Will Real Estate Continue to be the Core Investment Asset Class for Chinese Investors?

Although current market sentiment toward Chinese institutional capital and outbound investment is creating challenges, many Chinese corporates and investors are taking advantage of opportunities for global expansion. We believe this trend will continue despite recent international market turmoil following the UK Brexit vote. Paul Hastings has been active in helping clients secure major real estate acquisitions internationally. We also recently co-hosted the third of our series of strategic forums on Tomorrow’s Global Business with the Financial Times. Our event, China’s Champions in the New Global Economy, was held in Beijing and focused on the major trends affecting Chinese deal makers. Based on our in-depth experience, here are what we see as critical factors for Chinese real estate investors over the next few months.

Key Takeaways

Chinese investors will increasingly look to accelerate and diversify their overseas real estate investments in the second half of 2016
Megadeals in prime markets will continue to make headlines. However, we also expect to see further growth in investment in second- and third-tier cities in the U.S. and Europe, as well as more investors moving beyond traditional real estate assets, into areas such as infrastructure and distribution, emerging economies and key regional hubs
Chinese investors will seek out not only stable returns, but also knowledge and best practices that can eventually be used in China to capitalize on the PRC’s own demographic shifts, such as medical and senior care facilities across the U.S. and elsewhere

What are the key market trends affecting real estate investors based in China?

As a result of the ongoing depreciation of the yuan, domestic asset devaluation, and market volatility, we expect that Chinese investors will accelerate and diversify their overseas real estate investments in the second half of 2016. They will also face short-term pressure from authorities seeking to prevent excessive cash flowing out of the PRC.

When talking to our clients at state-owned enterprises (SOEs) and other businesses, many say that the environment is increasingly challenging for them this year. As a result, they are interested in exploring diversification. In fact, total Chinese outbound capital reached record levels in 2015, supported by capital liberalization initiatives such as the Qualified Domestic Institutional Investor (QDII) scheme.

What differentiates Chinese investors' recent outbound real estate investment and diversification activity?

There will be a growing interest in second- and third-tier cities in the U.S. and Europe, particularly for small to mid-sized investors. And more Chinese companies will consider increasingly innovative and complex investments in and beyond traditional real estate assets.

As Chinese companies mature and become more familiar with the overseas investment climate, they have increasingly looked to invest in projects that deliver more long-term, stable yields. Our partners expect this trend to continue, and in fact hasten, in the year ahead. As Chinese investors become more sophisticated and understand the need to broaden their horizons, the locations and types of assets they are looking to invest in may change dramatically. This could entail considering Seattle instead of New York City, for instance, or transitioning from prime-location office buildings to “last-mile” logistics centers.

However, this does not mark the end of megadeals, which are still an attractive and viable option for some investors. We expect that many will also actively explore new, less glamorous sub-sectors, including medical and senior care facilities across the U.S. and elsewhere. These investments are about securing stable returns, together with knowledge gathering that can eventually be used in China to capitalize on the PRC’s own demographic shifts.

What are the critical issues and challenges that Chinese companies may face in outbound real estate deals?

Until late last year, Chinese companies were able to secure approvals for outbound transactions within a few weeks, thanks to the simplified approval processes employed by free-trade zones in Shanghai and several other Chinese cities. However, things have become more complex in the last few months.

It appears that some local authorities have unofficially slowed down the approval process, and banks have been exercising more scrutiny than before when examining their clients’ applications for converting RMB into foreign currencies for outbound investments, mainly due to the depreciation of the RMB since December 2015. We expect that Chinese institutions will now face a number of regulatory roadblocks that may impact their outbound transactions.


Recent Client Success

Co-investment in a Class A U.S. logistics portfolio and 1285 Avenue of the Americas in New York.
Formation of its first RMB fund to invest in residential development in the U.S.
Acquisition of a Grade A office and commercial building in Hong Kong from Chinese Estates Holdings Limited.
Acquisition of Dah Sing
Financial Center,
a Grade A commercial
building in Hong Kong.

Download a PDF