Chinese Outbound Real Estate Investment: More to Come

China’s total overseas investment in commercial real estate has been increasing – there was a 49 percent increase in 2016 compared to 2015. This article explores whether we can expect this increase to continue.

2016 was the year in which China officially overtook the US to become the largest cross-border real estate investor. In 2017, we see values and volumes continue to grow, while Chinese buyers continue to become more discerning, with even the smaller players making increasingly sophisticated and ambitious acquisitions.

We will continue to see significant outbound investment in the medium to long term, but this may slow in the short term as deal fluidity is affected by China’s restrictions on capital outflows.

Despite the recent tightening, the prospects for outbound investment remain positive. Last year the value of inter-Asia deals increased from US$51.7 billion in 2015 to US$69.3 billion, spurred by the rising middle class in China, India and Indonesia and, despite the current political headwinds, the ever increasing internationalisation of capital. Growth is extending beyond popular destinations such as Hong Kong to “second tier” markets in the region. We have recently seen China overtake Singapore as the leading investor in the Malaysian property sector, for example (see Real Capital Analytics).

Outside of Asia, the US, UK and Germany were important overseas destinations for Chinese investors last year. Instability in the US and European markets, particularly now that the UK has triggered Art. 50, could create favourable conditions for external investors with higher risk tolerances pursuing higher yields. For now, those investors appear to be gaining confidence about UK fundamentals, the precursor to deploying more capital for UK acquisitions.

In the US, questions remain about what to expect from President Trump’s administration, with foreign investors particularly focused on CFIUS (The Committee on Foreign Investment in the United States). The Committee appears focused on inbound Chinese transactions and it is unlikely that President Trump’s administration will alter that focus. High profile cases such as Anbang Insurance’s US$1.95 billion acquisition of Waldorf Astoria demonstrate that the property sector is rife with potential CFIUS issues. CFIUS’s applicability is not always clear and when deals are reviewed by CFIUS there is no requirement to publish CFIUS’s findings, posing a degree of uncertainty for investors looking at the US market (or, at least, for those investors that have not factored in a pre-acquisition CFIUS filing and review as part of their deal strategy).

China’s tightening of controls on Chinese companies acquiring overseas assets and its rules on capital outflows are also having an impact. The somewhat opaque approval process adds potential uncertainty to the Chinese investor’s ability to expatriate the capital necessary to close and may lead some sellers to look to alterative buyers who may have a greater ability to secure such funds.

That said, the Chinese government is still very committed to allowing Chinese companies to go global and to diversify their holdings. While there are concerns about Chinese outbound capital controls, we still expect deals to go through – but in the current climate there might not be as many high profile “trophy” deals as before.

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Partner, Paul Hastings

Partner, Paul Hastings