More Chinese cash abroad than at home
BANGKOK -- Overseas real estate is getting a lot of Chinese money. Jones Lang LaSalle, a U.S. real-estate services company, said 2014 was an epoch-making year in terms of Chinese commercial real-estate investment. Outbound investment surpassed domestic investment for the first time.
In a telephone interview to the Nikkei Asian Review, Alistair Meadows, JLL International Capital Group head for Asia Pacific, explained the dynamic shift.
Q: What is happening to outbound real-estate investment from mainland China?
A: Chinese outbound commercial real-estate investments in 2014 reached $16.5 billion, an increase of 46% from 2013. We witnessed for the first time ever that outbound investment has beaten domestic spending on commercial real estate. A lot of the activity has been led by mainland corporate developers, broadly speaking about $5.3 billion of the outbound money spent. The other favored asset classes were offices and hotels, and there were significant transactions in the last 12 months, particularly in global gateway cities such as New York, London and Sydney.
There has been exponential growth in the last two years in particular. However, putting the number in context, there were $710 billion of commercial real-estate transactions globally last year.
Q: Who are the actual buyers -- corporate developers, rich individuals or Communist Party cadres?
A: If we split in three buckets, first of all you have the corporate developers, like Greenland, Vanke, Wanda, and others. They have been the pioneers or the trailblazers, [though] they have taken slightly different strategies. Greenland has acquired significant sites in Los Angeles, New York, Sydney, and London. They are undertaking these developments on their own, whereas Vanke has decided to take the path of forming joint ventures with local partners.
The other bucket is the insurance companies, and 2014 witnessed transactions from the likes of China Life and Pingan Life. Given the scale of the insurance groups' balance sheets, we think they will be more active in 2015.
And then the third bucket is the high net worth and the ultra high net worth individuals. What we have seen is some of the ultra high net worth individuals competing with some of the global institutions and winning the race for trophy assets.
Q: It seems like the investment destinations are geographically spreading.
A: The three main destinations are the U.S., Australia and Europe. But when we talk about those regions, it is the story about cities and not countries. The vast majority of outbound capital goes into a relatively small number of cities. In the case of the U.S., it is the gateway cities of New York, San Francisco, Los Angeles and Chicago. In Europe, it has been dominated by London. But we are seeing increasing signs that Chinese investors are diversifying into mainland Europe, in particular into the German cities. And within the Asia Pacific, the interesting thing this year will be Japan, because we have seen an uptick in interests from Chinese investors, both institutional and private.
Q: Where would Hong Kong be placed in this picture?
A: Vanke has number of projects in Hong Kong, and we have seen other mainland groups establish platforms in Hong Kong for outbound investment. A number of banks and insurance companies have established real-estate teams and offices.
Q: Why do Chinese investors only go to big gateway cities? Is it because they are just beginning to build their portfolios and want to start with well-known locations?
A: Those are central in making their decisions. The other aspect is around transparency. They want to initially invest into deep liquid real-estate markets. There is more opportunity to invest in those global gateway cities and equally, when they are looking to exit, at some point in the future, there is less risk. There is probably higher level of comfort going into recognized destinations.
In many cases when it comes to development activities, corporate developers would sell end residential units to [their] customer base in China. Another aspect is education and immigration. There is a large Chinese population as students in universities or in established Chinese populations in those major cities. They could leverage the relationship with that community to sell their residential apartments.
Q: Is China's anti-corruption drive affecting overseas real-estate investments?
A: Maybe anecdotally, it is influencing the pace of outbound activities in certain instances. But I think typically with Chinese clients that we are dealing with at a corporate level, it is more to do with a slowdown of the Chinese economy and its own domestic business activities that is driving them.
Q: Do you foresee a lot more to come as Chinese economy is slowing down?
A: Yes. I believe this is not cyclical, but a structural shift that we are seeing. [The] $16.5 billion [in outbound commercial real-estate investment] in 2014 will grow to $20 billion and above. There is a lot of momentum in outbound activities, and we do not see that stopping.
Q: Where would China rank in 2014?
A: It now makes China rank in the top five of major cross border capital sources worldwide. If you draw a correlation with the Chinese economy, inevitably they will take a position in the top three.
Q: Do you think Chinese have a stronger appetite for real estate than others?
A: Yes, as an asset class, real estate is of preference or of choice in China. Underlying appetite is helping to drive some of these activities. Clearly, the real-estate sector in China has been in the front and center of economic growth, urbanization and development. If we take that as a case, then it is definitely affecting outbound activities.
Q: Do you see capital outflow causing a liquidity shortage in China?
A: Tightening credit has definitely started to have an influence on debts and the capital market in China, maybe for some of the smaller- to mid- sized players. As a consequence of that, we are now seeing some of our international clients quite carefully looking at potential mergers and acquisitions opportunities in the real-estate sectors over the course of next 12 to 18 months. Some of the projects may come to a halt if there is a credit squeeze on some of these developers and [these investors may] step in to take over those projects.
Q: Do you see any risk scenario for the Chinese investors going abroad?
A: I think inevitably, there will be mistakes being made on individual projects, because in certain cases expansion has been aggressive and very ambitious. But I believe this is part of a long-term structural shift that will see Chinese capital being a permanent fixture on the global real-estate landscape.
Interviewed by Nikkei deputy editor Kenji Kawase