An Expanding Horizon - Chinese Capital Tapping into Overseas Real Estate Markets
An Expanding Horizon - Chinese Capital Tapping into Overseas Real Estate Markets
July 10, 2013
China’s Institutional Investors Expected to Be a Growing Force in the Booming Overseas Property Investment Market
July 10th, 2013, Beijing — CBRE, the world‟s leading commercial real estate services firm, recently released its latest research in China, entitled An Expanding Horizon – Chinese Capital Tapping into Overseas Real Estate Markets. According to the report, in recent years Chinese individual investors, property developers and institutional investors have increased the scale of investment in overseas real estate markets. This trend has been driven, in our view, by several factors including limited investment channels in China, abundant liquidity, diverse domestic and overseas credit conditions, RMB appreciation and the relatively lower valuation of overseas assets in the years following 2008 Global Financial Crisis.
Focusing on the individual investors, domestic real estate enterprises and institutional investors, CBER initiated an in-depth research to analyze the status-quo, drivers, as well as the trends of Chinese capital‟s direct overseas real estate investments.
For Chinese individual investors, who have been particularly active in overseas real estate markets in recent years, they are now extending their primary investment objectives from immigration and children‟s education to wealth preservation and creation.
By contrast, the involvement of Chinese real estate enterprises in overseas real estate markets is still in its preliminary stage, with some pioneers attempting to develop overseas market according to wealthy Chinese‟ wishes to purchase housed abroad and others looking to broaden their financing channels, gain knowledge, experience and know-how from their overseas counterparts.
In terms of institutional investors, for domestic insurance institutions, which possess abundant, cheap and long-term capital and have been granted permission from China Insurance Regulation Commission (CIRC) for oversea investment (including direct investment in real estate) in 2012, we expect them to become major buyers in overseas real estate markets in the near term.
In addition, the well-capitalized Chinese Sovereign Wealth Funds (SWFs) have initiated allocation of capital to real estate investment in their attempt to generate both capital gains and long-term stable rental income from undervalued overseas core property assets.
Frank Chen, Executive Director, Head of CBRE Research, China, commented: “Compared with domestic real estate developer, China‟s institutional investors have a shorter history in direct property investment. However, given the current global and domestic economic environment, the cheap and long-term capital and their risk appetite, it is expected that China's insurance funds and SWFs will become active in the overseas property markets and focus on core investment properties that can generate capital gain and stable rental income, such as quality office properties in international gateway cities. Chinese institutional investors are anticipated to emerge as a major new buying force in overseas real estate markets in the near term.”
Individual Investors: Continue to Be Vibrant
The research unveils two main reasons that driving Chinese individual investors marching in the overseas property markets actively. First, as a traditional investment channel of wealthy Chinese, overseas property investment in recent year raised more attention as a diversifier of wealth preservation and creation, in addition to its immigration and child‟s education. Second, given the subdued domestic stock markets whilst austerity measures remaining imposed on residential market and taking financial products‟ poor diversity and flatten hierarchy, the lack of long-term, medium-term, short term and other types of investment products into consideration, wealthy Chinese have been left with fewer investment options, a situation which has compelled many buyers to look overseas. This trend has been further supported by the continued appreciation of the RMB.
CBRE estimates that about 5% of investable assets of the Chinese High-Net-Worth Individuals (HNWIs) who hold investment asset of over RMB 10 million would be invested in overseas real estate markets in the future, totaling RMB 1.1 trillion. The preferred traditional destinations for immigration and overseas study, including US, Canada and Australia, are expected to remain as the primary choices for Chinese individual investors over a certain period of time, given their substantial market capacity, comparatively lower property prices and lower likelihood of policy regulation on inbound investment in local properties.
Corporate Investors: At Trial Stage
The research identifies overseas property purchasing demand from HNWIs as the main driver for domestic real estate enterprises to expand overseas. In addition, confronting the slowing pre-sales and a tighter credit environment, many developers have sought to broaden their financing channels, reduce the cost of financing and enhance the flexibility of operation.
In addition, the Chinese real estate market enjoyed particularly rapid growth in the first ten years of the 21st century and has since settled on a slower but more sustainable growth trajectory. In terms of overseas strategy and operation, Chinese developers are confronted with challenges due to increasing difficulties in acquiring land, rising land prices and mounting market competition and risks. Some large developers have opted to cooperate with experienced foreign partners on some projects by establishing joint ventures, mergers, or acquisitions. Such strategies have helped quicken their learning process in overseas markets and use advanced overseas experience to support their domestic operations. The last factor to motivate the expansion is that the undervalued overseas real estate markets which were hit by the financial crisis will create opportunities for Chinese real estate enterprise to gain a better return on investment.
Despite the increasing investment volume from domestic developers with diversified investment volume, property types and destinations, CBRE considers that the current domestic real estate businesses still remain at a trial phase where many challenges continue to confront them and investment outlook remains unclear. Geographically speaking, we believe that the advanced markets marked by high transparency, such as US, Canada, and Australia, as well as some Asian markets which are adjacent to mainland China with similar cultural backgrounds, such as Hong Kong, Singapore, Malaysia and Thailand, will be the major destinations for Chinese real estate developers to tap into in the future.
Institutional Investors: On the Horizon
There are no successful cases of outbound real estate investment so far for Chinese insurance funds, but we believe they are soon to come for the following two reasons. First, by 2012, before being granted with the permission for overseas investment in real estate, Chinese insurance agencies have already accumulated a certain amount of experiences in the domestic property market by purchasing in terms of owner-occupied & rental, self-use, project equity, jointly venture, direct purchase and other forms of direct investment in China. Second, insurance funds, life insurers in particular, are in large amounts, at low cost and enjoying longer payment period liability, which will perfectly match retail and office properties investments that featured with low liquidity, good value-added potential, and stable cash flow. In the future, about USD 14.4 billion Chinese insurance capital will be invested into overseas real estate markets by CBRE‟s estimation.
By the end of 2012, China's SWFs ranked the first in the world by scale, with total assets of USD 1.49 trillion. Despite its shorter history and less experience than their counterparts in developed countries, CBRE believes that China„s SWFs will keep active in overseas direct property investment in the future, given the history of capital allocation of global SWFs to real estate property investment, other major international SWFs‟ portfolios and the recent active performance of China‟s SWFs in the real estate investments. In view of the comparatively small size of investable properties in Asia Pacific region, we expect that Chinese institutional investors will focus on the core investable properties capable of generating stable ROI in the short term, such as the premier offices in international gateway cities.
Opportunities and Challenges
In summary, CBRE suggests Chinese investors to focus on the following issues when venturing into overseas property markets.
Select a suitable positioning strategy before investing in overseas real estate market. This is particularly important for individual investors and developers which should avoid blindly following other groups in terms of investment destination and timing.
Select the right local partners, recruit experienced local employees and utilize professional real estate advisors with extensive networks to fully capitalize on local market intelligence and shorten their learning curve.
Consolidate resources and fully utilize the real estate related investment experience accumulated by their domestic asset investment team to create an appropriate portfolio and select the best investment management model.
Implement risk management policy, fully consider the strengths and weaknesses of direct and indirect real estate investments, and then to build an optimal investment portfolio.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2012 revenue). The Company has approximately 37,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2014 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.