Chinese outbound real estate investment changing currents, rising tide: Knight Frank

Chinese outbound real estate investment changing currents, rising tide: Knight Frank
Chinese outbound real estate investment changing currents, rising tide: Knight Frank

Riding on last year’s strong momentum, the waves of Chinese outbound capital continued in primary real estate markets around the world in the first half of 2016, according to Knight Frank.

Looking at the total volume, the US$10.7 billion invested actually represents a 13.6 percent drop compared to the same period last year.

But this should be considered in the context of some of the biggest real estate deals in Chinese outbound investment history early last year, such as the US$1.9 billion purchase of New York’s Waldorf Astoria.

Nevertheless, Chinese investment was gaining momentum as we crossed the half-year mark. Since June there have been deals in the making that promise to turn 2016 into another productive year.

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Chinese outbound real estate investment changing currents, rising tide: Knight Frank

The US market attracted US$5.1 billion worth of Chinese investment in the first half of the year, up 21 percent year-on-year (YoY).

Chinese investors, like most international investors, are again focusing primarily on the major markets, especially New York, which attracted 80 percent of Chinese investment in the US. Remarkably, the amount of Chinese capital invested in New York from January to June was equivalent to 81 percent of Chinese capital invested in the city in all of 2015.

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Chinese outbound real estate investment changing currents, rising tide: Knight Frank

A large share of this (62 percent) was in office deals, as Chinese institutional capital continued to chase trophy assets. A joint venture involving China Life, for example, bought the PaineWebber Building in New York for US$1.65bn. Both CIC and HNA group also splashed out on New York offices this year.

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Chinese outbound real estate investment changing currents, rising tide: Knight Frank

Major hubs on the west coast, such as San Jose and Seattle, also drew interest from Chinese investors, particularly hi-tech-related development sites and industrial properties. For example, LeEco acquired the former Yahoo site, where it reportedly plans to set up regional headquarters.

As the Fed-led low interest-rate environment persists, Chinese investors, like all investors chasing yield, will continue to favour tangible assets such as real estate in the next few years. Added to this is the slow devaluation of the renminbi against the US dollar, which has resulted in a sense of urgency for Chinese investors to invest in USD-denominated assets.

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Some investors may wait for the coast to clear regarding the presidential election, but barring a major political upset, the US should see slow but stable GDP growth of around 2 percent, according to IMF’s latest forecast. This will put the US ahead of other developed countries, where the danger of a recession continues to linger.

Added to this advantage is the significant market depth, not just in New York, but in a score of coastal hubs and high-tech centres, making the US the foremost investment destination 2,700 for Chinese capital.

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In the six months leading up to the Brexit vote, London, which drew the lion’s share of Chinese investment in the UK, saw a number of large en- block deals, which contributed to the US$1.7bn in total volume, a whopping 75% uptick year on year.

Even though there were only a limited number of transactions, London’s status as a key international financial centre and the perceived stability of the UK economy definitely contributed to this tremendous growth.

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Chinese outbound real estate investment changing currents, rising tide: Knight Frank

One interesting aspect of these deals is that private banks, developers and conglomerates such as Baosheng Bank and Fosun became noticeable part of the investment landscape, which was crowded last year with major Insurance companies. This is partly because they are able to make decisions more quickly. They tend to favour the City and West End over Canary Wharf, partly because of pricing.

Even after the Brexit vote, Chinese investors’ interest in London seems undiminished, as there have been a few major office transactions since July. For example, through its majority-controlled SRE group, China Minsheng Investment Corp, said to be China’s largest private investment conglomerate, bought Societe Generale’s London headquarters for GBP84.5 million (US$110 million) in September. Meanwhile, Vanke reportedly bought London’s Ryder Court for GBP115 million (US$149 million) through Hong Kong-listed Vanke Overseas.

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While economists have torn up their previous forecasts of a UK recession, the negotiation process for Brexit will still mean increased political uncertainty in the short term.

During this period we expect overseas buyers to focus on Central London, particularly districts popular with technology and media firms, instead of looking at the wider UK. The fall in the value of the pound and recent yield softening has made London more attractive than some other global hubs.

Chinese investors and developers spent US$1.7bn in Australia in H1 2016, a 37 percent decline YoY. With the absence of mega-deals, such as CIC’s record breaking purchase at US$1.8bn for an office portfolio, the volume of office deals dropped 65 percent and hotel deals dropped 42 percent YoY. Meanwhile, investment in development sites stabilised.

Despite this, Chinese and other Asian capital continues to be drawn mainly to the office markets in Sydney and Melbourne. Tenant demand from various sectors remains strong, but lack of supply has caused rents in both cities to rise and vacancies to fall. Yields, meanwhile, have been tightening, but are still above long-term bond yields.

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Chinese outbound real estate investment changing currents, rising tide: Knight Frank

Fewer buying opportunities, coupled with the positive rental outlook, have already attracted large Chinese private developers such as Poly Group and Shanghai Shenglong to the office market. Since June there have been a number of major deals in the making, which will underpin the investment market outlook for 2016.

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Despite its relatively smaller market, Hong Kong has attracted Mainland investors because of its role as the international financial centre closest to the Mainland and the increased financial cooperation between the two sides.

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In H1 2016, Hong Kong attracted over US$1.68bn worth of Chinese investment, down only 9% from the US$1.86bn recorded in the same period last year.

Since last year, a series of currency and stock connect schemes between Hong Kong and the Mainland have attracted new tenant demand from across the border. As Hong Kong office rents remain the highest in the world, any opportunity to own a trophy Grade A office asset in the CBD cannot be ignored.

Following Evergrande’s US$1.6bn purchase of the MassMutual building last year, Everbright group dished out US$1.28bn on the Dah Sing Financial Centre in H1 2016. In July, Cheung Kei Group, a private developer from Shenzhen, bought the East Tower of One Harbour Gate in Kowloon for US$580 million.

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Chinese outbound real estate investment changing currents, rising tide: Knight Frank

Thanks to the severe shortage of en-block Grade A office buildings for sale, any property offered for sale is guaranteed to attract Mainland institutional investors and prominent developers, who are willing to pay higher prices.

The Hong Kong residential land market also offers better opportunity than some of the hotly contested Mainland markets. As witnessed in a recent land auction, Mainland developers are prepared to pay a higher premium in order to secure market share in the city and take advantage of anticipated growth in residential prices.

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