China Outbound Real Estate Investments Become the New Normal
China Outbound Real Estate Investments Become the New Normal
January 21, 2015
CBRE Shares its View on China’s Overseas Investments
January 21, 2015, Beijing – China has always been known as a country that attracts massive foreign direct investment. However in recent years, following the challenges manifested by the nation’s macro-economic transformation including a shift in the domestic real estate market, many Chinese real estate enterprises and institutional investors were motivated to seek new investment breakthroughs. At the same time, a comparative look at the overseas markets gradually recovering from the financial crisis reveals asset values generally falling within a more reasonable range. Recognizing the combined impact of this internal and external macro-environment, a growing number of Chinese real estate developers and investors are becoming active to “Go Global”, engaging in overseas real estate investments. According to CBRE’s “The Surge of Asian Capital in the Global Real Estate Market H1 2014” report, the level of cross-border investments by Asian investors continued to rise in the first half of 2014, an increase of 40% from the prior year with 23% of the active capital coming from China, second to Singapore (29%) and Hong Kong (25%).
Kitty Liu, Senior Director, CBRE Global Capital Markets, said, “To Chinese companies, now is the right time to look at outbound real estate investments.” On December 24, 2014, Premier Li Keqiang further proposed at a State Council executive meeting to increase financial support for Chinese companies investing and operating overseas, or “Going Global”. The move will raise the international competitiveness of Chinese products, boost structural upgrades of foreign trade and propel manufacturing and financial sectors to a higher level. In recent years, the Chinese government has also introduced a series of significant policy initiatives to encourage outbound investments such as: issuing the “Administrative Measures for the Record-filing of Overseas Investment Projects in China (Shanghai Pilot Free Trade Zone)” in October 2013. The Shanghai FTZ has currently become an important platform and channel for Chinese companies to expand their outbound investments; implementing the “Administrative Measures for the Confirmation and Recordation of Overseas Investment Projects” in May 2014 to ease approval and registration restrictions on the outbound investments of Chinese companies, significantly simplifying the process and playing a positive role encouraging Chinese companies to make outbound investments; the National Development and Reform Commission has adjusted China’s overseas investment catalog, increasing the number of target investment industries and expanding investment areas; under risk-controlled conditions, individuals qualified in the Shanghai FTZ are allowed to open capital accounts, opening the floodgates to individual overseas direct investment while helping to promote the internationalization of the RMB; the Shanghai-Hong Kong Stock Connect Program will aid the investment of Chinese capital in Hong Kong stocks, further expanding overseas RMB investment channels.
Outbound Investments Become the New Normal
“Outbound real estate investment is now a flourishing component of China’s overseas investments and this will remain as a long-term trend,” said Kitty Liu, “Currently, Chinese investors are mainly focusing their investments in markets such as the UK, US, Australia, Europe and Southeast Asia with property types ranging from residential developments and office buildings to hotels. Participation in outbound real estate development and investment will have a positive and far-reaching impact on the development of China’s real estate companies and institutional investors”
We find a focus on the residential sector mainly by real estate development companies and RMB real estate private equity funds. Relative to other asset types, Chinese developers and private equity funds are more familiar with and experienced in residential developments. At the same time, we find an increasing number of Chinese individuals purchasing overseas residential properties, driven by such major factors as education, immigration, tourism, vacations or asset allocation, well reflecting a relatively wide range of interests for residential products. In addition, developers believe that their domestic network and sales channels will continue aiding the sales of their overseas projects.
For development of overseas residential projects, it is suggested that Chinese developers consider collaborating/JV with a high caliber local partner. With the support of a local partner when entering into a new market, potential risks in laws and regulations, planning and design and other factors could be mitigated while also addressing the challenges faced in areas like project financing. There are Chinese developers who choose to build their own overseas development team in executing their project developments and that would set a high standard to their in-house team and they need to be highly capable.
We find the office properties are largely favored by institutional investors. Core office assets can bring along stable rental income and achieve a stable return on investment with favorable market liquidity. Additionally, as the economy is currently experiencing an uptrend, that could suggest potentials for core office properties to appreciate in asset value. Yet, the appreciation of asset value also depends on quality asset management; hence post-investment management is an important point to note when investing in office properties including both property and lease management. Currently, investors typically appoint their local equity partners to take care of asset management or mandate CBRE and other internationally renowned professional real estate service providers to provide asset management services.
In the hotel sector, we find interests come mostly from both institutional investors and family enterprises. As compared to office buildings, investment in hotel properties managed by internationally renowned hotel companies creates the ability to generate higher brand impact for investors. Just to name a few hotel acquisitions by Chinese investors worldwide Park Hyatt Hotel was acquired by Fu Wah International Group in Melbourne; Hilton’s Waldorf-Astoria Hotel was acquired by Anbang Insurance in New York; Sheraton on the Park was acquired by Sunshine Insurance Group in Sydney and Paris Marriott Hotel Champs-Elysees was acquired by Kai Yuan Holdings in Paris. These are high quality, high reputation hotel properties and as a result, greatly enhance the brand awareness, profile and reputation of the underlying Chinese companies who have invested in them. With operations of the hotels typically managed by internationally renowned hotel management companies, investors find post-investment management much easier.
Chinese companies often face challenges revolving around cultural differences, the legal environment and talent pool when investing overseas. “Following the trend of China’s outbound investments, it is essential for Chinese investors to understand and learn about the various overseas markets. In addition to developing an international team, we would suggest that Chinese investors also work with third-party professional service firms or local partners who are familiar with the dynamics and operations of the local market. Engaging real estate consultants, law firms, tax planners and other professional firms will mitigate potential risks and facilitate the smooth implementation of overseas investment and development projects, helping Chinese investors to get access to international experience and best practice, which will in turn have a positive impact on their long term international business expansion ” Kitty Liu suggested.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2014 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.