Foreign investment firms eager to buy NPLs
Source: China Daily
Foreign investors are eager to make multiple and sizable purchases of non-performing loans (NPLs) in China over the coming three years, due partly to growing interest in investments in real estate and hotels, a report from PricewaterhouseCoopers (PwC) said in December 2006.
“We estimate that foreign investors have approximately USD$5 billion to USD$10 billion earmarked for investment in China’s distressed markets, including NPLs,” said Ted Osborn, PwC advisory services partner.
The report, issued by one of the world’s largest accounting firms, shows that around 57 per cent of respondents expect to see increased opportunities in NPLs and other types of distressed investments over the next one to three years.
According to the China Banking Regulatory Commission, as of the end of the third quarter of 2006, the total number of NPLs in China’s commercial banks was approximately 1.3 trillion yuan (US$160 billion). This amount did not include the NPLs that are presently held by asset management companies (AMCs) as well as provincial and regional banks.
Recent press reports indicate that as of the second quarter of 2006, AMCs have resolved approximately 1.17 trillion yuan (USD$145 billion) of the 1999 transfer of NPLs totalling 1.4 trillion yuan (USD$170 billion). This implies that the AMCs still have a significant number of 1999 NPLs on their book. Since 1999 an additional USD $150 billion has been transferred to the four original AMCs and the Huida Asset Management Company (the AMC acquired the NPLs from the Bank of Communication).
“The overwhelming majority of respondents (89 per cent) said they expected to invest in NPL portfolios from AMCs over the coming one to two years, indicating their clear optimism for the market,” said Brian Cheung, another partner in advisory services at PwC, adding investors are expecting annual rates of return ranging from 21 per cent to 30 per cent.
Some of the respondents also indicated their interest in other types of distressed or “under-valued” investments emerging in China, such as the making of high yield loans to cash-starved real estate development and private equity investments.
When asked what types of investments they planned to make in China over the next two years, 56 per cent of the respondents said they expected to invest in real estate, hotels and private equity.
“Foreign investors prefer NPLs to be secured by land or real property,” Cheung said.
The survey shows that all of the foreign investors interviewed by PwC intend to invest more than USD$10 million, with 44 per cent preferring investments between USD$10 to USD$25 million, and 31 per cent preferring investments between USD$26 to USD$50 million.
Consistent with PwC’s 2004 survey on NPL investment, the top two locations for NPL portfolios were Guangdong and Beijing.
“These results are not surprising given Guangdong’s close proximity to Hong Kong and its more developed economy and distressed market,” Cheung explained.
More foreign investors are prepared to consider opportunities outside the traditional “hot” NPL markets, with priority going to Shandong, Tianjin, Liaoning and Zhejiang.
“This might be an indication that investors are now more mobile and flexible from a geographic standpoint,” said Situ Xinmei, a senior manager with PwC.
PwC’s report, the China NPL Investor Survey 2006, is based on interviews with senior management of 40 investment banks and hedge funds presently operating in China.
