Chinese outbound investment in real estate will continue but the pace of capital deployment is likely to slow as investors adjust to the new rules and fine-tune their investment strategies.
CBRE Research expects to see robust investment by sovereign wealth funds and a renewed focus on investment related to the Belt & Road initiative in the coming year. Taking positions as limited partners or purchasing smaller equity stakes below $50 million are other strategies likely to be utilized by Chinese outbound investors in 2018.
These changes in investment strategies has been an outcome of China’s continuing clampdown on overseas investments, in a move designed to stabilize the renminbi, restrict capital flight and reduce financial risk since December 2016. As a result, capital outflows have been slowing substantially, with the Ministry of Commerce data showing that overseas direct investment in the property sector fell by 82 percent year-over-year in H1 2017.
Nevertheless, CBRE Research data shows that China still remained the largest source of capital in the Asia Pacific commercial real estate investment market in the first six months of this year. Discrepancies between actual investment turnover and official data suggest that there is already a significant volume of Chinese capital circulating outside of the country.
However, although the weight of Chinese capital seeking opportunities overseas in 2017 has remained considerable, CBRE Research has noticed a change in the composition of buyers. SWFs have remained active but state-owned enterprises have scaled back their activity as they are more policy driven.
From a regulatory perspective, measures restricting or banning Chinese companies from engaging in overseas mergers and acquisitions in certain sectors were announced in August of this year, and are set to influence Chinese investors seeking real estate investment opportunities abroad in the coming year.
The guidelines, issued by the State Council and the National Development and Reform Commission, listed three categories of overseas investment including those that are banned, such as industries related to gambling; those that are restricted, such as property, film and sports; and those that are to be encouraged, such as investments that support the Belt & Road initiative. The inclusion of real estate on the list of restricted sectors means any proposed overseas acquisitions by Chinese companies will be subject to additional layers of scrutiny.
The most recent regulatory change, announced in November, suggests that Chinese outbound investors will be required to obtain the NDRC’s approval for transactions in what it describes as “sensitive” countries or industries, even if the deal is conducted entirely via offshore entities.
The draft rule does not explicitly categorize real estate as a sensitive industry. However, with previous guidelines issued in August classifying real estate as restricted, real estate has already been implicitly labelled as sensitive.
The draft rule brings offshore entities, which were considered a loophole through which Chinese firms could conduct overseas M&A, into the regulatory framework. This suggests that practices such as investing via offshore special purpose vehicles or pledging domestic assets against foreign exchange loans to finance investments will be administered under a more transparent regulatory framework.
CBRE Research expects the new rule, once implemented, to help clearly define the NDRC’s policy towards different markets and industries; improve the transparency, clarity and efficiency of the policy environment for outbound investment; and provide long-term support to Chinese investors formulating their overseas investment strategies.
CBRE Research sees only a limited chance of a significant shift away from the current regulatory posture towards outbound property investment in 2018. Nevertheless, China remains the largest source of capital in Asia Pacific and will continue to play a critical role in the global commercial real estate investment market.