China was the biggest cross-border real estate investor globally in 2016, according to research from JLL.
Despite overall property transaction volumes lagging, the one area of the market which continued to grow was the pace at which Chinese investors are still looking overseas for properties.
As of Q3, 2016, the Chinese had invested almost $18 billion into commercial property assets internationally, according to the global property services firm. Total outbound investment in 2016 was up 30 percent from 2015, with the previous year’s investment volume itself 45 percent ahead of 2014. In fact, the annual rate of growth of Chinese outbound capital has not dropped below double digits in the last seven years, JLL said.
The capital base in China is also colossal and many institutions are only just embarking on real estate investing globally. JLL estimates that the country’s insurance companies alone could ultimately invest $250 billion into direct property, based on their current assets under management.
However, events at home can often make for a dampener to that flow. In the past, outbound capital from Japan, Germany and the US has all fluctuated primarily as a result of domestic issues. And given the depreciation of China’s currency – partly because of large capital outflows – a government clampdown on money laundering, and a concern that property is being acquired without sufficient expertise or diligence, overseas property investing is now squarely within the government’s crosshairs. So it was not a total surprise when the National Development and Reform Commission, The People’s Bank of China, the Ministry of Commerce and The State Administration of Foreign Exchange indicated in November that they would scrutinize cross-border investment deals more closely going forward.
Possible measures include curbing overseas investments of more than $10 billion and mergers and acquisitions valued at more than $1 billion if they are not part of a company’s core business.
And while no confirmation of these measures has occurred, stricter controls are likely already being enforced. Purchases of foreign assets by Chinese companies and households fell to just $1 billion in October, compared with $20 billion in September, according to London-based economic research consulting firm Capital Economics.
As such, more rigorous due diligence will lengthen the approval period for Chinese buyers of real estate and restrictions on transaction size would force businesses to reduce the size of their acquisitions.
That said, 70 percent of Chinese outbound property deals between 2013 and H1 2016 were below the rumored threshold of $1 billion, according to Los Angeles-based commercial real estate company CBRE. In response, it is expected that Chinese investors may simply opt to engage in a higher number of smaller deals below the stipulated maximum investment amount.
And even for sellers of the largest property assets, there are ways of engaging with Chinese buyers while at the same time safeguarding against the elevated execution risk. One of the US’s biggest landlords recently told PERE that when negotiating with Chinese buyers, he includes a non-refundable deposit clause of around 5-7 percent. He said if the buyer agrees to the clause, he can take comfort that if a sales process were to fall through due to constraints to capital outflow, he would be able to recoup the sales expenses and then some, as well as still have the keys to a prize property.
So while there may be some short-term impact on the more high-profile deals, there should be few long-term structural changes to Chinese cross-border real estate investing.
Although keen to keep a close eye on overseas real estate investing, it is clear that the government is committed to making outbound investing central to its long-term economy policy.
As such, Chinese investors will continue to deploy capital overseas, albeit in a more selective manner.