Chinese Outbound Real Estate Investment: New Waves, New Destinations

Introduction:

In 2015, we saw a devaluation of the RMB along with stock market turmoil and considerable debate on the health of China’s economy. Inevitably, many in the field are keen to understand whether all this will have a fundamental impact on China’s outbound investment.

Knight Frank’s Chinese Outward Real Estate Investment: After the Initial Waves What’s Next report, published in December 2014, identified a succession of Chinese investment waves hitting global real estate markets. Apart from the heavyweight financial institutions, developers and insurers who formed the first three waves of capital outflow, we identified a new “Fourth Wave” - a mixed group of investors consisting of lesser known small- to mid-cap companies and developers, private equity funds and individuals, who were increasingly active in those markets. With them joining the fray in the last two years, we have already seen all these waves beating on the shores of mature markets.

By shedding light on recent investment deals and activities of Chinese investors, this paper intends to answer two key questions. First, given the uncertainties in the Chinese market, going into 2016, will there be a tapering of investment from China? Second, what will bring investors to the market?

Key Findings:

  • Despite domestic market uncertainties, Chinese real estate investment overseas has continued to grow strongly in 2015, riding on the strong appetite for overseas real estate from both major and smaller investors. This trend is also supported by the growing need for diversification from some of the more hotly contested property markets in China. While more developers among the country’s top 20 have invested overseas in 2015 (increasing from 10 to 14), there has been only a limited increase in the number of top 20 insurers investing abroad (four in 2014 and six in 2015), even though they managed to clinch several mega-deals in 2015.
  • Global gateway cities continue to attract the bulk of Chinese overseas real estate investment. The insurance giants, in particular, continue to splash out on trophy properties. In 2015 investment in the UK is on par with that of 2014, but strong growth in Australia continues unabated. There has also been significantly increased investment in US commercial real estate, making it the fastest growing mature market. Manhattan has absorbed the lion’s share of this capital, with a fivefold increase year on year (YoY), dwarfing other primary cities. However, there has been a flurry of activity by small- to mid-cap investors in projects below US$50 million, especially in primary and secondary American cities.
  • De-coupled from the uncertainties of China’s domestic economy, Chinese outbound capital is set to grow. This is not just the result of the government’s various capital liberalisation initiatives, such as the Qualified Domestic Institutional Investor (QDII) schemes, but also, perhaps more importantly, an outcome of China’s long-term national strategy both to project its trade and investment prowess globally and to ensure financial stability.
  • When compared with gateway cities, the yield spread in some leading regional centres has continued to improve over 2014, indicating the relative attractiveness of these cities for investors, especially small- to mid-cap ones. However, large investors will continue to favour gateway cities because of the availability of stock, capital value and rental growth. Gateway cities with a strong quality pipeline, relative stability, active occupier activity and sustained income growth will continue to benefit from the growing outflow of Chinese capital.
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