Elsewhere: Merill Lynch Debut in China

The minority stake in holding company Beijing Yintai Property Co., to be announced tomorrow in Beijing, makes Merrill Lynch a joint-venture partner in the three-tower project, housing the Park Hyatt hotel and more than 200 private residences, among other facilities.

With the deal, Merrill, in its Chinese property-management debut, joins longtime investors such as Morgan Stanley in the market.

China's central government has sought to slow the nation's pace of construction and ward off economic overheating by restricting bank loans. Some investors fear that the country's real-estate market is experiencing a bubble and that plunging property values will follow. But Merrill Lynch, of New York, and the other investment banks continue to search for what they see as attractive real-estate plays in China, eager to invest in one of the world's great economic-growth stories. China's gross domestic product expanded by 9.5% last year.

In addition, some firms are turning to real estate as a bet that Beijing will eliminate or widen the band that constricts the Chinese currency's trade against the dollar, possibly providing an overnight bounce in property values.

Last year, Morgan Stanley's property-investment arm co-invested with Shanghai Forte Land Co. in a $50 million deal to develop upscale residential property. And Wachovia Corp. began looking for real-estate opportunities in China in early summer. So far, the company has closed one deal, buying 10% of Tian An China Investments Co., a publicly traded property company listed in Hong Kong, in December, said a person familiar with the deal.

A banker not involved in the deals said the Merrill pact is "a logical progression of people getting focused on China and looking for areas where they can find immediate value." He said real estate is "sustainable" because in a nation as vast and economically dynamic as China, there will always be areas under development. He also said the Chinese government is watching how much foreign money comes into the sector and could choose to limit those inflows if its efforts to cool development are ineffective.

Most financial-services companies investing in Chinese real estate are exercising a measure of caution in forming their partnerships. Merrill, for example, spent more than a year in discussions with Yintai, a person familiar with the deal said.

"The opportunities in China are huge," the person said. "The hard part is weeding out bad deals."

These are toe-in-the-water investments for the banks, said Kenny Tse, a property analyst at Morgan Stanley who expects the trend to gather momentum provided the deals generate returns on equity of more than 15%. Mr. Tse said this expectation isn't outlandish. In many cases, developers have acquired land cheaply. As long as the property market stays strong, new construction has the potential to provide solid gains.

Nonetheless, some banks, such as Citigroup Inc., have chosen to remain on the sidelines. Citigroup participates in auctions of nonperforming loans, some of which are backed by real estate, but doesn't seek to invest in hard assets in China, a Citigroup executive said.

One impetus behind partnerships such as those formed by Merrill, Morgan Stanley and Wachovia is that the property developers themselves need money. Many have built up banks of land but have faced a cash shortage since Beijing clamped down on lending. Hampered by the restrictions, developers are more willing to engage in joint ventures with Western financial firms, Mr. Tse said, whereas before they could easily get a bank loan and wouldn't have to worry about working with an equity partner.

In addition, investment banks expect several property developers to launch initial public share offerings this year in Hong Kong. By making a modest investment now, the banks might be seeking to secure an IPO underwriting mandate later on. Morgan Stanley, for example, led Shanghai Forte's $220 million IPO the same month it invested the firm's own capital.

This week, Shanghai developer Shimao Group said it would split off its unit on the mainland, Shimao Properties Holdings, this year in a $250 million public offering in Hong Kong -- giving rise to speculation among investment-banking competitors that lead underwriter Goldman Sachs Group Inc. will also make a principal investment in Shimao before then. A Goldman spokesman declined to comment.