New rules could affect outbound Chinese property investment

If new restrictions on Chinese outbound investment were to come into effect, they could encourage large investors to become more selective when investing in foreign real estate, according to CBRE.

In a note, the consultancy said that new rules – currently being drafted, according to media reports – could push state-owned enterprises (SOEs) and insurers towards more prime assets, and possibly smaller lot sizes.

Four Chinese agencies, including the country’s central bank, issued a joint statement this week, affirming that all outbound investment remained subject to existing rules, but cross-border deals would be scrutinised more closely.

But reports suggest Chinese authorities are planning greater monitoring of large outbound deals, including real estate transactions worth more than US$1bn that are carried out by SOEs.

Julian Jiang, associate director of research at CBRE China, said: “While none of these measures have been confirmed, and a major announcement is unlikely as it would be viewed as backtracking on the government’s liberalisation policy, CBRE Research believes stricter controls on outbound investment are likely to be implemented in a low key manner in the coming months.”

Jiang said any new restrictions would encourage “more rigorous due diligence” and “lengthen the approval period”.

He said: “Chinese buyers, primarily large SOEs and insurers, will therefore turn more selective towards potential investment targets abroad, although they will continue to prefer core/core-plus assets in global gateway cities.”

The rumoured threshold of US$1bn for real estate transactions could be seen as being set relatively high, according to CBRE, since 70% of Chinese outbound property deals between 2013 and the middle of this year were below this limit.

“Once the expected new restrictions are in place, Chinese investors may simply opt to engage in a higher number of smaller deals below the stipulated maximum investment amount,” Jiang said.

CBRE Research data show that six of the 10 largest outbound property transactions by Chinese buyers over the past three years were completed by SOEs.

“Any restrictions on transaction size would force SOEs to reduce the size of their acquisitions and adopt a more careful and strategic approach,” Jiang said.

“The increased scrutiny of outbound real estate deals, and the longer timeframe and procedures involved, would boost demand for, and capital values of, core commercial assets in domestic tier-one and selected tier-two cities.”

The news comes as China’s second largest insurer, Ping An, said it had signed a memorandum of understanding with Australian fund manager QIC, in part to help it invest in real estate and infrastructure overseas.

CBRE expects outbound investment – along with the One Belt, One Road initiative – to remain a key component of China’s long-term economy policy.

“The central government will therefore continue to encourage and facilitate strategic outbound investment,” Jiang said.

“Chinese investors will continue to deploy capital overseas, but will turn more selective towards deals and more closely scrutinise the underlying performance of potential acquisitions.”