As global investment into property by Chinese and Hong Kong investors nears record levels, we track who is spending and where
Chinese and Hong Kong investors have splashed more than $41.8bn (£31.5bn) on international property in 2017 so far, a near-record level reached despite the Chinese government’s tightened capital controls.
Research compiled by Real Capital Analytics reveals that the 20 most active investors from China and Hong Kong accounted for $7bn of transactions.
They focused their attention mainly on the US, where they have collectively spent almost $4.2bn in the first eight months of the year. In the UK they spent just over $3.6bn, including CC Land’s £1.1bn purchase of the Leadenhall Building, EC3, also known as the Cheesegrater, in May.
A further £1.3bn of investment is heading to the City with the purchase of the Walkie Talkie, 20 Fenchurch Street, EC3, due to complete later this month.
The two largest Chinese overseas investors have both recently come under their government’s scrutiny as it looks to restrict outbound investment and its potential impact on the country’s currency reserves.
Anbang tops the list, having spent more than $2.3bn buying a residential portfolio in Japan from Blackstone.
Coming in close second with a total spend of just over $2.6bn is HNA Group, which made the bulk of its investment in the US from the $2.2bn purchase of 245 Park Avenue in New York.
Hong Kong-listed CC Land was the third most active investor from the region as a result of its Cheesegrater purchase.
Tom Leahy, senior director of Real Capital Analytics, said the total investment figure so far this year is close to a record level. He said: “The latest numbers showing capital outflows from China and Hong Kong contradict some of the noise about a slowdown due to Chinese capital controls.”
The figures also show that while the US received the most investment from China and Hong Kong as a region, the UK in general and London specifically was the most popular for Hong Kong buyers.
Leahy said: “London continues to be the target market for players from Hong Kong. More than $5bn of closed and pending transactions are on the books in 2017, and the city accounts for 50% of all cross-border acquisitions in 2017 excluding China.
“As yet there is no sign that these players are slowing their activity in the City, which must be seen as a long-term vote of confidence for the market’s future in a post-Brexit world.”
This tallies with EG research into the ownership of London’s office stock, showing that Asian buyers are the third most-active investors in the UK capital by sq ft and now own the most City core stock (16%) of all overseas investors.
James Beckham, head of London capital markets, Cushman & Wakefield
The view from the UK
The dominant appetite from Chinese and Hong Kong investors for London’s commercial property has been the big story for 2017. It reached new heights this year, most evident in the record-breaking deals, first for the Leadenhall Building (Cheesegrater) and then for 20 Fenchurch Street (Walkie Talkie) for £1.2bn and £1.3bn respectively. This is about more than currency fluctuations, it reflects the long-term regional confidence in the global status of London.
When you are dealing with high-calibre investors who are in the running for these landmark assets there is no point travelling to the Far East with the IM for a building that doesn’t have the right characteristics. You will be told – politely – not to waste their time. Dickie Wong of CC Land, buyer of the Leadenhall Building, said as much when he told EG that if it wasn’t a high-quality trophy asset, it wouldn’t be suitable for CC Land.
One of the appealing aspects of London’s trophy assets is that they tend to stand out on the skyline. If you walk – or are driven – from St Paul’s Cathedral, for example, you see the Walkie Talkie in all its glory. That allows you to affiliate your brand with one of the jewels of the London skyline, as opposed to a generic skyscraper in a CBD cluster somewhere. You only need to look at the waves made by the two landmark deals to see that this strategy works. At an international level, everyone now knows who the owners are.
Equally, it would be a big mistake to think of the pool of investors from China and Hong Kong as being homogeneous. The depth of the interest in assets of all types has been immense, accounting for nearly half of all investment into the City and more than a third in the West End in the first half of the year. To put that in perspective, in 2015 the respective figures were 8% and 5%. New entrants are in the wings wanting to acquire their first deals.
Andrew McGinty, partner, and Claire Liu, counsel, Hogan Lovells, Shanghai
How new controls are affecting investment
Overseas property investment by Chinese enterprises started to surge between 2005 and 2015. However, the outbound property investment boom began to slow significantly in the fourth quarter of 2016 due to a series of additional capital controls imposed by the People’s Bank of China, the State Administration of Foreign Exchange, the Ministry of Commerce and the National Development and Reform Commission. These were aimed at reining in ill-gotten gains, legitimate investments seeking a safe haven from a falling RMB, and over-exuberant investment overseas by Chinese companies with little business planning or rationale to support it.
All the policies relating to the tighter capital controls have been put in place by means of “window guidance” given to banks or internal rules issued by SAFE, notably the dual $5m and $50m review thresholds for outbound payments and by way of imposing monthly quotas within which Chinese banks have to fit all their outbound payments, whether current or capital account, rather than hard (transparent) law.
At the end of 2016, officials of PBOC, SAFE, MOFCOM and NDRC spoke out against “irrational” investments in certain outbound sectors, such as real estate, hotels, cinema, media and sports club businesses, suggesting that this is not just an exercise in imposing currency controls to prevent outflow of foreign currency reserves targeting fake outbound deals designed to asset-park overseas, but also a more paternalistic exercise in making sure that Chinese firms seeking to go global are spending their dollars wisely. The review processes are opaque, causing lengthy delays on transactions we have worked on.
Furthermore, as the One Belt One Road initiative is gaining more and more prominence in China, the Chinese government is pushing the business community to reallocate financial resources to the Belt and Road initiative instead of outbound activities that “blindly chase after profit”. This is possibly another reason why the tighter capital controls targeted the focus sectors rather than infrastructure assets.
More recently, China turned up the heat on overseas investments by Chinese companies in real estate a notch further, with a guidance opinion issued by China’s state council earlier this month.
On the one hand, it encourages companies in China with the ability and the wherewithal to actively develop overseas investments in an appropriate manner to promote OBOR, and places heavy emphasis on encouraging investment in overseas infrastructure projects which are beneficial to the interconnection of OBOR construction projects and surrounding infrastructure.
On the other hand, it discourages the same companies from investing in overseas investment projects classified in the restricted category, namely those which are incompatible with state policies. This includes (in words echoing those in the tighter capital controls, which somewhat less diplomatically, referred to them generically as “blindfolded overseas investment projects”): “real estate, hotel, movie theatre, entertainment, sports club and other such like overseas investments”.
The guidance opinion goes on to say that the relevant government authorities must guide companies towards a more prudent approach in participating in restricted sector projects and bring together the real circumstances in giving the necessary guidance. Deciphering the coded message behind the words, this is saying to the Chinese government officials who are responsible for giving out the approvals for overseas investments by Chinese companies in these sectors to “tread very carefully”.
A report by Morgan Stanley said that after the implementation of the tighter capital controls, outbound property investment by mainland Chinese enterprises fell 82% from a year ago, and is expected to plummet 84% to $1.7bn for the whole of 2017, and down another 15% to $1.4bn next year. It also said that the tighter capital controls are slashing China’s outbound property investments, which is likely to have an impact on property prices from London to Hong Kong.
On an individual buyer level, the fall in the value of sterling following the Brexit decision may have given a temporary boost to sales, but it should not be forgotten that there is no legal channel for Chinese individuals to get money out of China to buy real estate overseas, although we often see phenomena like individuals clubbing together using the $50,000 annual individual quota which every Chinese person is allowed to convert into and out of RMB every year to raise the funds needed, among other workarounds.
James Shepherd, managing director, research, Greater China, Cushman & Wakefield
The view from China
In the first half of the year there was a massive swing towards development sites, with the sector taking the biggest slice, some $6.9bn of Chinese investment through the first half of 2017. This 391% year-on-year surge was driven by two landmark deals. In May, KWG and Longfor jv acquired a residential development site in Hong Kong’s Kai Tak area for $793m. The other major deal, also in May, was a Singapore site bought by Logan Nanshan Group and Logan Property jv for $717m.
Office investment fell to second place in H1 at $6.8bn. Other noteworthy transactions included Anbang’s purchase of the Doubletree Amsterdam hotel for $392m and Lesso’s acquisition of The Mall at Source in Westbury, New York, for $92m.
For the first half of 2017, Hong Kong was the leading investment destination. The city pulled in $5.4bn of Chinese investment, 91.6% of which was directed to development sites. The US and UK were next by destination, recording $4.2bn and $4bn, respectively over the same period.
UK property remains appealing to Chinese buyers given the pound is down some 10% against the dollar. London and surrounding areas are anticipated to be the largest focus areas for UK deals, with office and residential development sectors remaining front and centre.
China’s foreign exchange reserves remain stable, which bodes well for continued participation in real estate investment markets globally from Chinese investors, particularly experienced Chinese property developers. Ahead, top destinations will likely remain the US, Hong Kong and the UK.
