increasing long term capital that is emerging in China's capital markets
Selected mixed use developments on an opportunistic basis, and
Guaranteed yield products backed by high credit quality developers.
So as you can see, the opportunities and deal flow in China remain strong and Harvest Capital is well placed to continue to offer our LPs — both foreign and local — investment opportunities that fit their risk appetite and investment objectives.

There is an on-going debate among industry experts on India versus. China. What are the major differences?
We're not qualified to comment about the opportunities in India, as our mandate and expertise is primarily in China. I'm sure both countries offer excellent opportunities as their overall demographics are quite similar.
However, based on discussions with investors, I see one key difference being the Chinese government's efficiency in planning and encouraging a sustainable investment market through clear regulation, building infrastructure that supports property investments, and establishing a market environment conducive to making a decent return.
The government coordinates its planning very well and makes it easy for investors in China to see its intentions. For example, this year's 12th five-year plan is quite clear about social development, stimulating domestic consumption, reducing the income gap, promoting environmental awareness and increasing the value of China's industries. Hence, as an investor in this market, you can anticipate what strategies are sustainable over the coming years and plan accordingly. I think that's a huge advantage.

There is a stiff competition among foreign and local fund managers try to raise capital for China. What sets you apart from other players?
The Chinese market is full of opportunities, if you know where to look. There is also plenty of room for competition, which we feel is good for the development of the market.
Harvest Capital is different from most private equity real estate players in the market as we are truly local. Being part of the China Resources Group, a State-owned Enterprise, also has its advantages. Our networks and pipeline of opportunities are genuinely deep. All of our investments are sourced off-market, and our key focus is to buy into investments at a reasonably low cost. What’s more, having an extensive footprint in the country gives us access to proprietary research and information not available to others.
As a local player, China's real estate market is not opaque to us and we are able to make informed decisions when we assess investments in different cities. Another key difference is that we have a hybrid business model with significant asset management capabilities. We're not just a financial investor.
The team at Harvest Capital is also very experienced, bringing together both local and foreign expertise within an international best practice framework.
All of these factors resonate with our investors and the industry, which I think accounts for us receiving the award from The Asset magazine and being the first Chinese firm to win Asia Firm of the Year at the Global PERE Awards.

What are the best market entry strategies as a foreign investor?
I think some investors underestimate the partnership risks in China. We advise anyone looking to invest in China to find a suitable local partner. China is still a market that requires significant local expertise, due to the general lack of transparency and the sheer geographical scale.
It remains challenging to invest directly in China but having a good local partner will help smooth over "local" issues. Even more importantly, investors should look at China as a long term investment destination.
At Harvest Capital, we try to build long-term relationships that add value to our partners in numerous ways, such as utilizing our asset management capabilities to increase returns. We can also bring our networks and relationships to the partnership, such as tenant relationships, government relationships or banking relationships. Essentially, we can act as a "bridge" between our investors and China, and our LPs can look to us to manage the local risks as best as we can, leveraging on our expertise to deliver the best possible risk adjusted returns.