As 2015 closed, many of us engaged in the time-honored ritual of looking back and making sense of things by putting them into neat little boxes.
China real estate professionals were no different. While there certainly are discernible trends for both outbound and inbound investment in the sector, relying on those trends only gets us so far. Not very far, actually.
Most of us are aware that the Chinese government has relaxed restrictions for outbound real estate investment, and went through last year anticipating the nearly weekly announcement of yet another large outbound deal.
What has been largely ignored in the industry is the interplay between the ever-increasing maturity of the Chinese economy and its continued integration with the global economy, the inevitable slowdown of growth in the domestic real estate market, and the relationship between outbound and inbound investment in the Chinese real estate market.
When talking about China real estate, outbound investment seems to grab all of the headlines. Chinese institutional investors, much like other institutional investors, continue to be interested in first-class assets in gateway cities such as New York and London. No surprise there. As competition and pricing for those types of assets become fiercer, Chinese institutional investors have, by necessity, expanded their investment scope both by type and location.
In 2015, one of the most favored types was logistics, and Chinese institutional investors were market leaders, not followers. Both Ping An and China Life announced blockbuster US logistics portfolio deals.
On the development front, Chinese developers continued to look for gateway city development opportunities but, like other developers, they have had to expand their reach outside of those cities in the search for both deals and returns. It doesn’t hurt that some of these Chinese developers are among the best capitalized in the world, and have spent the past few years increasing their understanding of foreign markets and bulking up their overseas development teams.
Chinese institutional investors and developers are building global brands. It is exciting, fun to watch, and good for us all. While Chinese institutional investors and developers are becoming significant global players, Chinese high net worth individuals are right there with them.
They continue to buy apartments in gateway cities and invest in US EB-5 (Green Card) real estate developments because, well, that is what rich people do. And now that the Chinese government increasingly allows them to invest overseas, why should they be different from anyone else?
As all of this is happening, Chinese trust companies, private equity and wealth management firms are also developing more products to meet the demand of high net worth individuals who want to invest a portion of their wealth in global markets. These include what appears to be an ever-expanding roster of renminbi-denominated private equity funds targeting overseas real estate.
2015’s China real estate investment story became much more interesting when outbound investment was viewed through the lens of the domestic real estate market. If Chinese institutional investors and developers were operating in the same environment that existed in 2010 and 2011 (and making the same type of profits), they would be so busy pursuing their China strategies that there would be little reason for them to turn their attention elsewhere.
The slowdown in the domestic market may not have forced them to invest overseas, but it certainly provided a good push in that direction.
On the regulatory front, this slowdown has led the Chinese central government to loosen its restrictive policies toward inbound (foreign) real estate investment.
The government seems to have replaced its concern that inbound investment was “hot money”, chasing quick returns with comparatively less equity risk in a real estate market that seemed to be moving ever upward, with an understanding that risk-adjusted real estate returns in China continue to move closer to those available in other markets.
This has allowed the Chinese government to start to roll back its previous inbound real estate investment regulatory scheme which, at its height, subjected foreign real estate investment to both significant additional restrictions and scrutiny.
As the economy continues to mature and as success in the China real estate market becomes more dependent on investment savvy and less on having access to deals, China real estate investment will become both easier (for foreigners from a regulatory standpoint) and more difficult (for everyone) as the market continues to become more competitive.
So, where did we stand at the end of 2015? It is likely that, absent one of those black swan events, the trend of increasing China outbound real estate investment and the loosening of restrictions on inbound China real estate investment will continue.
But, as with most complex issues, the closer we look at the boxes in which we have placed the trends, the less neat they become.
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(This piece was first published in EJ Insight, the English service of the Hong Kong Economic Journal (Hong Kong’s first Chinese financial newspaper), on December 24, 2015)