Chinese realty sprees overseas to continue

A real estate buying spree overseas by Chinese investors is expected to continue for at least the next few years as developers, institutional funds and the privately wealthy seek portfolio diversification and long-term, stable returns amid a softening domestic market.

Chinese investors may fork out US$20 billion this year on offshore property, according to the latest forecast by international property consultants Jones Lang LaSalle. That would be up a fifth from last year, when US$16.5 billion was splashed out on overseas real estate. Of that, 70 percent were invested in commercial property, including office buildings, retail malls and hotels.

"The emergence of Chinese capital in the global real estate market has been growing steadily in recent years," said David Green-Morgan, head of global research for international capital at the firm. "The fact that half of all Chinese purchases in 2014 were outside of China may herald that demand for overseas property investment could remain strong for many years to come."

In 2014, the trend captured world attention as the media chronicled one landmark purchase after another as Chinese investors snapped up iconic office buildings in London and trophy hotels in New York and Sydney.

The first month of this year showed no softening in the trend.

At the end of January, Fosun Group, controlled by billionaire Guo Guangchang, announced a partnership with Australia's Propertylink to purchase a 14,672-square-meter office building in Sydney for A$116.5 million (US$92 million). It was Fosun's first foray into the Australian property market.

Days earlier, Chinese media reported that Dalian Wanda Group, controlled by Wang Jianlin, the second-richest man on China's mainland, bought Gold Fields House on Sydney's Circular Quay from Blackstone and a group of pension funds for A$414.7 million. The office block, overlooking the iconic Sydney Opera House, will be turned into luxury apartments.

Also in January, Ping An Insurance (Group) Co paid 327 million pounds (US$502 million) to acquire London's Tower Place, a Grade A office complex located in the capital's insurance district. It was Ping An's second major real estate investment after the purchase of Lloyd's Building for nearly US$400 million in July 2013.

"Investors today are shifting their focus toward sustainable returns in the long term," said Dominic Ong, senior director of Asian markets at Knight Frank Australia. "The key factors for Chinese investors are the policy push from the Chinese government to diversify into other countries, a softening domestic market and the attraction of higher returns overseas."

Chinese overseas real estate investment skyrocketed from US$600 million in 2009 to an estimated US$15 billion in 2014, with majority of that money going into gateway cities in the United States, UK and Australia, according to Knight Frank. The firm forecasts that investment will rise to between US$20 billion and US$30 billion this year.

"What first started as sovereign funds making exploratory investments has proliferated into buying sprees by Chinese developers, banks and institutional investors, such as insurance companies," said David Ji, head of research and consultancy at Knight Frank China. "Having invested heavily in core office and residential developments in gateway cities, Chinese investors are now diversifying into leisure and industrial assets and expanding into provincial capitals such as Manchester, Frankfurt and Brisbane."

In the first wave of overseas property investment, sovereign wealth funds invested in trophy assets and banks acquired residential sites. Large developers then followed suit in the same asset categories. In the current third wave, equity investors and insurers are mainly focused on yield-driven opportunities. A fourth wave in the making, involving the super rich, private developers and mid-cap state-owned companies, may be harder to track as investors diversify into other segments of the property market, Knight Frank said in a report on Chinese real estate investment.

Insurers seen as major players

What seems clear is that real estate investment overseas is becoming the norm. Cash-rich insurers are emerging as major players after the government relaxed restrictions to allow them to invest up to 30 percent of their assets in real estate, with a maximum 15 percent permitted offshore.

In a most recent deal, China's Sunshine Insurance said on February 9 that it will purchase Manhattan's luxurious Baccarat Hotel from Starwood Capital Group for US$230 million, or an equivalent of more than US$2 million per room. That followed the acquisition of Sheraton on the Park in Sydney last November. The Beijing-based insurer has also acquired the 100-room Chateau Elan Hotel in the Hunter Valley in the Australian state of New South Wales, according to media reports.

Sunshine Insurance's strong interest in hotel properties is probably sending a signal that Chinese investors are going to be dominant players in the global hotel market.

Global hotel transactions may hit an eight-year high of between US$65 billion and US$68 billion this year, with Chinese investors among the top participants, Jones Lang LaSalle Hotels and Hospitality Group predicted earlier.

In the Asia-Pacific, transactions are expected to rise 15 percent this year to about US$8.5 billion, with Chinese buyers accounting for US$5 billion.

"This will place Chinese investors, not featured in the Top 10 list just a few years ago, among the ranks of top capital exporters, alongside US-based private equity funds and Middle East investors," said Scott Hetherington, chief executive officer for Asia at Jones Lang LaSalle Hotels and Hospitality Group.

Despite the rosy outlook, pitfalls remain, such as cultural hurdles, the legal environment and public concern overseas about property falling into the hands of foreigners, industry experts warned.

Addressing concerns about too much prime farmland under foreign control, Australian Prime Minister Tony Abbot earlier this month announced changes to regulations governing land purchases by foreign entities. The threshold for review of those acquisitions will be dropped to A$15 million from A$252 million and will be applied to cumulative sales.

Simon Henry, co-founder of Juwai.com, which matches Chinese investors with international investment opportunities, including 2,775 current Australian agricultural listings, said the new rules will make Australia less competitive for foreign investors, according to a report by the state-owned broadcaster ABC.

"It is essential for Chinese investors to understand and learn about the various overseas markets," said Kitty Liu, senior director, CBRE global capital markets. "In addition to developing an international team, we suggest that Chinese investors work with third-party professional service firms or local partners who are familiar with the dynamics and operations of local markets."