In a dramatic change of heart, Beijing has reversed restrictions on foreigners buying residential apartments in China as it attempts to shore up its sluggish property market and reboot confidence in the economy.
Beijing has also partially relaxed rules on foreign capital requirements in wholly owned foreign enterprises investing in large-scale real estate projects. Foreign institutional investors no longer have to pay registration fees when taking out domestic and foreign loans to finance their property purchases, or when settling foreign exchange transactions.
Property is a significant pillar of the Chinese economy. Importantly, it is the collapse of the Chinese housing market that has partly been blamed for a growing outflow of capital into offshore markets.
According to Andrew Taylor, co-CEO of Juwai.com, the largest global real estate portal in China, Chinese investors spent $52bn (€46bn) on offshore property last year – a figure expected to rise to $220bn by 2020.
At this early stage, however, the consensus of those who spoke to IP Real Estate is that the impact of the new measures on foreign capital in the Chinese market will be, at best, minimal.
China attracted ¥18.5bn (€140m) in foreign investment to the real estate sector in the first seven months of this year – down 24.5% from a year earlier according to China’s National Bureau of Statistics.
Quoting the Bureau, Hong Kong’s South China Morning Post said the first half of 2015 saw a year-on-year drop of 3.9% in foreign investment in the real estate sector, indicating a steep decline in July. It said foreign capital accounts for less than 1% of total real estate investment in China.
Key points of reform
• Lower equity requirement: from 50% to 30-70% of registered capital
• Financing flexibility: easier access to domestic and overseas loans
• Purchase of residential property: foreigners can buy apartments without having to live in China for a year.
“It is a big gesture as the government has reversed the measures it put in place a decade ago,” says Keith Chan, head of real estate, Greater China at Macquarie Capital in Hong Kong.
However, there is unlikely to be an immediate positive impact. “A foreigner may know that the market is not very good, and thus they will just wait and see to make sure that the price is right before buying,” Chan says.
Taylor says: “We don’t expect a wave of new international investment in Chinese real estate. It looks as if the government intends to limit the new rules to housing for expatriates who are in the country. There are about 600,000 expats, and our best guess is that fewer than 10% would be possible buyers.
Macquarie Capital’s real estate business is unlikely to change its investment strategy in China as result of the new capital relaxations. “It is business as usual,” says Chan. “On the real estate side, we are investing more in the private capital market, focusing on institutional investors with a much longer-term horizon. But there could be people with contrarian strategies, and they could see an opportunity to enter the Chinese market now.”
“From our perspective, the additional liquidity is meaningful”
Peter Mitchell, Singapore-based principal of Elysium Capital, an investment consulting firm, says: “I am aware of plans to establish funds in Singapore involving Chinese assets. These plans were afoot before the change, but, obviously the changes will make things easier for them.”
According to the international law firm Linklaters, there is now more financing flexibility, since a foreign enterprise in China is no longer required to have its registered capital paid in full before it becomes eligible to obtain domestic or overseas loans.
Mark Gabbay, CEO for Asia at LaSalle Investment Management, says: “From our perspective, the additional liquidity is meaningful in terms of lowering the cost of onshore debt.”
However, Gabbay notes that foreign investors are still required to obtain a variety of approvals before they can own real estate in China. In this respect, he says, there is no structural change to policy.
The overarching issue confronting investors today is where the Chinese economy is headed. In the last one to two years, he says, the market has been trying to figure out how the economic slowdown in China will affect demand for commercial real estate.
“We look at it in two ways,” Gabbay says. “Firstly, one can say that the slowdown could create some opportunity to purchase assets from distressed sellers. Secondly, you can wave the yellow flag and take a more cautious stand to see how the commercial market evolves.”
However, Gabbay says there is no evidence that good quality commercial real estate is being sold at dramatically low prices. “There seems to be good interest for good quality cash-flow assets in China today.”
He adds: “LaSalle has a fair amount of capital available to invest in China today. The majority of that capital is still looking for high double-digit returns consistent with a higher-risk strategy.”
However, Gabbay is seeing more opportunity for core or lower-risk investment. “Investors might be able to buy better quality cash-flow assets in Beijing and Shanghai at reasonable yields. We are monitoring those types of situations right now.”
Some industry analysts believe the relaxation on registered foreign capital could also be aimed at discouraging capital outflow following devaluation of the yuan. The intent may be to offer an alternative for foreign corporates to invest in China if the government decides to restrict capital outflow.
But capital outflow is not likely to stop, although there may be renewed caution.
Nick Crockett, who heads CBRE’s Capital Advisors team in Asia Pacific, based in Singapore, expects Chinese investors to remain positive but may take longer to make investment decisions.
He classifies Chinese investors into three groups – the experienced institutional investors, like CIC and SAFE, insurance companies and Chinese developers.
He says experienced investors will continue to look for opportunistic and core investments in joint venture with global fund managers, as well as secondary markets with good fundamentals. Chinese insurance companies will look to Australia, Europe and US for grade-A assets and hotels, while developers, who are still focused on creating global portfolios, will remain opportunistic in what they pursue.
Chan sees a subtle change in the offshore strategy of Chinese investors – for the time being. Instead of the insatiable appetite of the past, he expects them to be more discerning. “They are now smarter investors,” he says.