Chinese investors target UK and Germany

Chinese investors have Europe in their sights. Following the relaxation of investment restrictions on the part of the Chinese regulator last year, they are ramping up their interest in European real estate, particularly in markets such as London and Germany’s ‘Big Six’.

Until May 2013, Chinese laws prohibited insurers from investing outside their home market. However, spurred on by recent high-profile investments in Europe by investors such as Singapore’s GIC and Malaysian institutional investors, Chinese investors are now turning their attention to Europe.

Chinese investors acquired €3.05 bn of European commercial real estate last year, a huge leap from the €978 mln in acquisitions they made in 2012, according to consultancy firm Real Capital Analytics. Combined, they acquired 43 properties last year, up from just 10 a year previously. That figure is likely to increase significantly this year, given that the Chinese regulator has recently doubled the proportion of capital that Chinese insurers - which together hold €900 bn across all investment asset classes - are permitted to invest in real estate and infrastructure to 20%, up from 10%, according to RCA.

Subsequently, investor interest is soaring, according to Dan Wagerfield, partner and head of the real estate international business group at law firm Norton Rose Fulbright in London: ‘We’re just seeing the beginning of this. Chinese investment in Europe reportedly tripled last year and shows no sign of abating. Europe, with its capacity for growth in most markets, excluding southern Europe, is attractive to Chinese investors. I’m going to China next month to talk to more investors and developers who want to come to Europe.’

Chinese investors, particularly sovereign wealth funds, only entered the European real estate market two years ago, according to Nigel Almond, global head of strategy research at DTZ in London ‘We’ve had different waves of capital. First, we had Malaysian investors, then the South Koreans. Now, it’s the Chinese. The capital typically goes to London first, then Paris, then big cities in Germany,’ he said.

With their deep pockets, Chinese investors have the purchasing power to outbid many European players, according to Wagerfield: ‘It’s a sign of the times that many domestic and overseas investors are struggling to compete with the purchasing power of the Chinese. We suspect many are getting pushed aside by the money coming from Asia, particularly on development opportunities. Chinese investors are looking at gateway cities in politically stable European countries, such as the UK and Germany, which are likely to witness strong economic growth in coming years.’

Such investors are especially keen on trophy assets in these markets. In January, China Investment Corp., a sovereign wealth fund responsible for managing part of China’s foreign exchange reserves, signed a deal to acquire the Chiswick Park business park in west London from Blackstone for €917 mln. And earlier in the month, Chinese state-owned developer Greenland Group acquired the Ram Brewery site, to the West of London, for £600 mln in its first venture in the UK. It plans to develop a mixed-use tower on the site.

Last year, China’s second biggest insurer Ping An acquired the iconic City headquarters of insurer Lloyd’s of London for £260 mln, marking the first real estate deal in the capital by a Chinese insurer. A spokesman for Gaw Capital, which advised Ping An on the sale, told PropertyEU that it was now on the lookout for ‘good investment opportunities’ in Germany.

Chinese investors are already reportedly the third biggest non-domestic investor group in London after German and US investors and are estimated to have invested £1 bn in the first 9 months of 2013. ‘If they continue at that rate, they will be the biggest and there is no evidence to suggest their appetite is diminishing. Due to the relatively low returns offered by China’s domestic market, investors have to go further afield and the weak pound makes the UK an attractive move,’ Wagerfield added.

Gingko Tree, an investment arm of the State Administration of Foreign Exchange, was the most active Chinese buyer of European real estate last year, acquiring 16 properties for €1.82 bn. Its acquisitions included the Adlerwerke office building in Frankfurt in partnership with Pramerica Real Estate last November for €111 mln.

Overall in Germany, there have been fewer acquisitions on the part of Chinese investors, but that is swiftly changing. In total, Chinese investors accounted for €210 mln of direct deals in Germany last year, against a backdrop of €1 bn for all Asian direct investment in German real estate last year, according to Helge Scheunemann, head of research at JLL in Hamburg. (By way of comparison, Asian investors accounted for €3.5 bn in deals in the UK in the first three quarters of last year, according to DTZ.) One active investor was Chinese private equity fund A.E. Funding Luxembourg, which acquired two offices in Frankfurt last December for a combined total of €70 mln.

‘There has been limited investment on the part of Chinese investors in Germany so far, although everyone expects them to become more active. Chinese investors were not permitted to invest abroad until fairly recently, so it’s only now that they are looking at cities such as London and Paris - and Germany is not far behind; it’s definitely on their agenda,’ Scheunemann said.

Nonetheless, there were a number of club deals involving Asian investors in Germany last year, including the sale of the Gallileo office tower in Frankfurt, which was acquired by IVG and a consortium of South Korean investors, and Silver Tower in Frankfurt. The trend is set to continue, according to Timo Tschammler, international director at JLL in Frankfurt: ‘In both of these deals, Asian capital teamed up with continental European capital and fund management capabilities. I think we’ll see more deals like that this year,’ he said.

And investor appetite for German assets is also increasing, according to Tschammler. ‘We expect Asian investment - as well as overall interest - to increase this year. We may even see more Asian investors strike out on their own and not just rely on club deals this year.’ There were €30.7 bn of commercial property deals in Germany last year - the best year since 2007.