The buying spree of China outbound real estate investors, led by insurance companies, real estate developers with global ambitions, asset management companies and state-owned enterprises with access to substantial capital to deploy abroad, has come to a close. No one element caused the pullback from overseas investment. A series of factors came together to create an environment to discourage, prevent or limit China-based investors from pursuing cross-border investment.
In recent years, as part of an effort to restrict capital outflows and keep debt risks under control, Chinese regulators implemented measures designed to clamp down on speculative overseas real estate deals. Outbound investment activity also depends on the ability to raise capital to fund deals. Capital sources became scarcer as government policies limited access. For example, the government substantially limited the ability of certain companies to market wealth management and other financial products in China, the proceeds of which were used to fund speculative real estate investments abroad. Government policy also made it difficult for Chinese companies to issue bonds or other debt in foreign currency for the purposes of pursuing new real estate ventures.
Some Chinese investors remain active overseas, notably those with access to offshore foreign currency to deploy into deals. Among others, this includes family offices and affiliates of listed developers that have experience in cross-border real estate investment deals and are also able to put together club fund structures with other investors with access to foreign currency capital for transactions.
Another category of investor that continues to participate in the market is the deep-pocketed sovereign wealth fund. In the current phase, we are seeing increasing interest in alternative real estate-related assets and business, rather than trophy buildings. This includes logistics facilities, student housing, senior living and care facilities.
Ingredients for growth
China cross-border real estate investment activity will remain subdued for the remainder of 2020. Two factors need to come together to create an environment favorable to the return of Chinese capital to the global real estate markets: economics and government policies. During times of domestic market dislocation and turbulence, whether caused by health crises or trade wars, China tends to retrench and focus on home markets rather than look abroad. Once the Chinese economy stabilizes and is on a path to steady growth again, investors start to aggressively look outward.
A favorable economic environment will also impact government policies. Comfortable with the country’s level of foreign currency reserves and confident that certain overextended companies that aggressively pursued cross-border real estate investment are no longer a systemic risk, China will loosen capital outflow controls. It is difficult to predict when the necessary ingredients will be in place to spark and restart China’s outbound real estate flows – which might not be until well into 2022. But when the door is finally pushed more widely open, the next wave of Chinese cross-border real estate investors will be markedly different.
First, we will see Chinese institutional investors, whether insurance companies, asset management companies or other financial institutions utilize investment strategies that are more akin to other global cross-border institutional investors. This means greater focus on long-term, diversified (both geographically and in asset type) institutional grade investments. A smaller group of China-based real estate developers will be more active overseas than previously. Those that localize and build teams in specific countries targeted for expansion will most likely succeed. Finally, as China’s financial services and private equity industry further grows and develops, the next phase of China outbound investors will include fund sponsors and asset managers that pool Asia-sourced capital into deals.