Even as China tightens its reins on capital outflow, the country’s 2017 outbound investment into commercial properties is projected to at least match the US$30 billion recorded last year.
That’s according to the latest JLL data, which shows US$13 billion worth of Chinese investment was poured into overseas commercial properties and development opportunities in the first half of the year, up 28 percent from the same period last year. This figure excludes the 12 billion euros (US$14 billion) sale of European warehouse company Logicor from Blackstone to sovereign wealth fund China Investment Corporation announced in June. The sale, when completed, will be the biggest private equity real estate deal in Europe on record.
“At this stage, we think Chinese outbound capital into property investments will at least match the US$30 billion we recorded in 2016,” says JLL’s Head of Global Capital Markets Research David Green-Morgan.
“We’re continuing to see demand for global opportunities from our Chinese clients.”
JLL’s estimate followed the release of China’s Ministry of Commerce data showing that overall outbound capital flows dropped to US$48.19 billion across all sectors in the first half of the year, down 45.8 percent from a year ago.
The first-half plunge on outbound spending was mainly due to a high comparison base, continued improvement in China’s economy, rising uncertainties abroad and efforts to curb irrational investment, Bloomberg reported citing ministry spokesman Gao Feng.
In 2016, China’s overseas commercial and residential property investment hit a record of $33 billion with the hotel and industrial sectors showing the largest increase due to significant transactions in the U.S. in the form of portfolio sales and Chinese appetite for industrial parks. Based on JLL research, China overtook the U.S. to become the largest overseas commercial real estate investor in the third quarter of last year.
In 2007, Chinese commercial real estate outflow stood at less than $1 billion. A decade later, outbound investment in the commercial property space exceeds US$20 billion annually. Rising capital outflows caused a rapid depreciation of the RMB, and hampered government efforts to internationalise the currency, leading to controls brought in late last year to curb investment outflow. Some of the tough measures implemented to restrict capital outflows include the prohibition of outbound investments amounting to more than US$10 billion, the banning of overseas real estate deals worth US$1 billion by state-owned companies, and the restriction of mergers and acquisitions outside a domestic investor’s core business valued at more than US$1 billion.
Despite the capital controls and the reported drop in overall outbound capital investment, JLL sees limited impacts in the commercial property space in part due to Chinese investors’ desire to diversify and manage risk amid the slowing domestic economic growth.
“Although the capital controls are having an impact we still see an increasing level of demand from both traditional and new clients,” says Green-Morgan.
“They have brought a certain amount of additional regulations particularly for the insurance companies, which has slowed their rate of activity. However, very few of the regulations are new but a reinstatement of previous rules.”
While the restrictions are still in place, companies that have units in Hong Kong or branches outside of the mainland could still transact overseas by using offshore proceeds or financing to fund the deals.
According to Green-Morgan, this challenging environment may change after the National Congress of the Communist Party in the autumn.
Amid the controls, Chinese investors have deepened their investment domestically. Local investment accounted for more than 86 percent of transactions in China in 2016, up from about 75 percent in the past few years, based on JLL data.
“We do believe that Chinese investors will continue to be major movers of capital into global real estate for many years to come,” says Green-Morgan. “But a similar increase in 2017 may be challenging given the recent discussion about China monitoring its capital outflows.”
Global Capital Markets Research Director, JLL