Despite rumours of a slowdown following tighter outbound regulation, experts say that Chinese real estate investors are more bullish than ever.
“There is a huge demand for Chinese outbound investment and it would be very wrong to say that China has stopped because of government policy; my biggest message to the market is that China never stops,” said Darren Xia, Head of International Capital, North Asia, at JLL.
The Chinese government took measures to cap its Qualified Domestic Institutional Investor (QDII) quota in 2016, restricting how much capital institutional investors could deploy in foreign markets.
The rules raised concerns over the future ability of Chinese investors to maintain their position in global real estate markets.
But despite the reported drop in overall outbound investment, JLL figures show that real estate volumes have held strong over the last 24 months. According to the firm’s China 12 report, in 2017, Chinese foreign real estate investment (including land sales) totaled US$32 billion, about 20 percent of the total overseas investment. This is roughly in line with the record high US$33 billion invested overseas in 2016.
The U.S. and Australia are top of the list.
And, following President Xi Jinping’s recent pledge to internationalize China’s financial system, Beijing relaxed the capital controls in April this year.
Xia says this is a sign that China is opening back up again.
“With the size of China’s economy and GDP there’s a real need for these investors to diversify and real estate and infrastructure projects are in demand,” he said.
But rather than continue with high-profile acquisitions of office blocks, malls and hotels, China’s biggest players are exploring alternative ways to access global real estate markets.
Made in China 2025
“The assets they [Chinese institutional investors] target are changing as their strategies become more sophisticated,” said Jeremy Kelly, global research director, JLL.
“Chinese overseas investment will align more closely with government policy and industrial strategy and, for many investors, this will mean focusing on technology, logistics, and R&D facilities.”
This is all part of the government’s ‘Made in China 2025’ policy, which is about transforming the country from the world’s factory into a leader in technology.
M&A activity has been stepped up in markets such as Singapore, Silicon Valley and Germany, to gain access to expertise in areas where China is inherently weak.
Xia added: “Last year I saw a lot of investment in R&D facilities.
“Investing in these buildings gives investors access to technology firms that they can bring back to China.”
In February 2018, China’s Tsinghua University invested over £200 million into a Cambridge University Science Park. In the same year, Chinese Sovereign Wealth Fund (CIC) bought Logicor – Europe’s largest network of logistics assets – in what became one of the biggest real estate deals in history.
“Chinese students are going to Harvard and Oxford and the government wants to school talent at home,” Xia said.
Investing in educational facilities and world-renowned institutions is part of China’s strategy to strengthen its own academic prowess.
JLL’s alternatives team has seen an uptick in enquiries from Chinese groups in recent months. In addition to schools, retirement villages are popular as the government seeks out deals that will help it to house its own massive and rapidly ageing population.
Anbang kick started the trend in 2016 when it acquired a majority stake in Canada’s biggest retirement home operator. And Australian developer, Lendlease, entered China in a CA$400 million deal to build a retirement village in Shanghai.
Debt and infrastructure
Such direct real estate deals will undoubtedly continue to grab headlines globally but more investors will also access property through other means.
“I’m starting to speak to some of these guys about going indirect,” said Xia.
“Debt lowers exposure to risk and is less expensive that it was before.”
“It’s a trend we’re seeing everywhere across the market,” he said.
Meanwhile, despite being exempt from the capital control measures, China’s developers have laid low.
“They’re springing back up and talking about deals they dropped six months ago,” said Xia.
This is especially evident in South East Asia where they’re speculating on opportunities along the Belt and Road corridor.
“For those who understand, or think they understand, Belt and Road there are opportunities to invest in infrastructure in Vietnam, the Philippines and Thailand. But the ultimate aim is to pick up technology and businesses and bring IP back to China,” Xi added.
The changing nature of Chinese capital outflows will impact 2018 volumes, which are expected to remain flat on last year at around US$30 billion.
But this is not due to lack of appetite or capital waiting in the wings.
“What we have now is investor appetite that is more sporadic and diversified,” Xia says. “The challenge for Chinese investors today is not just how to find value, but where.”
London, New York, and Sydney are all increasingly tough global markets to find a return as yields stagnate and the cost of capital rises. As such, investors will look domestically and China’s own real estate market will benefit in the coming years.
What is currently a US$40 billion per year direct commercial real estate investment market could grow into a US$150 billion a year market within the next decade, according to JLL’s China 12 report.
This would challenge the U.S. for the world’s largest real estate market crown.
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