By staff reporter Zhang Yingguang

Morgan Stanley is raising a property fund worth 10 billion yuan with aims to expand its share in China's property market, according to a source closed to the U.S. investment bank.

On July 4, Crystal I Ltd., a unit of Morgan Stanley, bought 30 percent of a real estate project in Hainan Province from developer Agile Property Holdings Ltd. (HKSE: 03383). The final price tag for the deal was 5.28 billion.

Agile Property won the bid of the project in 2006 and planed to invest a total of 13 billion yuan in ten years' construction. However, when capital began running low, Morgan Stanley got the chance to buy in.

"Developers will only invite a partners into a project when they face a financing bottleneck," said one analyst. A report from Guotai & Junan Securities showed that Morgan Stanley paid an average of 1,800 yuan per square meter for its stake in Agile's project, a sum that fall quit a bit short of the market price.

Straining under the tight credit controls and sales slump of the last six months, many Chinese developers are now facing capital crises. Many have land reserves but are incapable of developing them on their own. In the end, they have to invite in partners or sell the projects at cut-rate prices.

"Although the government has strict regulations on foreign capital's direct investment in property market, it has few limit on their ability to purchase a stake in real estate projects," said an analyst.

Recently, Beijing Capital Land Ltd. (HKSE: 02868) announced the sale of three projects in Tianjin to Singaporean Reco Ziyang Pte Ltd. They will also set up a joint venture to develop a project in Chongqing.

And on August 22, China Merchants Property Development Co. Ltd. also said it would sell 100-percent of its stake in Fucheng Co. Ltd. to Singapore-based ARA Managers Pte Ltd. The deal will give ARA development rights for the Nanjing International Financial Center project, which was owned by Fucheng.

Foreign investment firms – including Morgan Stanley, Blackstone, and RZP – are all seeking opportunities to snap up projects from distressed Chinese developers, said the analyst Caijing spoke to.

However, an analyst from an investment bank said that foreign capital's moves shouldn't be seen as bottom fishing. "They are establishing partnerships with domestic developers, which at least shows their confidence in the market over the long term," said the analyst.

1 yuan = 14 U.S. cents