ASIA GUEST COMMENTARY: China’s investors unfazed by scrutiny

The property world was on tenterhooks as Chinese President Xi Jinping and US President Donald Trump finally broke the ice with a phone call in February. And if newspaper reports are to be believed, a meeting between the two is on the cards soon.

According to JLL’s Global Capital Flows data, China invested $33 billion in overseas real estate in 2016. Of this, the US captured 43.3 percent – a total of $14.3 billion pumped into American commercial, industrial and residential development real estate.
Some of the biggest China-US deals last year include Anbang Insurance Group’s $6.5 billion acquisition of Strategic Hotels and Resorts from private equity group Blackstone; hotel purchases by China Life Insurance; and New York office deals by China Investment Corporation, the sovereign wealth fund.

While the Chinese government’s renewed scrutiny on outbound investments could make it hard to reach the same volumes in 2017, we expect a range of $25 billion-$30 billion. In our discussions with clients interested in taking capital outside of the country, they remain relatively unfazed.

It’s worth noting that many of the biggest players already have a significant amount of capital outside China, so their investment decisions are not so reliant on changes in Chinese governmental policy.

Looking at the other side of the equation, the Committee on Foreign Investment in the United States, a government agency that reviews foreign deals for national security implications, is expected to closely monitor Chinese acquisitions.

However, indications are that President Trump is not against foreign investment if it benefits the US economy. Chinese investment patterns are unlikely to dramatically change as businesses and investors take their cue from the Chinese leadership.

With the US turning inwards, President Xi sent out a clear message at the World Economic Forum in January that China remains committed to globalization and free trade.

Real estate opportunities outside the US also appear promising for Chinese investors. Looking more broadly at the Asia-Pacific region, President Trump’s withdrawal from the Trans Pacific Partnership – a trade agreement between a dozen nations in the Americas and Asia – opens a gap for the Beijing-backed Regional Comprehensive Economic Partnership, a proposed free trade agreement between the 10 members the Association of South East Asian Nations and the six Asian countries with existing free trade agreements with ASEAN.

China’s One Belt, One Road initiative, which links China to western Europe and through to Africa, will make investment in untapped markets along the OBOR more attractive. Now into its second wave of expansion, Chinese companies will require more infrastructure and housing. Already, port operator China Merchants has announced it is building industrial zones and commercial real estate development at locations along the OBOR outside China.

We expect Chinese investors will continue to put their money in destinations such as Australia and the UK. Australia has long been viewed as a safe bet for overseas investment – the country attracted $3.7 billion from foreign investors last year. Meanwhile, the slump in the pound has sent Chinese capital flowing London’s way, and the process of Brexit is unlikely to deter long-term confidence in the UK market.

At the same time, Chinese investors will also continue to invest in real estate domestically, with Tier 1 cities the main beneficiaries. They remain attractive due to limited inventory supply and strong demand boosting returns. Last year, total transaction volumes in Shanghai reached $14 billion – 48 percent of China’s total investment volume. Beijing was the runner-up, with 16 percent of all transaction volumes in 2016, while Shenzhen came in third.

China’s expansion of its securitization market will further spur demand for assets since 70 percent of China’s asset-backed securities are backed by real estate. Uncertain global markets and a confrontational American president may mean more prudence from Chinese investors, but their real estate investment strategies will remain robust as they seek to diversify their portfolios geographically.