* Fund initially seeking $500 million

* Targets include residential, retail, hospitality and elderly care homes

* RRJ "bullish" on China economic growth and stability

By Stephen Aldred

HONG KONG, Nov 18 (Reuters) - Asia private equity firm RRJ Capital is launching an up to $1 billion real estate fund that will mostly target investments in China, the firm's founder, former Goldman Sachs dealmaker Richard Ong, told Reuters on Monday.

RRJ's new fund, which is initially seeking $500 million, will focus on residential, retail, hospitality and care homes for the elderly, and is expected to close in the first quarter of next year, Ong said. The fund will target a 25 percent to 30 percent return on investments.

Global private equity firms have stepped up their Chinese real estate investments this year, betting the sector will benefit from Chinese government support for housing programmes aimed at providing affordable housing to China's urban middle class.

Buyout firms are also ploughing more money in China as small and mid-sized real estate firms tap alternate funding sources due to tighter liquidity.

"We are very bullish on China's economy and expect stable, good growth. Depending on demand, we may expand the fund to up to $1 billion," Ong said, adding it would avoid prime office space because the sector is more competitive and offers lower yields.

Blackstone Group, Carlyle Group, TPG Capital and RRJ have all completed China real estate investments in recent months. By early November, private equity investments in China's real estate sector had risen 53 percent to about $1.2 billion, according to Thomson Reuters data.

The growing interest from private equity firms in Chinese real estate comes as home prices in the world's second-biggest economy have hit record highs despite a four-year government campaign to cool the property market. That is adding to fears of a price bubble in the property sector..

RRJ has already invested in $150 million worth of equity and bonds of Hong Kong-listed China property developer CIFI Holdings Group Co Ltd.

Blackstone, the world's biggest private equity real estate firm with $69 billion in assets under management, recently made its largest investment in shopping malls in Asia when it agreed to pay around $400 million to buy a stake in Chinese developer SCP Co Ltd.

Among other deals, U.S. buyout firm Carlyle in August said it would invest around $200 million with U.S. investment management firm Townsend Group to buy and build 17 warehouses as part of plans to build a logistics platform across China.

TPG invested $108.6 million in U.S.-listed China property company Xinyuan Real Estate Co Ltd.