Outbound real estate investment from China surged in 2013. A recent joint study by property services company CBRE and research firm Real Capital Analytics reported outbound investment from China investors to markets around the world tripled year-on-year reaching about US$8.3 billion in 2013.
Stories of upwardly mobile Chinese individuals scouring the markets around the globe and purchasing high end residences in places like London, New York, and Vancouver are now old news. In 2013, Chinese investment in real estate entered a new phase characterized by cross-border institutional investment in commercial real estate. Going forward, cross border Chinese investment in real estate will no longer be limited to individuals dabbling in residential real estate. In the new and current phase of outbound investment entrepreneurial and institutional investors from China will increasingly target office buildings, shopping malls, hotels, and construction projects in both major cities and second tier cities in both developed and emerging markets.
There are a number of key trends to watch in the new phase of China’s outbound real estate investment push.
The Sovereign Wealth Funds
Sovereign wealth funds are key participants around the world in cross-border real estate investment. To date, the China Investment Corporation (CIC) has been China’s most active sovereign fund cross-border real estate investor. In the new phase of China’s outbound real estate investment, additional China sovereign wealth funds together with large state owned enterprises will likely join the CIC as active players and may bring to the table substantial capital to deploy into global real estate and real estate funds.
The Real Estate Developers
China’s policy response to an overheated domestic real estate market has been a mix of restrictive measures designed to cool the market and to gently deflate speculative bubbles. Chinese developers, finding it difficult to source domestic deals and get approvals, will increasingly look abroad for opportunities.
China’s commercial real estate market is still relatively new in comparison to developed North American and European markets. Some forward looking Chinese real estate developers will target deals in developed markets now in order to learn how real estate projects are constructed, operated, and marketed in developed markets in preparation for the future phases of China’s domestic market.
The Insurance Companies
In the new phase of outbound real estate investment from China, the universe of outbound real estate investors from China will expand significantly beyond the developers and sovereign funds. One key emerging institutional player is likely to be Chinese insurance companies. Reforms in the regulatory framework governing where and how China’s insurance companies can invest have opened the door to outbound investment into real estate assets and into real estate private equity funds. Amid domestic reforms, these companies are now actively searching for income-producing, stabilized real estate assets around the globe.
The Private Equity Industry
At the same time China’s relatively young but rapidly maturing private equity industry is also expected to emerge as a participant in the new phase of outbound investment from China into real estate. China-based fund sponsors and managers will devise innovative products to channel funds into real estate. Regulatory hurdles and restrictions currently remain which make it difficult to easily aggregate RMB funds onshore in China to invest on a cross-border basis. Consequently, the first wave of outbound China private equity fund investment in real estate will be U.S. Dollar-denominated funds formed outside of China but largely funded by Chinese individuals or companies who have U.S. Dollar resources located offshore from China.
The Debt Providers
Active participants in outbound investment from China will not be restricted to equity investors. Debt providers will also play a role. Look for China’s major policy banks like China Development Bank and the Export Import Bank of China to provide financing for large real estate development and infrastructure projects in both developed and emerging markets.
The Chinese policy banks will most typically become involved in financing deals by teaming up with major Chinese building contractors like China State Construction Engineering Corporation and China Railway Construction Corporation Limited. A construction bid from a Chinese building contractor may come wrapped with a proposal for financing from the Chinese bank. Select the building contractor on the deal and the Chinese bank will provide construction financing on very attractive terms.
These deals are a win-win for all parties involved. China has a surplus of foreign currency reserves, so channeling these reserves into foreign real estate loans will help China earn more attractive returns. At the same time, the arrangements will help support the Chinese economy by enabling contractors to win major deals. Finally, the real estate developer and investor will benefit by receiving construction financing on attractive terms.
The Journey Has Only Begun—What Is Next?
China’s efforts to “go global” have finally reached the real estate sector. Outbound investment is no longer limited to the search for natural resources or advanced technology. Chinese financial institutions, investors, contractors, and developers have embarked on the long journey around the globe in search of opportunities in bricks and mortar. In the new phase of outbound investment from China, the pace of investment activity will only quicken and market participants in developed markets in North America, Europe, and elsewhere will meet many new travelers from the Middle Kingdom.