On August 11, China’s central bank announced a one-off step to make the yuan “more responsive to market forces.” What does this change mean for the country’s real estate market and how will the new exchange rate formation system impact the overseas real estate investment market? Here are what leading property advisors have to say:

Jones Lang LaSalle

China’s one-way path to appreciation was, for almost a decade, icing on the cake for foreign inbound investors buying commercial property in China. Currency appreciation by itself was insufficient to build an investment case, but was a welcome bonus — a boost to home-currency returns. Although in most cases, the liquidity premium (the cost of exiting from the market) would erode most currency gains at the time of exit of the investment for foreign institutions.

Before the devaluation, foreign direct investment in real estate was already dampened by high prices, and a weakening growth outlook. The recent move adds to this by making investors question future assumptions about cash flows on their China investments when converted into home currency. This makes inbound investment into China worthy of a careful pause. In limited cases new market entrants or capital raising mandates for China-focused funds may be delayed until a certainty can be achieved for managing returns and setting up partial hedging agreements. However, investors with China-focused mandates will continue to look at China. Foreign investors will likely wait and see, causing a temporary stall in decision making over the coming weeks and months.

The surge in outbound capital flows, real estate included, has been tremendous in the last one to two years. Could the devaluation be a crude capital control to stem this outflow? This is not certain. The devaluation has a temporary effect of raising prices of assets abroad, therefore discouraging outbound investment. However, an attempt to reduce outflows via devaluation will in fact encourage more capital outflows in real estate. The devaluation has the unintended consequence of encouraging Chinese real estate funds to diversify their assets globally in order to hedge currency risk. This will encourage more outbound investment. Outbound investors will benefit from stronger foreign-denominated cash flows, and see a tidy boost in total returns.

Colliers International

China’s residential real estate market is currently in a state of consolidation and divergence. The market is predominately driven by domestic purchasers. While the demand in the first-tier city markets — namely Beijing, Shanghai, Guangzhou and Shenzhen — will remain sustainably strong, that in the non-first-tier cities are considerably diluted by the massive new supply at present. No change in this pattern of consolidation and divergence is expected as a result of the yuan depreciation against the US dollar.

Developers who have received levels of overseas funding will need to re-assess their business strategies in China and hedge against losses. Those with particularly high gearing of overseas funding may dispose of assets in light of increased financial pressure.

The yuan depreciation does make US real estate more expensive for Chinese buyers, which may catalyze a “think-twice” sentiment before a decision of acquisition is made. However, this should not dampen the growth momentum of the Chinese outbound investment activities, according to Lina Wong, head of Investment Services, China, Colliers International. Only if a further significant devaluation occurs — e.g. 10 percent to 20 percent — a more negative impact on this segment would be noticeable, Wong said. It should be envisaged that individuals and companies who must convert their capital from the yuan to the US dollar will have to re-evaluate whether their returns on investments in the US real estate are sufficient to cover the additional cost.

Institutional real estate investors normally do not make investment decisions based on currency exchange risks, as they do have the options to hedge such risks with financial instruments, though with greater costs.

Such investors make their investment decisions based on long-term economic and property market fundamentals, which substantially affect the investment returns and these factors cannot be hedged.

Savills

The recent devaluation of the yuan against the US dollar surprised market watchers with the yuan falling close to 4 percent within a matter of days. The government’s move has sent a shockwave throughout the global financial markets. The continued uncertainty as to how the Chinese government will adjust the yuan’s relative strength in the future has caused consternation in the global markets.

Many speculate that the yuan will weaken further given that only a further devaluation will help the lackluster Chinese export market.

Albert Lau, head and managing director of Savills China, said: “For me, the devaluation is not a surprise at all. The Chinese economy is weak. When travelling to different cities throughout China, with the exception of some of the coastal cities, I have seen many virtually empty shopping centers and restaurants — at the same time there is an oversupply of residential and office properties in many second-tier cities.

With further currency devaluations likely in the future, capital markets are bound to go through a period of instability.

While the devaluation of the yuan is a relatively new concept for most Chinese people, the idea of inflation is not. Nevertheless, at the end of the day, to most of them, they mean the same thing; money is losing its value. In these uncertain times it is recommended to invest in assets with intrinsic value. Once Chinese investors realize this, we are likely to see residential transaction volumes increase as investors look for this greater wealth security. The Chinese stock market — with its latest volatility, and with the memory of the last stock market crash in 2008 still fresh in their minds — is unlikely to prove appealing to investors.

For domestic institutional investors, the ongoing trend of overseas investment is likely to continue, with the added incentive that a weakening yuan will generate higher yuan returns from investments denominated in foreign currencies such as the US dollar.