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China’s nuanced investment landscape

As China’s real estate investment market grows more complex, three sources of capital are set to become more relevant, says Hodes Weill’s Hong Kong-based partner Alfredo Lobo.

Alfredo Lobo

China should stand out as one of the most attractive destinations for global investors looking to allocate capital to Asia. It has largely subdued the pandemic and its economic growth trajectory has resumed, as the only major economy to have expanded in 2020; GDP is expected to range from 6-8 percent in 2021; and it possesses a growing domestic consumption sector.

Yet we are witnessing a slowdown of both direct and indirect capital flows into Chinese property, particularly from North America and Europe. Much of this can be attributed to geopolitical and governance concerns, which have been compounded by travel restrictions and the related challenges associated with initiating new investment relationships. This makes for a more complex investment environment in which foreign capital is approaching China very selectively and domestic Chinese capital is beginning to mobilize in response to opportunities that are arising. Here are three capital trends to watch in China:

Foreign capital is seeking highly focused exposure

Institutions already very familiar with China are continuing to invest programmatically in strategies that play into the domestic consumption story. Notably, Canadian and European pension funds and institutions with a physical presence in the region, if not within China itself, have taken a view on sectors in which they want further exposure and are executing strategies through asset- or sector-specific joint ventures and clubs with domestic operating partners and/or fund managers.

As in other global markets, logistics, cold storage, data center and rental housing sectors have been key areas of focus. The office sector has also seen selective demand as a tighter credit environment in China has made under-capitalized or liquidity-constrained developers and owners more accommodative on pricing than they would have been in the past.

Intra-Asia capital flows are increasingly important

Notwithstanding slower capital flows from North America and Europe, China attracted record foreign direct investment of $163 billion in 2020, more than any other country and an increase over the prior year. This underscores the importance of intra-Asia trade and investment flows. We are seeing continued interest from regional investors, particularly from Singapore-based institutions, which have taken a longer-term view of China and are looking at the current environment as an opportunity to continue to build exposure in the country.

Domestic capital is beginning to fill some investment gaps

Chinese institutions are increasingly being viewed as a source of funding to capitalize or recapitalize domestic cash-flowing assets. While Chinese institutions have, for the most part, been restricted from investing in offshore real estate, they are not restricted from doing so onshore and are very under-allocated to property relative to their global peers. Insurance companies in particular have shown readiness to invest in stabilized income-generating assets, and last year committed to domestic property funds sponsored by global managers targeting completed logistics assets. We expect to see more such activity this year as foreign managers find creative ways to mobilize Chinese capital for existing or new investments.