April 20, 2017 10:00 am JST

Samuel Biggins: The skeptics are wrong about Chinese investment in Australia

Flows of cash into property are changing, but the river has not run dry

For those who make a living out of cross-border real estate investment, these are interesting times. Not a day goes by without a seller asking about the current level of demand, or examining the execution and financing risks of entering a deal with a Chinese counterparty.

The global backdrop is uncertain, including Brexit, electoral risks in the European Union, the continuing anxiety caused by U.S. President Donald Trump's election victory, and the impact of increased anti-corruption measures instigated by Chinese President Xi Jinping.

But the principal issue for investors is China's clampdown on cross-border capital flows. Net capital outflows peaked at a record $650 billion in 2016, and China's foreign reserves have dipped below $3 trillion for the first time in six years, prompting determined action to stanch the outflow.

At Colliers International's most recent Australian Investment Showcase roadshow in China, questions were asked at every event about the prospects for funding acquisitions through Australian banks, reflecting Chinese institutions' tighter controls on lending to offshore and nonresident buyers.

For Colliers, which has been running these events in major Chinese cities for the last three years, this change in discourse was notable. However, there is some comfort in recent figures for long-term believers in Chinese investment in Australian real estate.

Excluding the agribusiness sector, investment from China into Australian commercial real estate amounted to approximately $3.25 billion in 2014, $4.89 billion in 2015 and $4.45 billion in 2016. That contrasts with total investment in commercial property from China of just $50 million between 2001 and 2008.

In 2014, China overtook Singapore as the dominant source of offshore capital for Australian commercial real estate. Mainland Chinese developers that had made significant wealth in residential development in China started to come to Australia in large numbers, seeking geographic diversification and trying to replicate their successes at home.

Groups such as Golden Horse Holdings, Greenland Holdings, Beijing Capital Land, Dalian Wanda Commercial Properties, Guangzhou R&F Properties and ChiWay Land began to acquire sites and enter development joint ventures with local partners -- a trend that continued into 2015 and 2016.

The destination of investment has varied, especially in 2015, when a fall in development investment was almost exactly mirrored by a rise in the office sector. This was explained in part by outlier transactions, such as China Investment Corp.'s 2.45 billion Australian dollar ($1.85 billion at current rates) acquisition of the Investa office portfolio from Morgan Stanley -- the largest such deal in Australia.

This transaction also heralded a change in the general Chinese buyer profile from opportunistic developers acquiring one-off development sites to institutional, state-backed players seeking investments yielding core or core-plus returns.

This trend continued into 2016 with the emergence of other major players such as Ping An Real Estate. The subsidiary of Ping An Insurance Group struck its first development joint venture deal with Mirvac and quickly established two more projects -- one with Mirvac and another with Lendlease Group.

The evolution in the sophistication of buyers is a key theme in the marketplace, and is expected to continue through 2017 as more Chinese state-owned enterprises and institutional investors go to Australia for scoping studies of core investment-grade assets.

GAINING EXPERIENCE A second major theme is a switch in the bulk of investment from office assets, which accounted for $2.57 billion in 2015, to development, which attracted $2.44 billion in 2016. This reflects growing interest from China-backed developers that have already invested in Australia, usually in one-off acquisitions in central business districts or near-city apartment sites. Many are now aiming to build sustainable, long-term development enterprises in Australia with project horizons of five years or more.

Consequently, several groups have acquired large, undeveloped land banks with the intention of building planned communities -- traditionally the domain of established Australian developers. A prime example is Dahua Group's 2016 acquisition of more than A$700 million worth of greenfield development sites in urban growth areas in Melbourne and western Sydney.

Together with others such as Poly and R&F, each of which acquired sites for house and land products, this change in approach is a principal reason behind the 2016 spike in development investment. Based on current discussions, more groups are expected to follow this strategy.

To the great delight of China skeptics, it has not all been plain sailing. China is actively enforcing its capital transfer restrictions, which has caused some potential transactions to stall in recent months. While it is not impossible to transfer funds out of China, it has become a more time-consuming process, adding 60 to 120 days to transactions and requiring substantial additional documentation.

Groups that moved early to set up offshore cash-box entities in markets such as Singapore and Hong Kong have huge competitive advantages over those operating out of China, and are much more active. Those pursuing transactions are also putting more effort than ever into vetting parties before brokering deals, to minimize financing and execution risks.

Domestic Australian banks are applying more thorough screening to offshore apartment buyers, together with rigorous assessment protocols for those seeking mortgages to pay for units under construction. This has created a void that was initially filled by private lenders, and, in some cases, developers that were able to offer vendor-financing packages. Increasingly, however, global banks are stepping into this area with new products at competitive rates.

Chinese investment in Australian real estate is evolving at all levels. Inbound tourism from China has grown by 284% in the last decade, and continues to show double-digit growth year on year, supported by Chinese airlines opening direct links to cities such as Brisbane and Hobart.

Institutional investors, in many cases with state backing, are now entering the market at a steady rate after long periods of reconnaissance. Developers are still active buyers, and are pushing into new markets such as the state of Queensland, changing the types of projects they are acquiring and adopting long-term business models. All this means that the level of demand from China is stronger than ever, although the sources are changing as local market knowledge and understanding evolves.

Sam Biggins is a director with Colliers International in Australia, responsible for facilitating inbound Asian investment.

Asia300

Greenland Holdings Corp. Ltd.

China

Market(Ticker): SHG(600606)
Sector:
Industry:
Finance
Real Estate Development
Market cap(USD): 13,731.32M
Shares: 12,168.15M
Asia300

Ping An Insurance (Group) Co. of China Ltd.

China

Market(Ticker): HKG(2318)
Sector:
Industry:
Finance
Multi-Line Insurance
Market cap(USD): 139,456.63M
Shares: 18,280.24M
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