February 24, 2013
China Quietly Invests Reserves in U.K. Properties
By DINNY MCMAHON And LINGLING WEI
BEIJINGChina's foreign-exchange regulator has been actively but discreetly investing in U.K. property and infrastructure, marking a significant shift in how the secretive manager of the world's largest foreign-currency reserves uses its funds.
Since May, U.K.-registered Gingko Tree Investment Ltd., a wholly owned unit of China's State Administration of Foreign Exchange, has invested more than $1.6 billion in at least four deals, including a water utility, student housing, and office buildings in London and Manchester, according to data providers that track property deals and disclosures by the companies that received the investments. People familiar with Gingko Tree say there have been other deals, but the details haven't been disclosed publicly.
China's foreign-exchange regulator bought a 49% stake in Manchester office building One Angel Square.
In recent years SAFE, which is responsible for investing most of China's $3.31 trillion worth of foreign-exchange reserves, has branched out beyond its traditional role of simply parking that wealth in low-risk government bonds, and has allocated a small portion to listed stocks and even private equity. It has mainly kept a low profile, taking very small positions in blue-chip stocks or allocating funds to third-party asset managers to invest on its behalf.
But SAFE's recent U.K. investments signal a new willingness to take significant direct ownership stakes, following in the footsteps of China Investment Corp., the better-known investor of Beijing's sovereign wealth.
SAFE didn't immediately respond to a request to comment.
In the biggest of the four deals, U.K.-based Gingko Tree last month bought a 40% stake in UPP Group Holdings Ltd., a major provider of university accommodation in Britain, from Barclays Capital Inc. Gingko Tree paid £550 million ($834 million at today's exchange rate) for the stake, according to Dealogic, a data provider. The Chinese investor has appointed two non-executive directors to UPP's board, according to one of the people familiar with Gingko Tree.
Gingko Tree also holds a 10% stake in the consortium that paid £1.236 billion to take over Veolia Water Central Ltd. in July, according to the water utility. Veolia Water Central has since changed its name to Affinity Water Ltd.
The Chinese investor has also been buying property. It took a 49% stake in Manchester office building One Angel Square for about $110 million in December, and in May it paid $438.2 million for Drapers Gardens, a 16-story office building in London, according to Real Capital Analytics, a New York-based property research firm.
"This type of investment is very much 'en vogue' with a range of sovereign investors, including pension funds," said Victoria Barbary, director of Sovereign Wealth Center at Institutional Investor, a publisher. "In fact, it's difficult to walk through the City of London without passing a building at least part-owned by a foreign government pension or sovereign fund."
Sovereign-wealth funds from Norway to Malaysia to Qatar have invested in office and commercial real estate in central London in recent years, seeing it as an attractive alternative to volatile stock markets and low-yielding bonds. That in turn has helped support London's property market, even in the aftermath of the financial crisis.
In December, Azerbaijan's State Oil Fund made its first property investment when it paid £177.4 million for an office complex in London's upscale Mayfair district. In November, China Investment Corp., one of the world's largest sovereign-wealth funds with about $410 billion under management, bought Winchester House, which is leased by Deutsche Bank AG DBK.XE +1.67%for its London headquarters, for about $400.6 million, according to Real Capital Analytics.
CIC has also invested in U.K. infrastructure, including small stakes in Heathrow Airport Holdings and water utility Thames Water.
Gingko Tree is wholly owned by a Singapore-registered company called the Investment Company of the People's Republic of China (Singapore), which in turn is wholly owned by SAFE. SAFE's role in the U.K. deals has been further obscured because Gingko Tree had a third party invest on its behalf in one case, and because Gingko Tree made a purchase using a strangely named investment vehicle in another.
One of the people familiar with Gingko Tree said that while the Chinese company has thus far invested only in the U.K., its investment scope isn't limited by geography and it has been looking at real-estate and infrastructure opportunities in other countries in Europe as well.
The person said that Gingko Tree hasn't been allocated a fixed amount of money to invest, but gets funds from SAFE on a deal-by-deal basis.
SAFE accelerated the diversification of its mammoth foreign-exchange holdings into higher-yielding assets last year, when it committed $500 million to a real-estate private-equity fund managed by Blackstone Group BX +0.93%LP.
SAFE is increasingly looking for investments in so-called alternative asset classes such as private equity and real estate as a way to enhance returns on the reserves, much of which have been parked in ultralow-yielding assets such as U.S. government bonds. SAFE's plan is to allocate about 5% of the reserves for alternative asset classes, a person with knowledge of the agency said. Government bonds, cash and other liquid assets still make up the bulk of the reserves.
SAFE's initial foray into private equity turned out to be an embarrassing failure for China. That involved SAFE's $2.5 billion investment in 2008 in a fund run by U.S. private-equity firm TPG. SAFE suffered losses when the fund's subsequent investment in Washington Mutual, WMIH +4.14%the largest U.S. savings-and-loan firm at the time, was wiped out after the lender's closure by the U.S. government.
It is unclear how large SAFE's loss was. But that black eye caused the reserve manager, whose duty is to preserve and increase the value of the reserves, to move "ultra cautiously" in its future endeavors, the person said.
Gingko Tree was first registered in the U.K. in late 2009 under the name Crius Investment Ltd., but it wasn't until 2012 that it started making investments.
One of the company's directors is Yin Yong, the director general of SAFE's department of reserve management.
Cassell Bryan-Low in London contributed to this article.
China Quietly Invests Reserves in U.K. Properties - WSJ.com
