After three years of rapid ramp up, Chinese capital has now become a major source of capital in some of the world’s most active real estate markets. Like with all ‘new kids on the block,’ everyone is wondering who they are, how they behave, and why.
For starters, there are multiple types of Chinese investors going overseas. One type is Chinese developers, both large and small. The large ones are doing it as part of their growth strategies.
Smaller ones, which are being bought or squeezed out of the industry as it goes through a massive consolidation process, are collecting large payouts and looking for new areas to invest. Overseas real estate opportunities are naturally one of their targets.
Similar to small real estate developers, owners of many traditional manufacturing businesses also are becoming investors as the economy transforms. Domestic real estate, which has been a darling of Chinese private capital, has passed its peak and is seen as risky, offering less attractive returns.
On the financial institutions side, another source of Chinese capital is the country’s rapidly growing insurers. At the end of 2015, Chinese insurers collectively amassed $1.9 trillion of assets under management, and even with all those high profile acquisitions, less than 1 percent of that has been spent on overseas real estate, versus an allocation limit of 15 percent. We can get an idea of how much their demand is.
Meanwhile, Chinese state-owned asset management companies, with their large balance sheets and high credit ratings, have very strong borrowing power, and are increasingly becoming investment managers of third-party capital. As they go public in Hong Kong one after another, and gain access to the international capital markets, their investment desire and capabilities in real estate have increased, and will continue to increase, significantly.
Lastly, trust companies, security firms, and wealth management platforms, either independent or divisions of banks, which were the main sources of capital for Chinese developers during 2011 to 2014, are now starved for new investment products as larger developers are turning to the cheaper domestic bond markets and smaller developers have become too risky to lend to. They are increasingly paying attention to overseas opportunities, especially in real estate, in order to keep up with the demand from their high net worth clients.
The number one focus for all these investors is gateway markets. They are from ‘out of town’ and can only relate to places they have heard of. As their sophistication level – a combination of familiarity, knowledge, experience, infrastructure and other factors – improves, they will gradually venture into more inland markets and different asset types. Secondly, they prefer to make these investments themselves, or at least know exactly what they are getting themselves into. This may also change, in my view, as they become more sophisticated. The more they are familiar with the business, the more they will be willing to let professionals handle it for them. After all, overseas investing is secondary; their main focuses will still be their domestic businesses.
A few factors will influence how active these investors will continue to be. The Chinese political and economic outlook is one of the strongest factors. The more pessimistic it looks, the more capital is willing to go abroad. Government policies can have an immediate impact on the speed of capital flow, only an important thing to note is they are usually not intended to shut down capital flow, only to prevent a flood out of the country.
The outlook of the RMB exchange rate is obviously another important factor, but more so for private capital than it is for state-owned institutional capital. Personal ties to a foreign market is more of a psychological factor, but an important one nonetheless. It not only affects private capital’s decisions, but also those of institutional capital. Investors and investment managers are more willing to invest in a market where they intend to eventually move or where family members are studying or planning to study.