_As the Chinese outbound real estate investment retreats how are the key market dynamics evolving?
In the past 18 months, one factor – China’s tight control over capital outflows – has overshadowed the world’s key real estate markets. This outflow control has intensified since mid-2017, when real estate was classified as a “sensitive” sector, requiring official approval for every large transaction.
What are the impacts of capital outflow controls on key markets?
Chinese real estate investment are mostly concentrated in key markets of US, UK, Australia and Hong Kong. So as expected capital outflow controls have had a detrimental impact on Chinese investment volume in some of these markets. In the US and Australia, this volume has dropped as much as 64% YoY last year. In the US, the insurance giants and sovereign wealth funds that purchased major hotel portfolios and prime office towers in previous years all but retreated from acquisitions. The Australian market was affected by Chinese policies but there is also intensified competition from other Asian investors such as from Hong Kong, Korea and Singapore other limited commercial stock in Sydney and Melbourne.
“…capital outflow controls have had a detrimental impact on Chinese investment volume in some of the key markets”
In contrast, the Brexit vote and the subsequent devaluation of the pound led to a major rebound of Chinese investment in the UK, four times more than in the previous year. The majority of these investments were in Central London offices, such as CC Land’s purchase of the 48-storey Leadenhall Building, “the Cheesegrater”. Hong Kong has also emerged as one of the top gateways for Mainland Chinese capital, with investment volume up 61% YoY. The city witnessed a rush to invest in development sites, with Mainland firms constituting around 56% of total site investment.
So what’s next?
Capital outflow control will persist
The prevailing view is to contain and correct the over-expansion in the past. So unless this view changes because of a major event like a geopolitical shift, the investment in real estate by heavyweights, such as insurance giants and conglomerates, will remain subdued.
Hong Kong capital as a key investment driver
Since Chinese Mainland offshore activities have been curtailed, Hong Kong investors are actively stepping into the space they left open. For example, CK Assets bought the UBS headquarters for US$1.326 billion, one of the biggest office acquisitions in the City of London. Asset holders in Hong Kong, where capital value has reached new heights but yields are historically low, in many cases below 2%, now have the option of investing in London, where long-term yield growth is stronger. Meanwhile, like their Hong Kong counterparts, other Singaporean and Korean investors are gearing up to fill the space left open by Mainland Chinese investors.
“Hong Kong investors are actively stepping into the space they (mainland investors) left open”
London and Hong Kong will continue to perform
From the Chinese investment perspective, investment activity in the US and Australia will continue to be subdued because of worsening bilateral relationships and increasing market competition. In comparison, London and Hong Kong remain the key destinations to watch going forward. Hong Kong has its advantage in medium-term value appreciation. One of the pull factors for mainland developers, for example, is the tremendous price growth in Hong Kong’s housing market, prompted by constant undersupply and strong buyers’ appetite. London’s strength is in its long-term return prospects beyond Brexit. The very recent cases in which Hong Kong’s Kwok family and developer Barrymore paid over £50 million for two residential sites in Canary Wharf and which Gaw Capital invested over £36 million for two office buildings in the area, are good examples of this trend.