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ASIA NEWS: Putting the brakes on

Over the last few years, China has been an active source of capital for private real estate investment markets globally on the back of its government’s bold economic reforms.

A change now appears to be in place. As the country grapples with an unsettling economic and financial environment, curbs on capital flight are being imposed, leading to questions about a possible drop in the volume and pace of outbound investments.

In September this year, news emerged that the Beijing-based insurance company Anbang Insurance had withdrawn its bid to acquire the Heron Tower in London. According to media reports, the insurer was set to exchange contracts to acquire the landmark skyscraper for around £750 million (€1 billion; $1.1 billion) in a matter of weeks, but then decided to opt out.

Multiple calls to Anbang’s headquarters for a comment went unanswered. A source close to the deal told PERE that the insurer faced challenges in obtaining regulatory approvals from Chinese authorities. However, issues that cropped up in the due diligence process also were understood to have contributed to the collapse of the deal.

This is not an isolated case. Such regulatory hurdles have certainly begun to impact both institutional investors and private wealth’s offshore transactions, according to one lawyer who asked not to be named because he is currently advising several Chinese insurance companies on outbound deals. This regulatory tightening has only happened as a result of the poor economic climate. In fact, prior to China’s recent economic volatility, regulations for overseas investments were being eased.

For example, State Administration of Foreign Exchange (SAFE), China’s foreign exchange regulatory agency, is not giving any more quotas to companies which have used up their existing foreign currency quota, he said. The agency, which is responsible for granting quotas for the conversion of the yuan into foreign currency for overseas transactions, has also indicated that it will not give any more new approvals for the rest of the year.

Mixed messages
Earlier this month, the California Association of Realtors released a report stating the share of international buyers representing home sales in California fell to less than 4 percent this year, the smallest share in eight years, according to a report in Bloomberg. The overseas spending limits placed on Chinese purchasers by the government were cited among the reasons for the drop.

However, in the absence of any new research reports or statistics signaling a drop in volumes of institutional and private capital flows, it becomes difficult to conclusively establish the impact on global real estate markets.

PERE’s conversations with real estate brokers advising Chinese clients have also yielded mixed views. In its Q3 Capital Flows Report released last month, Colliers International recognized that while “very recently Chinese capital has been pulling out of existing transactions in Central London, other forms of Chinese capital continues to pour into European real estate.” For example, Hualing industry and Trade Group invested £1.2 billion in three UK property schemes being developed by UK’s Scarborough Group earlier this year.

Some industry observers have said that with the free fall in the Chinese stock markets negatively impacting the equity holdings in the portfolios of Chinese companies, such firms could be prompted to hold off aggressive investing in any asset classes, including real estate.

Alistair Meadows, head of JLL’s International Capital Group in Asia, however, doesn’t think the outcome should be generalized.

“In the short term, there is potential for government regulators to slow the pace of outbound activity. However, we have closed a couple of transactions in the middle of the stock market volatility, proving there is still the ability to invest overseas,” he said. “There is a long term structural shift that will take place by Chinese insurance groups as they seek to globalize investments and increase allocations to real estate relative to their global peers.”

Marc Giuffrida, executive director of the global capital markets group at property consultancy CBRE, said: “We are seeing some institutions sit back a bit to see what’s happening with their wider portfolio. But these institutions are very prudently managed and we don’t see a major slowdown in the volumes of real estate investments. Volatility in markets may affect share prices and the financing markets on equity and debt, but it doesn’t affect what companies are looking to achieve, that is, growth and diversification.”