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C U S H M A N & WA K E F I E L D R E S E A R C H 1
Views on China’s Recent
August 2017
Circular [20
17] No.74
Outbound Investment Announcement 74
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China’s most recent regulations on outbound investment, although effectively codifying previous tightening measures, 1 apply specific attention to overseas investment in the property and hotel sectors. In a positive move, the announcement suggests facilitation and streamlining of the processes by which qualified PRC investors would be enabled to execute a prudent outwards investment strategy.
At the root of the latest guidance, the government expresses concern over the challenges of global investment activity, looking to reduce risks to Chinese businesses and ultimately the Chinese Banking sector through closer monitoring of such investments. In particular, the text of the circular, “Further Guidance and Standardize on China Overseas Investment,” issued by the State Council on August 18, states China’s aim “to strengthen the macro guidance of overseas investment, to further guide and regulate overseas investment, to facilitate the continuous, orderly and healthy development of overseas investment, to effectively guard against all types of risks, and to better meet the needs of national economic and social development…” 2
Figure 1China Non-Financial ODI Y-O-Y Growth Rate Over Past 12 Months
“ In a positive move, the announcement suggests facilitation and streamlining of the processes by which qualified PRC investors would be enabled to execute a prudent outwards investment strategy.
Source: Ministry of Commerce of PRoC
2016.08 2016.09 2016.10 2016.11 2016.12 2017.01 2017.02 2017.03 2017.04 2017.05 2017.06 2017.07
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OutlookIn the immediate future, we anticipate investors with outbound investment aspirations will be cautious given the latest guidance, especially in light of the run-up to China’s 19th Party Congress later this year. Looking further ahead, we believe that the latest guidance will (in general) have a positive impact on overseas real estate investment activity and the investment behavior of Chinese companies. In particular, we anticipate this will lead to enhanced due diligence procedures, more balanced asset allocations and a more prudent approach to negotiations for overseas assets. Nevertheless, overseas property transactions are now likely to close with less urgency than before.
While the latest circular does not explicitly discourage Chinese companies from “going global,” it does offer a more qualified view of the mantra. In particular, it states that Chinese companies making investments overseas take responsibility for corporate strategy and, ultimately, the success or failure of those investments. The announcement points out that although the government will seek to offer guidance on overseas investment and permit companies to enjoy a strong degree of autonomy on such investment decisions, “the buck” ultimately stops with the company.
There is a clear preference for investments linked to China’s massive Belt & Road Initiative. The guidance seeks to promote this initiative and such investment activities. In truth, making predictable economic returns in Belt & Road countries is still fairly challenging. Thus, predominantly state-owned companies will venture into such areas. A few other private investors with higher than average risk tolerance will follow suit, albeit with a relatively small portion of the funds allocated for overseas investment.
The government established three categories of overseas investment: those that are encouraged, limited or prohibited. Investments in real estate and hotels are categorized as limited under the new classification, which perhaps is unsurprising given the fact that such deals are highly capital intensive. China’s cumulative investment in outbound real estate has reached US$123.6 billion since 2009, according to Real Capital Analytics. If left unchecked, the sheer amount of capital involved in outbound real estate transactions could potentially contribute to the challenges of managing foreign exchange reserves and the value of the Chinese currency.
It is important to note that China is not outright banning overseas real estate and hotel investments. At this stage, there also are no specific value thresholds mentioned for such investments where these would become prohibited. With emphasis on streamlining of processes and due diligence, it appears such investments may still be permitted. This hinges on whether such deals are done in a prudent manner, so long as foreign exchange reserves remain relatively balanced and if the government has controls in place that help to identify overseas investments that may be considered “irrational.”
Areas of Note From the Circular
1 E.g., an announcement released by the National Development and Reform Commission, People’s Bank of China, MOFCOM and State Administration of Foreign Exchange in November 2016.
2 See https://www.mingtiandi.com/wp-content/uploads/2017/08/Guidelines-on-Overseas-Investment_en-2017-08-18.pdf.
Figure 2China Outbound Real Estate InvestmentSource: RCA / Cushman and Wakefield Research
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We Forecast >>
China’s major real estate developers will likely remain active in residential development projects in stable international markets but will also become more active in the larger cities within the Belt & Road Initiative.
As another encouraged investment category, R&D Centers may receive additional capital allocation. There may also be more investor interest in developing stabilized business park type facilities.
The trend to put capital into a holding pattern locally as opposed to executing on outbound investment is likely to continue for the time being and will support already buoyant local property markets in China.
The logistics sector should receive massive investor interest following its inclusion in the “encouraged” investment category. Now with the government’s express backing, this should create significant interest in investment into logistics portfolios and development of new facilities. We anticipate there will be an uptick in such overseas real estate investment activity from Chinese buyers on the back of this. This may include acquisitions of businesses where the core business is not real estate development but where their balance sheet holds a significant portfolio of owned logitics properties.
Investment activity in the global stabilized office sector will likely cool slightly until early next year when we should see more clarity on this latest policy announcement
C U S H M A N & WA K E F I E L D R E S E A R C H 5
The U.K. could be dealt the most significant impact, where 70% of Chinese funds have recently been directed at stabilized office investment. The sector will likely face higher scrutiny as it has not traditionally been a core business of Chinese investors or developers, who have typically held such investments for shorter terms.
Any downtrend stemming from the restricted activity of PRC investors in the U.K. office market may well be offset by rapidly strengthening demand from wealthy Hong Kong investors. Opportunity is ripe for such investors with a long-term view of the U.K., taking advantage of a window in which the currency exchange rate is favorable and competition from more traditional U.K. investors and mainland Chinese investors is softer than before.
It is foreseeable that, over the mid-term, interest in the U.K. will remain. An area to watch is continued targeted investment into U.K. property development. Such activity could involve the upgrading of properties given the growing experience of Chinese developers in the field of repositioning and refurbishment of existing structures. Ongoing logistics property investments in the U.K. and Europe would also seem quite likely.
Growing Chinese interest in the U.S. logistics sector will no doubt swell on the back of the sector being categorized as encouraged. The U.S. typically has received the broadest variety of investment across property sectors by Chinese developers, and recently witnessed a shift in favor to development projects. The shift was driven largely by high return expectations from Chinese investors and LPs as yields for core or core-plus projects in U.S. gateway cities were considered too low.
Investors deploying capital into these residential development projects were prepared to slow their investment spree and look deeper as they recognized a need to shift their focus to develop strong asset management and development capabilities as well as build strong track records. In pursuit of quality product delivery, this in turn supported future fund raising activities and increased diversity in product offering.
By destination, Hong Kong may well see continued strength of activity despite this latest guidance as Chinese companies seek to diversify their investment portfolio geographically. PRC developers have won six out of seven residential development sites sold by the Hong Kong government thus far in 2017.
Investment deployed into Hong Kong seems justifiable and part and parcel of prudent business growth for Chinese developers given the fact that this is considered a core business activity and given the already massive exposure to mainland China real estate development. But completed and/or stabilized assets will likely remain out of favor for Chinese investors active in Hong Kong, unless it is genuinely proved to be for their own occupancy.
C U S H M A N & WA K E F I E L D R E S E A R C H 7
Jason ZhangSenior DirectorInvestment & Advisory ServicesGreater China
Adam RushSenior DirectorConsulting, Greater China
BUSINESS CONTACTS
Outbound Investment Team
Belt and Road Team
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About Cushman & WakefieldCushman & Wakefield is a leading global real estate services firm that helps clients transform the way people work, shop, and live. Our 45,000 employees in more than 70 countries help occupiers and investors optimize the value of their real estate by combining our global perspective and deep local knowledge with an impressive platform of real estate solutions. Across Greater China, there are 20 offices ser-vicing the local market. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $6 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. 2017 marks the 100-year anniversary of the Cushman & Wakefield brand. 100 years of taking our clients’ ideas and putting them into action. To learn more, visit www.cushwakecentennial.com, www.cushmanwakefield.com or follow @CushWake on Twitter.
DisclaimerThis report has been produced by Cushman & Wakefield for use by those with an interest in commercial property solely for information purposes. It is not intended to be a complete description of the markets or developments to which it refers. The report uses information obtained from public sources which Cushman & Wakefield believe to be reliable, but we have not verified such information and cannot guarantee that it is accurate and complete. No warranty or representation, express or implied, is made as to the accuracy or completeness of any of the information contained herein and Cushman & Wakefield shall not be liable to any reader of this report or any third party in any way whatsoever. Cushman & Wakefield shall not be held responsible for and shall be released and held harmless from any decision made together with any risks associated with such decision in reliance upon any expression of opinion in the report. Our prior written consent is required before this report can be reproduced in whole or in part.
© 2017 Cushman & Wakefield All rights reserved.
XiaoDuan ZhangSenior Director Head of Research South & West China
James ShepherdManaging Director ResearchGreater China
Wendy HsuehDirectorHead of ResearchTaiwan
Reed HatcherDirectorHead of ResearchHong Kong
Sabrina WeiSenior Associate Director Head of ResearchNorth China
Gracie MiaoManagerResearchCentral China
RESEARCH TEAM
Shaun BrodieSenior DirectorHead of Occupier Research Greater China
This report was authored by James Shepherd, Managing Director of Cushman & Wakefield Greater China Research Team. James has been working in the China Real Estate Market since 1998. To better serve our clients our Greater China Research Team has established Centers of Excellence in various focus areas such as Capital Markets, Industrial, Logistics and Retail. James also leads the Research Center of Excellence for China Outbound Investment Research.
