Chinese investors: Manning the floodgates
Restrictions on outbound investment is having an effect. But appetite for global real estate means that Chinese capital is here to stay, finds Florence Chong
Anecdotally, successive rounds of capital control tightening by the Chinese government are beginning to have an impact on global investment by Chinese companies. The real estate sector is not exempt. Sources close to investors say outbound investment has started to slow, with deals taking longer to complete.
Yet, in May, China Investment Corporation (CIC) struck a record-breaking deal, acquiring Logicor, Blackstone’s European logistics platform, for €12.15bn. The deal confirms that certain Chinese entities will continue to invest overseas unimpeded.
CIC is also looking to support a Chinese consortium buying the Singapore-listed Global Logistic Properties. A deal would be worth upwards of $8bn (€7.1bn).
Property consultants in Australia say Chinese buyers are looking for high-yielding logistics assets there. Logistics is a good choice because it is an “easily scalable” asset, says David Green-Morgan, head of research at JLL Global Capital Markets.
Of China’s capital control tightening, one observer says: “So much of what are meant to be Chinese government restrictions are shrouded in innuendo and interpretation because no-one really knows. There are no clear-cut rules.”
It is not surprising that CIC, as China’s sovereign wealth fund, continues to invest. If media reports are to be believed, CIC is looking over Blackstone’s portfolio of shopping centres in Australia, currently available for AUD3.6bn (€2.4bn).
But some believe that the Chinese pullback in outbound investment will be significant – and that it is unlikely to return in the foreseeable future to the levels of the past couple of years.
“Clearly, in the past six months or even longer, large Chinese institutional investors with a history of going offshore have all indicated that it is becoming more difficult to get approvals,” says a senior foreign fund manager. “If the acquisition is strategic to the investor’s line of business, then maybe there is a better chance of getting approval.”
Another source says: “Most Chinese institutions are indicating to us that they are basically shutting down any kind of effort to invest offshore for the rest of the year.”
Another adds: “In the last year or so, we have seen many high-profile investments spook Chinese authorities, as China tries to control capital outflow.” Apart from difficulty in obtaining approval, there is a perceived need to keep a low profile.
However, no one expects wholesale retrenchment in outbound investment. Deals will invariably continue to be done.
According to the Ministry of Commerce, China’s non-financial outbound direct investment (ODI) in December 2016 amounted to US$8.4bn, down 39.4% year-on-year following the tightening policy.
Data from Capital Economics, an independent research firm, shows that China’s foreign exchange reserves fell 10% in 2016 – a trend unlikely to reverse any time soon.
“The continuous decline in China’s FX reserves means that tightened capital controls will likely remain in place,” observes Alan Li, managing director of capital markets, CBRE Greater China. Li suggests that, instead of larger transactions, Chinese investors may simply opt for a higher number of smaller deals.
In January, authorities added another layer of regulation to Chinese banks, deterring them from sending renminbi overseas.
Of the deal pipeline, sources say that approving authorities are undertaking more rigorous due diligence – and lengthening the approval period. This may force state-owned enterprises to reduce the size of their outbound property acquisitions, and adopt a more careful and strategic approach, says Li.
“We are certainly getting a few signs that moving a substantial amount of new money outside of China is getting more difficult,” says a source close to Chinese buyers.
China was the world’s second-largest real estate investor in 2016 with US$32bn – up 31% from 2015, says Green-Morgan. For the first time, he says, Chinese investment in Hong Kong – mostly land – hit US$5bn in the first quarter.
Led by HNA Group, which bought four plots of the former Kai Tak Airport in Kowloon for a total of HKD34.44bn (€3.94bn), Chinese investors bid aggressively for prime Hong Kong land.
Green-Morgan is convinced the record level of $32bn in outbound investment in 2016 is unlikely to be matched. He expects it could reach as high as $30bn in 2017.
In the past, Chinese investors have navigated government restrictions, say industry sources, pointing to a belief that Chinese groups have access to capital from outside China. Over the years, Chinese corporations and high-net-worth individuals have accumulated vast pools of offshore funds.
One source tells IPE Real Estate that, to the extent the business generates non-remnimbi cash flows and/or has assets overseas, it is able to complete an investment drawing down on its offshore funds. “But, what I am hearing is that, if one of those big insurance companies bought a trophy asset in New York, it would make them look bad in the eyes of the government – even if the money came from offshore.”
However, this source and others say second-tier companies with access to US dollar funds outside China may continue to make investments.
Just how deep that offshore well of non-remnimbi capital is, no one knows for sure. “Obviously,” says one source, “the pool will eventually get exhausted.”
In some markets, the Chinese are sourcing funding locally – if not from local banks, from non-bank lenders. Australia’s richest man, the apartment developer, Harry Triguboff, says he is prepared to lend up to AUD400m in 2017 to help Chinese buyers settle. He financed buyers to the tune of AUD200m in 2016.
James Sialepis, director of sales at Meriton, the company founded by Triguboff, says: “Demand for Meriton finance is continually growing due to the capital outflow restrictions in China, coupled with disinterested local banks which refuse to entertain overseas purchasers. It’s not our intention to sell only with our finance. The finance simply offers security for our purchasers, knowing that they will be able to settle on completion.”
Chinese investment in residential markets in Australia, Canada, the US and UK is considerable, but goes unrecorded by global firms such as CBRE and JLL.
In its latest annual report, Australia’s Foreign Investment Review Board said it approved Chinese investment totalling AUD47.3bn in 2015-16. Of this, AUD31.9bn was going into real estate, mostly residential development.
For Chinese institutional investors, such as insurance companies, office and hotel assets remained the focus globally. Office and hotels accounted for 85% of capital outflows in 2016.
“The biggest transaction of 2016 was a hotel acquisition in the US by a Chinese investor,” says Li, referring to Anbang’s purchase of Strategic Hotels & Resorts for $6.5bn from Blackstone. Anbang had earlier bought the Waldorf Astoria for $1.95bn.
As office towers become more expensive, Li expects Chinese buyers to explore alternative sectors, such as senior housing, to gain higher yields.
Chinese investors are not compromising on destination. The US remains the most attractive, followed by Hong Kong and the UK.
Until now, insurance companies, like Anbang, Ping An and China Life, have been the drivers of China’s outbound investment among Chinese institutional entities.
“We worked out that if they allocated 10% of assets under management to global real estate, the insurers would have a collective allocation of $250bn,” says Green-Morgan. “They represent a core group of active investors. They can do serial deals in the same year. Other Chinese groups may do a big deal of $400m-500m and that will be it.”
He adds: “Chinese insurance companies are taking global expansion very seriously. They are putting a lot of work into strategy and the countries they are investing in.”
With more experience of investing globally, Li says Chinese institutions are looking for direct ownership, or to partner in clubs and joint ventures with local participants.
Ping An, a trailblazer when, in 2013, it bought the Lloyds of London headquarters in London for £260m, is one that has gone down the joint-venture route. In Australia, Ping An has entered deals with QIC, the Brisbane-based global fund manager, and two listed Australian property groups, Mirvac and LendLease.
Ping An now has two residential joint ventures with Mirvac. Last December, it took a 25% stake in what will be Australia’s tallest office tower, the AUD1.5bn Circular Quay Tower in Sydney. The developer, Lendlease, retains a 30% stake; Japan’s Mitshibushi has a 25% stake.
Li says some investors that prefer control have considered working with retained advisers. He says: “Retained advisers with a strong brand can gain trust from local market participants on behalf of the Chinese investor, as well as manage expectations from each party involved in the deal to cross any culture gaps. The advice of a local partner or retained adviser can also be invaluable for navigating an unfamiliar regulatory landscape.”
CIC entrusted Mirvac with management of the Investa Property Trust portfolio of prime office in Australia, which it bought for AUD2.45bn in 2015. It also has an understanding, that it will have first refusal to office buildings in Mirvac’s development pipelines.
Mirvac and other Australian groups – like their peers around the world – see relationships with a strong Chinese entity as mutually beneficial.
Campbell Hanan, Mirvac’s head of office and industrial, says: “Our relationships with significant global capital partners provide us with the opportunity to diversify funding and to leverage our investment management, asset creation and repositioning expertise. From the partner’s perspective, local relationships within Australia provide access to prime real estate opportunities.”
As the market sees it, the Chinese push to diversify globally is a long-term objective, which has been inconveniently interrupted by its government’s own crackdown on offshore investment.