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September 17, 2013

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Chinese overseas property investment surges

By Cherry Cao | September 17, 2013, Tuesday | Print Edition

Investment by Chinese firms in overseas real estate could keep growing at 20 percent per year over the next decade, and that’s a conservative estimate, according to Savills China, a major international real estate services provider.

Its latest research predicts the trend will continue as China further integrates with the rest of the world and new sources of capital gain traction in overseas markets.

Over the past three years, Chinese investment in overseas real estate surged from US$900 million in 2010 to US$5.6 billion in 2012.

Investment this year has already exceeded those levels, due to many high-profile deals in key gateway cities.

After being a net recipient of investment for more than two decades, China is beginning to send its money offshore. This process started with individuals picking up investment and personal residential properties, and continued as developers snapped up prime development sites and insurers and sovereign wealth funds purchased prime assets and strategic property portfolios.

Chinese individuals have long been subject to stringent capital controls, but as the economy grows and integrates with the rest of the world due to increased international use of the yuan, capital flight from Chinese nationals has become increasingly common. Much of this money finds its way into the property markets, the favored investment product of many Chinese.

Hong Kong and Singapore

While the percentage of Chinese nationals investing overseas is small, the absolute number compared with the population of some of the first markets they invested in is huge. Namely, the property markets of Hong Kong and Singapore were inundated by Chinese buyers from 2008 to 2012. This resulted in such a rapid growth in prices that governments had to enforce tough stamp duties in to stem the tide of money washing onto their shores.

“Chinese investors have now moved onto other markets where, although they are a relatively small portion of buyers, their numbers are rising rapidly,” said James Macdonald, head of Savills research, China.

“Chinese nationals are seeking capital security, access to education and healthcare, permanent residency and citizenship. At the same time, a much stronger yuan has made post-global financial crisis investment opportunities seem much more affordable.”

With the slowing of the domestic market and the increasing risk profile of the China market, Chinese developers and investors want to diversify their portfolios to include overseas properties. Each entity has adopted different approaches.

Varied investment focus

Developers have typically joined with a local partner, focusing on gateway cities, with most developments including residential components. Insurance companies, just starting to invest, are focusing on established income-producing commercial developments. Sovereign wealth funds are co-investing in logistics portfolios in key trading partners’ countries. At the same time, they are pursuing alternative asset classes such as student housing in the UK, as well as more traditional core commercial assets.

“We are seeing the opening salvo or exploratory foray for what is expected to be a much bigger wave of capital in coming years,” Macdonald said.

Following in the footsteps of investors like South Korea’s National Pension Service, the world’s fourth-biggest pension fund, and other Asian institutions, Chinese investors seek exposure to safe haven, high-yield and stable-price property markets in the West. Key investors at the moment are insurance companies, sovereign wealth funds and developers:

• Insurance companies have 7.7 trillion yuan (US$1.25 trillion) in assets under management (AUM) with potentially up to 10 percent able to be invested in property.

• China’s SWFs have a similar amount of AUM at US$1.2 trillion. CIC and SAFE, both ranked in the top five SWFs in the world, have been particularly active.

• Both China’s Public Pension Fund and National Social Security Fund are currently barred from investing in property, but could bring a great deal more money into the market, should deregulation occur.

• Developers will become major overseas investors going forwards, with several leading firms (Greentown, Vanke, Wanda, China Overseas Land & Investment) already making sizeable investments in key gateway cities in the US, UK and Australia.

 

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