The billionaire head of Chinese insurer Anbang has stepped down after being arrested by authorities.
Chairman Wu Xiaohui’s arrest is part of a wider crackdown by the Chinese government on the financial sector and corruption.
Last month, China’s insurance regulator banned Anbang for three months for causing havoc by introducing new products (high-risk financial instruments) into the market and by using aggressive sales tactics.
Anbang has been one of the leading Chinese companies investing in global real estate, and over the past two years has been one of the most high-profile bidders.
However, it has failed to complete on many deals, as the Chinese government puts the brakes on overseas investment by private Chinese companies in order to shore up the renminbi. Sellers and advisers have subsequently been affected by uncertainty surrounding Chinese buyers’ ability to finalise transactions.
Anbang’s £190bn of assets will now be managed by other senior executives.
Anbang: key purchases
■ September 2016: buys Strategic Hotels & Resorts for $6.5bn ($5.1bn)
■ November 2015: buys HSBC Building in Toronto from Brookfield Asset Management for around C$110m
■ February 2015: buys the Waldorf Astoria in New York from Hilton for $1.9bn, its first real estate foray outside China.
Anbang’s non-completed deals:
■ March 2017: withdrew from talks with the Kushner family to buy 666 Fifth Avenue in New York for $400m (£314m)
■ November 2016: Anbang was in talks to buy much of Blackstone’s Japanese residential property portfolio for $2.3bn
■ August 2016: reported to be preparing a £7bn bid for InterContinental Hotels Group, which owns Holiday Inn and Crowne Plaza
■ April 2016: walks away from deal to buy Starwood Hotels and Resorts Worldwide for nearly $14bn
■ July 2015: reported to be in talks to buy German real estate bank Deutsche Pfandbriefbank, valued at around €1.5bn (£1.1bn), from its parent Hypo Real Estate
■ Mid 2015: talks collapse amid advanced negotiations to buy the Heron Tower, now the Salesforce Tower, EC2, for £750m
Chinese investment into the UK
■ Many of these acquisitions have been through joint ventures, such as China Life AM and Brookfield’s purchase of Aldgate Tower, 10 Whitechapel High Street, E1, as well as Resolution Property and Fosun International’s purchase of Trinity Tower, 9 Thomas More Street, E1.
■ There has only been one transaction outside Greater London: Glasgow apartments for £6.1m. Offices purchase in Central London accounted for £1.37bn
How do you know if a Chinese buyer will perform?
While Chinese investment regulation may seem a murky business, it is no murkier than dealings with any other type of investor, according to those specialising in investment from the East.
Chinese insurers were the main players behind an exodus of capital out of the country before the Chinese government instigated outbound capital controls in 2015, as it worried about its national debt.
The government reviews large amounts of capital leaving the country. Regulation on what is allowed is less than specific: deals over a certain scale require approval. However, for the moment, while it is difficult for insurers, diversification is generally not a problem for property developers.
According to James Shepherd, research managing director at Cushman & Wakefield China, it is important for companies to invest in what they consider to be their core business. He says that for many property developers, the government is happy for them to diversify away from mainland China.
“The government is happy for them to diversify provided it’s in core assets,” he says. “For those property developers that have experience in China, and know that industry in China, the government completely sees that as legitimate.”
For the moment, there is the view this should continue. Cushman & Wakefield said in its China Outbound Investment Report that in February, China’s foreign exchange reserves increased for the first time in seven months and remained stable in March.
C&W said: “In tandem with an 8.1% rise in FDI in Feb, the enhanced stability suggests that legitimate and well-considered overseas investment deals may continue to be allowed, albeit they will be closely monitored and tightly controlled by regulators.”
As with all real estate transactions, proof of funds, company accounts and proof of lending support should all be fairly easy to obtain.
Andrew Thomas, head of international capital markets at Colliers International, says the process is the same for a UK company.
“[A company] has to convince you the source of funds is genuine and true, and there is a group of advisors working together to show that is the case.”
“Where people get a little fixated is where they think they cannot ask the question. Most of the big Chinese corporates and institutions are run in similar ways to most Western structures, if you ask the right questions.”
However, the Chinese government still has the power to review and block capital outflows.
One way of ensuring a buyer has the funds available outside China is to look at what it is already invested in overseas, which means that cash can be re-allocated without government permission.
HNA, which bought assets in the US, is selling stakes to re-allocate its money globally.
Those that have money invested in other asset classes – particular equities or bonds – are equally likely to have funds available.
“Companies will want to be more careful about Chinese firms that have never invested overseas and have no money overseas, and will therefore be completely reliant on government approval,” says Shepherd.
“But if the firm is a developer, and the deal is not huge, there is a good chance a deal will be approved.”
“What we are seeing is a move out of equities and bonds,” adds Thomas. “And a lot of capital is already out, and a lot goes through HK, which has structures in place that allow international trading to occur.”
Anecdotally, the rule of thumb for gaining state approval to take funds out of China for real estate development is to have local equity partner with a 30% interest.
One London agent said: “If they are willing to pay more because their IRR is 15% against a UK developer’s 20%, then you are going to have to take that bigger figure with a bit of faith.”
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