Written By: Diana Bailey – Corporate Finance
China is considered as a semi-transparent country regarding real-estate investments, according to JLL’s 2016 Global Real Estate Transparency Index. And progress is estimated as slow, although China’s Tier 1 Alpha cities (i.e., Shanghai and Beijing) have shown the greatest improvements in transparency in the country, led by market fundamentals. Strong investor interest has underpinned a rise in demand for transparent real-estate data in recent years, and these markets are on the cusp of JLL’s Transparent tier.
Nowadays, real-estate and domestic investment are the real drivers of Chinese growth.
But China also intends to regulate the market in terms of supply and demand.
Large Chinese cities have drastically tightened conditions for the purchase of apartments in order to stem a bubble considered dangerous, while the central bank has begun tightening credit in response to the surge in national indebtedness. Very recently China took another limitation measure in commercial real estate: New commercial plots can now be sold only to enterprises, public entities and social organizations, according to a statement issued by Beijing’s banking, industry and commerce, housing and urban planning authorities. The statement, posted on the Beijing Municipal Commission of Housing and Urban Rural Development website, said that personal loans for buying commercial property have also been suspended.
Fighting against a potential bubble, China has been trying to limit the increase in prices over the past year or so, imposing measures such as higher mortgage down-payments to defuse bubbles as the nation’s debt has raised the risk of a property-market crash. Only secondhand commercial property can now be sold to individuals, who have to prove income-tax payments for five consecutive years and hold no property, the regulators explained in their statement. The smallest unit available should be a minimum of 500 square meters, and real-estate agencies that falsely advertise commercial plots as housing will be punished. China also maintains strict restrictions on foreign investors, who cannot transfer capital invested in China out of China.
Chinese market: great potential remains to be explored.
Whether because of lack of transparency or for regulation purposes, the Asian market is less attractive than those of the United States and Europe. The latest JLL Investment Intensity Index compares the volume of direct commercial real-estate investment in a city over a three-year period from 2014, and from Asia, Hong Kong appears at the 28th spot. But in terms of absolute volume of direct commercial real-estate investment, Shanghai and Beijing came in at the 8th and 20th places, according to the JLL classification.
The Chinese market remains one of the largest in the world. But if Chinese investors are limited to investing in the commercial-property market, they are likely to turn themselves out of China.
Chinese investors are targeting investments outside of China.
The massive savings of Chinese investors—48 percent of gross domestic product—has to find a home somewhere, and given 1.5 percent yields in Shanghai compared with 4 percent or more in some developed countries, a significant share is pouring into the US, Europe and Australia. China is actively enforcing its capital-transfer restrictions, which has caused some potential transactions to become more time-consuming, adding 60 to 120 days to transactions and requiring substantial additional documentation.
But in Australia an evolution has been recently observed in the types of commercial-property investments made by Chinese investors:
- more Chinese state-owned enterprises and institutional investors go to Australia for scoping studies of core investment-grade assets;
- a switch from office-asset investments, which accounted for $2.57 billion in 2015, to real-estate development, which attracted $2.44 billion in 2016.
As reported by Sam Biggins, the director at Colliers International in Australia who is responsible for facilitating inbound Asian investment: “This reflects growing interest from China-backed developers that have already invested in Australia, usually in one-off acquisitions in central business districts or near-city apartment sites. Many are now aiming to build sustainable, long-term development enterprises in Australia with project horizons of five years or more.”
In the US, Chinese commercial-property investments seem directed mostly to major centres (New York, Los Angeles, San Francisco and Chicago).
A new first-quarter 2017 report from commercial real-estate services firm Newmark Grubb Knight Frank breaks down the amounts of foreign investment in the United States:
- Foreign firms invested $12.6 billion in US assets during the first quarter 2017, 70 percent of which went to office products, primarily in gateway cities.
- Whereas Canada was historically the top foreign investor in the US, recently China has taken the spot, with 28.6 percent of year-to-date foreign investment in the United States (22.5 percent for Canada).
- Chinese investors led the total-acquisitions volume year-to-date, with $4.48 billion invested (out of the total of $12.6 billion).
Chinese authorities have continually reminded us that they are not willing to support capital evasion from China and that the capital transfers requested by Chinese investors will be deeply scrutinised. But can they really stop the outward flows of economic dynamism of the Chinese people?