New trends in Chinese investment

As domestic market uncertainties persist in many markets throughout Southeast Asia, Chinese outbound real estate investment continued to grow strongly during 2015. Global gateways continued to attract the bulk of this investment, and by the end of 2015 the total Chinese outbound capital had reached nearly US$ 30 billion, doubling that of 2014.

Real estate firm Knight Frank, in its new report ‘China Outbound Real Estate Investment report: New Waves, New Destinations’ has examined the outbound investments of Chinese investors amidst the uncertainties in the Chinese market going into 2016.

The recent RMB devaluation and stock market turbulence have contributed to the market uncertainty and increased investors’ wariness of further policy intervention. This underscores the need for diversification for Chinese investors, particularly to overseas markets. Against this backdrop, there were some predictions of a retrenchment of Chinese outbound investment which did not come to fruition.

Key trends of Chinese outbound investment

Despite domestic market uncertainties, Chinese real estate investment overseas continued to grow strongly during 2015, riding on the strong appetite for overseas real estate from both major and smaller investors. This trend is also supported by the growing need for diversification from the Chinese market.

In 2015, there were significantly more Chinese developers investing overseas, reflecting their needs on for investment diversification. In contrast there has been only a small increase in the number of insurers investing abroad, however the transaction size attractive to the insurance companies is typically far larger than that of other buyer groups.

Global gateways continued to attract the bulk of Chinese overseas real estate investment during 2015. The insurance giants in particular, continued to splash out on trophy properties. There has been significantly increased investment in U.S. commercial real estate, making it the fastest growing mature market. Meanwhile strong growth in Australia continued unabated, while investment in the U.K. was on par with that of 2014.

Large investors continued to favour gateways because of the availability of stock, capital value and rental growth. Meanwhile some leading regional centers have become attractive to small- to mid-cap investors seeking higher yields.

Where and what are they investing?

KF Chinese buyers chart

Paul Hart, Executive Director, Greater China, said: “The traditional gateways are still the preferred destinations for Chinese investment. Manhattan, New York has become the top investment destination in 2015, having attracted US$ 5.78 billion of investment, a fivefold increase year-on-year. This was followed by Sydney and Melbourne in second place during 2015, attracting a total of US$ 3.8 billion of Chinese investment. London was in third place mirroring the momentum of previous years.”

During 2015 Australia continued to see rapid growth in real estate investment from China, with Sydney and Melbourne the focus. The China-Australia Free Trade Agreement, the Qualified Domestic Individual Investor or QDII schemes are expected to drive more Chinese investment in the Australian property market.

For London, Knight Frank noted that we are at the end of the yield-compression stage of the office cycle. Rental growth prospects are strong with the vacancy rate at a 14-year low. Buyer interest is focused on development sites and short income assets, particularly in London’s tech villages. Although relatively expensive, London delivers consistently good, demand-driven rental growth, making it attractive for investors in the coming 12 months.

In the U.S., the majority of the Chinese capital flows were into hotel and office properties in the New York borough of Manhattan, accounting for 52.3 percent of total investment in the country. Knight Frank also saw an increase of small- to mid-cap investment in a range of primary and secondary markets, such as Los Angeles, San Francisco, Chicago and Boston.

During 2015 there was a general preference for office assets, by both insurers and developers alike, especially the U.S. gateways and regional hubs. Meanwhile hotel transactions have increased significantly, propelled by a number of mega-deals in Manhattan, New York (the Waldorf Astoria to Anbang Insurance) and Sydney (the Hilton to Bright Ruby).

Paul Hart believes that Chinese investors will continue be interested in the traditional gateway markets however, the advent of the “Belt and Road” policy will also direct Chinese institutional investors to focus on economies that have close geographic and economic ties with China.

Beneficiaries will include Hong Kong, ASEAN counties and India. Interestingly a Tokyo office investment by CIC was one of the biggest investments in 2015 and Knight Frank expects that Japan will continue to be of interest.

David Ji, Director and Head of Research and Consultancy, aid that he believes that, in contrast to some predictions, the growth of Chinese outbound in 2016 will be strong despite the ups and downs of the domestic economy. The availability of quality stock has significant impact on the short- to mid-term investment decisions.

Going forward, this means ample opportunities for gateway markets and key regional hubs noted Knight Frank.