SHANGHAI/HONG KONG: CITIC Capital Holdings Ltd, an investment arm of the mainland's largest financial conglomerate CITIC Group, is in advanced talks with Australian bank Macquarie to acquire a luxury residential project in Shanghai, two people familiar with the situation said yesterday.

CITIC Capital's real estate arm is close to buying City Apartments, a 16,000-square-meter residential development in downtown Shanghai for about 250 million yuan ($37 million).

Disagreements over purchase conditions, however, could still result in a collapse of the deal, the sources said.

Although the transaction is relatively small, the discussions have been going on for months, underscoring the difficulty faced by Western banks looking to exit their investments as the real estate market cools in Shanghai.

Macquarie, which has been active in the mainland's real estate markets in the past few years, is also in talks with other potential buyers for the Shanghai project, said one of the sources, declining to name other potential buyers.

"The project has been put up for sale in the market for a while, so it is actually a very interesting deal for people in the industry to get a sense of how the market environment is," said the source, referring to the deal price.

The mainland's eight-year-old real estate boom ended in 2008 with prices and trading volumes falling, under pressure from the global financial crisis.

Last year, Morgan Stanley started selling two high-end residential properties in Shanghai, but has so far not secured a buyer.

Macquarie bought City Apartments in 2005 and put the project up for sale last year with an initial price tag of 26,000 yuan per square meter, while CITIC Capital may now pay about 16,000 yuan per square meter for the property, the sources said.

A spokesman for Macquarie declined to comment. CITIC Capital could not be immediately reached for comment.

Hong Kong-based CITIC Capital, half owned by steel-to-property conglomerate CITIC Pacific, in January said it had raised $400 million for its third real estate fund that targets the mainland property market.

CITIC Capital currently manages more than $1.6 billion in assets.

Some foreign investors are selling properties on the mainland as prices in top-tier cities such as Shanghai fall sharply, while others, such as Goldman Sachs and Blackstone Group LP, remain optimistic about the country's real estate market in the long term.

Blackstone would not slow its investments in China despite the global financial crisis, as high economic growth and low valuations promised good returns, the private-equity firm's Greater China Chairman Anthony Leung said last November.

Goldman Sachs has said it sees the mainland as a top pick in Asia's property market after Japan, partly as a result of growing urbanization.

Reuters

(HK Edition 04/21/2009 page16)