Shanghai fixer-upper

It took only three weeks and a flurry of phone calls. When he finished last summer, U.S.-born and -trained property investor Goodwin Gaw had raised $200 million to plow into China's red-hot real estate market.

Gaw is far from alone in his ambition. China is in the midst of a historic property boom that is attracting some of the world's leading investors. But thanks to his experience in the U.S. and knowledge of China, Gaw has moved quicker than most: He invested $150 million of his Gateway Capital fund in just six months and expects to commit the remainder by September.

The 37-year-old investor takes a distinctive approach, believing that old or distressed properties offer some of the best values, rather than the gleaming towers and shopping malls sprouting in Shanghai and other cities. Gaw recently paid $105 million for a dilapidated, 71-year-old, seven-story shopping mall on Shanghai's bustling Nanjing Road.

"Right now our Nanjing Road property is an eyesore," says Gaw, who plans to spend up to $25 million to restore the building to its art deco luster. "It will become a new icon," he says.

China's phenomenal economic expansion is fueling the market. Beijing recently revised upward its estimate of output -- the new figures show its economy is the fourth-largest in the world, ahead of France's and the U.K.'s -- and growth is continuing at more than 9 percent a year. As a result, real estate values have doubled, and in some cases tripled, in the past five years.

Although some analysts worry about overheating, demographics should support further gains, many investors believe. CLSA, the Hong Kong­based Asian brokerage arm of France's Crédit Agricole, forecasts that more than 70 million people will move from rural areas to cities by 2010, raising China's urban population to roughly 610 million.

Despite the recent run-up in property values, prices in China are still only a fraction of Hong Kong levels, Gaw says. Boston-based Colliers International Property Consultants estimates that top-grade office buildings were selling for an average of $3,875 per square meter in Shanghai in the fourth quarter of 2005, up 29 percent from $3,000 a year earlier; similar properties in Hong Kong were selling for about $15,000 per square meter in the fourth quarter, up 25 percent from $12,000 a year earlier.

Other foreign investors are attracted by those growth prospects. Industry observers estimate that foreigners have put $2 billion to $3 billion into Chinese real estate. Morgan Stanley has reportedly invested $700 million; its holdings include the 31-story World Trade Tower in Shanghai and a $50 million residential development in the city. Goldman, Sachs & Co. bought a 24-story Shanghai office building for $107.6 million in April 2005, and Australia's Macquarie Bank purchased a stake in nine shopping malls for $93 million in July.

Francis Li Chi-wing, executive director at DTZ Debenham Tie Leung, the Hong Kong arm of London-based property adviser DTZ, says he is seeing increasing numbers of American, European and Middle Eastern investors who are interested in buying property in China.

Even Hong Kong­based contrarian investor Marc Faber, widely known as "Dr. Doom," offers an optimistic outlook on Chinese real estate, particularly in Shanghai. "The Chinese property market did become overheated last year," Faber tells Institutional Investor. "But over time properties will fill up and the trend will be toward higher property prices until prime locations in Shanghai will be more costly than in London, New York and Hong Kong."

In addition to the Shanghai property, Gaw's Gateway Capital has bought stakes in residential developments in Beijing and Guangzhou. His investors include such high-profile players as New York hedge fund Angelo, Gordon & Co., Wachovia Bank and high-net-worth families in Asia and Europe.

Gaw traces his family roots to the coastal southern Chinese province of Fujian. His father, Anthony, was born in what was then Burma; his mother, Rossana, is from precommunist Shanghai. Goodwin Gaw was born in 1968 in San Francisco while his father was in graduate school at Stanford University studying engineering. In the 1970s the family moved back to Hong Kong, where Anthony founded Pioneer Global Group, a holding company with interests in food products and real estate.

After earning a civil engineering degree from the University of Pennsylvania in 1986 and a master's in construction management from Stanford in 1993, Gaw joined Los Angeles real estate investment outfit Kennedy Wilson, where he helped troubled Japanese firms sell U.S. commercial real estate.

In 1995, Gaw set off on his own, putting together a consortium to buy the Roosevelt Hotel in Hollywood. A onetime haunt of movie stars such as Clark Gable and Carole Lombard and site of the first Academy Awards ceremony in 1929, the 335-room hotel had long since lost its glamor.

Gaw asked his father (who died in 1999) to chip in. The elder Gaw gave him $1 million, along with a few words of advice. "My father said to me, 'You're too young. But if you really believe in it, find someone else who believes in you.'"

The young entrepreneur did, pulling in contributions from friends and family. Then he and his partners paid $10 million for the hotel and spent another $20 million renovating it. Now a trendy destination, the property is estimated to be worth upwards of $100 million.

Through Downtown Properties Holdings, his Los Angeles company, Gaw controls a half dozen other pieces of real estate -- typically, once-crumbling structures that he has restored. A prime example is the 113-year-old Bradbury Building, a landmark property that is the oldest commercial building in central Los Angeles and was featured in the Ridley Scott 1982 film Blade Runner. Gaw bought the building for $6 million in 2003; following an extensive renovation, it is now valued at about $9 million.

"My father liked passive investments," he says. "I like to get my hands dirty."

Gaw became interested in Asian real estate after the region's 1997 economic crisis depressed property values. Acting for Pioneer Global, the family firm of which Goodwin is vice chairman, he purchased a 10 percent stake in Dusit Thani, a leading Thai hotel operator, in 2002. He also acquired industrial properties in Singapore for the group.

At Gateway Capital, Gaw and his brother, Kenneth, formerly an investment banker with Goldman Sachs in New York and Hong Kong, are based in Hong Kong; Humberg Pang, a former executive with London-based real estate consulting firm Savills, runs the firm's Shanghai office.

The team focuses on transactions valued at $20 million and up. In today's frenzied market they put a premium on moving quickly to close deals. "We're nimble," Gaw says. "That's especially important in China."

Gateway also seeks to leverage its ethnicity. Gaw believes that authorities in China are skittish about foreign ownership of prime developments. "We're from Hong Kong, and we're Chinese," he explains. That cultural edge helped Gateway navigate the Chinese bureaucracy and obtain the approvals needed to buy the Shanghai property from a group of ten businessmen.

Gaw contends there is a gap between perception and reality of the Chinese market. "Right now a lot of funds are kicking the tires, but there aren't a lot of deals yet," he says. He is clearly betting on an increase in transactions to achieve his targets, though. Over the next seven years, Gateway aims to deliver at least a 20 percent average annual return to investors.

What about political risk? Gaw notes that Beijing authorities occasionally impose edicts such as mortgage restrictions to control bank lending and land values, but he is confident he can withstand any turbulence by taking a long view.

"We don't expect to be highly leveraged," he says. "When property prices go up too quickly, the government interferes. We take a long-term view that takes into account the government cracking down now and then."