China Outbound Real Estate Investment Reaches A Tipping Point

July 16, 2015, Beijing - The role of China-sourced capital in global real estate markets continues to grow in importance. According to CBRE’s recently published report The Expanding Role of Chinese Capital in Global Real Estate Markets, over the past four years, annual China-sourced outbound flows to commercial real estate (not including development projects and individual investor purchases of residential properties) experienced a CAGR of approximately 72% to reach over US$10bn  for the year 2014, marking the first time annual flows has exceeded the US$ 10bn mark. China also accounted for over a quarter of total outbound commercial real estate investment sourced from Asia during 2013 and 2014.

What began with moves by China’s SWFs and tier-one insurers to make highly publicized purchases of trophy assets abroad has now spread to acquisitions by mid-tier insurers and corporate investors. Meanwhile, Chinese real estate developers have also been quite active, expanding into overseas markets in a bid to meet increasing demand from mainland HNWIs for residential assets in key destinations.

The report provides an update on outbound activity among Chinese individual, corporate and institutional investors, and discusses the opportunities, challenges and trends for Chinese investors both in and extending beyond gateway cities in the U.K., U.S. and Australian real estate markets.

The rapid rise of Chinese capital
Frank Chen, Executive Director and Head of CBRE Research, CBRE China, comments:” The past two years have seen explosive growth in purchases of offshore real estate by Chinese investors, including HNWIs, corporations and institutional investors. Each of the groups, however, is driven by a different set of motivational factors. For mainland HNWIs, the purchase of offshore residential property often ties in with the desire to support the overseas study of their children and prepare for intended immigration. For Chinese developers, the main drive to purchase offshore property is not simply to establish office premises to expand global business lines, as it is for many Chinese corporations, but rather to meet increasing demand from mainland HNWIs for access to residential properties in key offshore destinations. For mainland institutional investors, the main motivation for engaging in offshore property investment is to obtain access to a wider array of attractive investment opportunities and diversify a growing pool of domestic wealth.

Capturing opportunity in key offshore markets - UK, US and Australia
CBRE’s Global Investor Intentions Survey 2015 revealed London as the most preferred city for investment among global investors seeking to purchase commercial real estate assets. With a large and liquid real estate market, as well as a transparent, relatively stable and highly developed market environment, London has drawn wide-spread enthusiasm from global investors. Real estate acquisitions in London accounted for approximately 80% and 52% of total China-sourced commercial real estate investment flows to Europe in 2013 and 2014, respectively.  Even as yields in gateway cities across the globe continue to compress, yields are likely to remain comparatively attractive in London; national employment figures for the U.K. are at a multi-decade high and forecasts of stable economic growth are expected to support the strong performance of local property markets over the next few years.

U.S.-bound flows accounted for over a fifth of total outbound investment from China in 2013 and 2014, the majority of which has gone to hotel and office assets in gateway cities. Over the two-year period, purchases of hotel and office assets in New York, Los Angeles, Chicago, Houston and San Francisco accounted for over 60% of U.S.-bound investment flows to commercial real estate, with flows to premium office and hotel assets in New York and Los Angeles comprising approximately half of the total.

Whereas the high level of Chinese investment flows to the U.S. and the U.K. is due in significant part to the size of each nation’s economy and the international status of their financial centers, Australia has instead relied largely on the strength of its commercial ties with China, its largest trading partner. In 2014, China rose to become the second largest foreign purchaser of commercial property in Australia (behind only Singapore). Properties in Sydney drew the most attention from Chinese investors.

Opportunities aside, offshore investment is certainly not without its risks
Initial purchase activity from mainland investors has largely focused on residential, premium office and hotel assets in gateway cities. As they gain experience and become more confident in overseas real estate investment, we expect that more and more investors will start  to look for investment opportunities across a wider range of geographies as well as across a greater variety of asset types. For example, as the pressure on property prices in gateway cities in the U.S. continues to increase, in the search for better investment opportunities, mainland investors will need to expand their search to include other large metropolitan areas, such as Atlanta, Boston, Dallas, Denver and Seattle. In the meantime, a number of mainland developers have already begun to foray into retail and other property types. Some institutional investors are also beginning to take note of the attractive returns offered by industrial and logistics properties.

Many Chinese investors have little experience investing in offshore real estate; navigating unfamiliar market and regulatory landscapes may prove to be the most significant challenge facing Chinese investors looking to enter offshore property markets. Johnny Shao, Executive Director of Investment Properties, CBRE China, comments:” In the initial stages of their entrance into foreign markets, Chinese investors should seek to cooperate with local partners or global retained advisors in order to enhance their understanding of the local market and regulatory landscape and thereby obtain access to the most attractive deals in an increasingly competitive environment.”

In addition to the above-mentioned challenges, the path ahead for mainland investors may also contain a number of other risks. Regulators in offshore markets may roll out new regulatory restrictions and requirements for foreign purchasers of real estate, as well as implement new policy complicating the landscape for all market participants.  The strong performance of global real estate markets in recent years will be followed, invariably, by market downturns that will vary in degree across regions and property types.  Mainland investors will thus need to come prepared for these and other challenges as they continue to build their global portfolios.

Exhibit 1: China outbound flows to U.K. Commercial Real Estate

Exhibit 2: China outbound flows to Australia Commercial Real Estate

Exhibit 3: China outbound flows to U.S. Commercial Real Estate