Risky business: Red flags aplenty in China’s real estate market

Investors from all over the world, including Wall Street’s biggest players, have poured billions of dollars into the Chinese real estate market. But though small bets can pay off handsomely in China, the country’s lack of transparency, high degree of political meddling and history of clandestine deals can take their toll.

Consider Kaisa, a Shenzhen-based property developer whose investors included private equity giant the Carlyle Group and Singapore investment fund Temasek holdings. Kaisa raised about $2.5 billion on the bond market, and became a major developer in more than 20 Chinese cities, the New York Times reported.

But in February, following a corruption scandal, the family of the firm’s chairman Guo Yingcheng sold its 49 percent stake for just $580 million – a fraction of what it was worth less than a year ago, according to the newspaper. Chinese authorities froze sales at several Kaisa residential developments in December, without providing an explanation.

“Many investors are shocked at what happened,” Neil McDonald, a Hong Kong-based lawyer in Hong Kong for Kirkland & Ellis, told the Times. “It’s troubling that in a market as sophisticated as this, no one knew what was going on.” [NYT] – Hiten Samtani