China Outbound Investment CapitalWatch · According to analysis by DTZ/Cushman & Wakefield ,...
Transcript of China Outbound Investment CapitalWatch · According to analysis by DTZ/Cushman & Wakefield ,...
China Outbound Investment
CapitalWatch
2015
CHINA OUTBOUND INVESTMENT
CapitalWatch
1
China reported gross domestic product (GDP)
growth of 6.9% in 2015, its slowest pace in a
quarter century, but still nearly three times as
rapid as overall global expansion. The country’s
growth cooled further in the fourth quarter of
the year, to 6.8%. Stock market turmoil starting
in June 2015, the sudden devaluation of China’s
currency (the RMB) in August, and surging
capital outflows in the second half of the year,
have raised concerns about China’s economic
prospects. While the possibility of a hard landing
cannot be dismissed, it is important to weigh the
bad news against an array of positive
macroeconomic factors such as China’s large
current account surplus, strong urban job
growth, and impressive progress in economic
restructuring as seen in the rapid growth of the
tertiary sector – now accounting for a reported
50.5% of GDP, compared to the 40.5% share
taken by manufacturing and construction.
According to the Ministry of Commerce, China’s
non-financial outbound direct investment (ODI)
reached a record high of US$118.02 billion in
2015, representing a year-on-year increase of
14.7%, more than twice the foreign direct
investment (FDI) growth of 6.4% in the same
period. Figures compiled by the American
Enterprise Institute show that Chinese global
investment in all sectors, including construction
activity and counting only large transactions,
totaled US$193.69 billion in 2015, of which the
U.S. absorbed the greatest share at US$22.49
billion. China’s outbound investment is poised to
take on historic dimensions with the evolution of
the “One Belt, One Road” trade and
infrastructure project, through which the
government plans to channel up to US$1.4
trillion of capital into participating countries in
Europe and Asia over the next decade.
ECONOMICOVERVIEW
020406080
100120140
20062007
20082009
20102011
20122013
20142015
To
tal valu
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US
$ b
illio
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China's ODI vs. FDI
Total ODI Total FDI
Source: Ministry of Commerce
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OUTBOUNDINVESTMENTTRENDS
Capital flows jump in 2015Chinese outbound investment jumped to a record high
in 2015. According to analysis by DTZ/Cushman &
Wakefield , overseas commercial property investment
by mainland-based investors totaled US$21.37 billion in
2015, representing year-on-year growth of 41.5%, and
over six times the 2010 total. Investors such as Bank of
China, China Investment Corp (CIC), China Life
Insurance, Greenland Group, and Shanghai Jinjiang
International Hotels led the way with high-profile
acquisitions of office buildings, shopping malls, hotels
and development sites around the world.
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CHINA OUTBOUND INVESTMENT
CapitalWatch
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Total investment by private enterprises/investors (US$ million)
Total investment by state-owned enterprises (US$ million)
Total number of deals by state-owned enterprises
Total number of deals by private enterprises/investors
Total outbound investment & deals from mainland China(all property types)
Source: RCA, DTZ/Cushman & Wakefield
1 Based on data from Real Capital Analytics (RCA) including all transactions from mainland China to overseas destinations (including Hong Kong) of
US$2.5 million or greater in value from January 1, 2008 to December 31, 2015. Property types include apartment (multifamily rental properties with at
least 10 units), development site, hotel, industrial, office, and retail. Deals include sale, entity-level, <50% interest, and “in contract” transactions.
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SOEs, insurers make high-profile movesState-owned investors tend to transact fewer but larger
deals than their private-sector counterparts. In 2015,
state-owned firms accounted for some 58.8% of the total
outbound transaction value by known investors, but
around 30.8% of the total number of transactions, while
private investors made up the remainder. State-owned
firms registered most of the year’s biggest outbound
deals, including developer Greenland, insurance firms
China Taiping and China Life, sovereign wealth fund CIC,
and Shanghai Jinjiang International Hotels. Greenland
was highly active with a series of office, retail, hotel and
development site purchases in Australia, Japan, and
Malaysia, especially in the fourth quarter of the year; the
largest of these was the acquisition for around US$683
million of a site in Malaysia for the mixed-use Tebrau Bay
Waterfront City mega-project. CIC, China’s leading
cross-border real estate player with some US$5.65 billion
of investments to date, purchased a retail portfolio of 10
shopping centers in France and Belgium for US$1.11
billion in August, and a portfolio of nine office buildings
in Australia for US$1.14 billion in October. Jinjiang took
over France’s Louvre hotel chain from Starwood for
US$1.46 billion in a deal that closed in March. From the
private sector, investments by developers Evergrande
Real Estate Group and Shimao Property topped the list
in 2015. Evergrande spent US$1.61 billion to acquire Hong
Kong’s Mass Mutual Tower in November, and Shimao
invested US$905 million in a luxury residential site in
Hong Kong’s New Kowloon in September.
China’s insurers maintained a high profile in overseas
markets, investing a total of around US$2.79 billion in
2015. This represented a slight rise on the 2014 figure of
US$2.67 billion – the vast majority of which, however,
came from Anbang Insurance’s announced purchase of
the Waldorf Astoria New York, a deal that finally closed
in February 2015. China Life Insurance led the way with
major transactions in Hong Kong (the west wing of
Wheelock’s One HarbourGate office project for US$755
million), London (the 99 Bishopsgate office tower for
US$420 million) and Boston (a majority stake, together
with Ping An Insurance, in the Pier 4 mixed-used project
developed by Tishman Speyer). China Taiping Insurance
also joined the fray with a US$820 million investment in
downtown Manhattan’s 111 Murray Street luxury
condominium site in July. Following its overseas debut in
2014, Beijing-based Anbang Insurance continued its
buying streak with another Manhattan acquisition – the
Merrill Lynch Financial Center (office condo) for US$414
million in May – and the purchase of the HSBC Building in
downtown Toronto for US$83.7 million in September. The
other outbound insurer this year, Beijing-based Sunshine
Insurance Group, spent a total of nearly US$250 million
on a chateau in New South Wales, Australia (February)
and part of New York’s Baccarat Hotel (May).
Insurance funds tend to purchase high-quality properties
in core areas of major cities in developed markets, assets
that generally offer low risk and stable profits. The
progressive deregulation of China’s insurance sector over
recent years has enabled an aggressive acquisition spree
by insurance companies, many of which have also taken
significant equity stakes in Chinese real estate
developers and other firms. Cumulative investment in the
overseas real estate market by insurance funds totaled
less than US$6 billion through the end of 2015. We
expect this to grow significantly in the coming years,
with additional investment of tens of billions of dollars
possible by 2019. Smaller insurance firms may emerge as
a driving force of this investment, following the path
blazed by the big insurers.
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CHINA OUTBOUND INVESTMENT
CapitalWatch 2015
Breaking new groundOffice remains the most popular asset class, accounting
for 40% of total outbound capital in 2015. However,
development sites took a sizeable 33% of investment
volume, rising from about 26% in 2014. Malaysia tops the
list for total investment in development sites, at US$2.52
billion, followed by Hong Kong, the U.S., Australia, and
Singapore. At the end of December, a consortium
including China Railway Engineering Corporation
(CREC) purchased the site of the former Royal
Malaysian Air Force Base on the outskirts of Kuala
Lumpur for US$1.75 billion, with plans to redevelop the
land into a major mixed-use transportation hub. In Hong
Kong, a series of development site deals by buyers
including Shimao Group and Poly Group demonstrated
the city’s growing appeal to mainland developers that
are muscling their way into a market historically
dominated by a handful of local players. According to
data from the Lands Department of Hong Kong,
mainland investors in 2015 accounted for 30% of land
transactions in the city, but 55% of total land transfer
fees.
Investment by asset class (2015)
Source: RCA, DTZ/Cushman & Wakefield
Retail10%
Development site33%
Industrial1%
Hotel14%
Office40%
Apartment2%
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U.S., gateway cities remain top targetsIn terms of global destinations, the U.S. enjoyed the top
spot again with approximately US$4.37 billion of
mainland Chinese investment in 2015. Hong Kong and
Australia (driven by Sydney and Melbourne) followed
closely behind with US$4.11 billion and US$3.99 billion,
respectively. The U.S. remains the premier magnet for
capital flows from around the world, with an
exceptionally active market last year; overall property
investment volumes rose 25% and represented 39% of
all global trading in 2015. The U.S. is still viewed as the
safest of safe havens, and the combination of a strong
dollar and weakening RMB boosted the appeal of the
U.S. for Chinese investors in the midst of economic
headwinds and financial market volatility at home.
Chinese investors overwhelmingly prefer gateway cities
in the U.S., with approximately 94% of deal value going
to New York, Los Angeles, Boston, Chicago and Seattle
(including surrounding metropolitan areas) in 2015. New
York and L.A. alone captured over 87% of deal value.
The preference for gateway cities only sharpened in the
fourth quarter, with virtually all deals occurring in New
York and L.A. During the year, a number of non-gateway
markets including Miami Beach (Florida), Phoenix
(Arizona) and Sacramento (California) received small
amounts of investment, while Houston (Texas)
witnessed modest deals for a hotel (US$65 million) and
luxury apartment project (US$61 million).
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Investment by destination (2015)
Source: RCA, DTZ/Cushman & Wakefield
Total value (US$ million) Total number of deals
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CHINA OUTBOUND INVESTMENT
CapitalWatch 2015
Europe took some 20.7% of Chinese overseas capital in
2015, for a total of US$4.43 billion, up by 3.97%
year-on-year. France, Belgium, and Italy moved onto our list
of top ten destinations by investment volume in 2015,
reflecting the mega-deals of Jinjiang’s acquisition of the
Louvre portfolio, CIC’s retail portfolio deal, and Fosun
International’s purchase of the Palazzo Broggi in Milan
(US$384 million). London remained a key target for
investment, with a total of US$855 million in deals,
including the acquisition of the Reuters headquarters
building, 30 South Colonnade, by HNA Group, parent of
Hainan Airlines. Total investment in the city plunged in 2015
compared to the previous year, but the difference is largely
accounted for by a single massive deal in 2014, China Life
Insurance’s purchase of the Canary Wharf office tower 10
Upper Bank Street.
Asia still absorbs the greatest amount of Chinese capital,
totaling US$8.1 billion, a nearly three-fold increase
compared to 2014. Hong Kong, Malaysia and Singapore are
the top three Asian destinations, with Hong Kong receiving
more than US$4.1 billion of outbound capital, accounting
for 50.7% of the regional total. Land development and
office buildings have become the most popular asset class
for Chinese investors in Asia, with investment of US$4.6
billion and US$3.1 billion, respectively, in 2015.
Some countries receiving Chinese investment are
actively making it easier for these flows to continue.
Australia, while cracking down on illegal residential
purchases by foreign nationals, has opened its doors
wider to commercial property investment with reforms
to the Foreign Investment Review Board (FIRB) rules
which took effect on December 1, 2015. The new
regulations raise the threshold for investments requiring
FIRB approval and cut red tape on foreign developers
buying vacant residential land. For its part, the U.S. in
late December signed into law a major reform of the
1980 Foreign Investment in Real Property Tax Act
(FIRPTA) which breaks down tax barriers imposed on
foreign pension funds investing in U.S. properties and
REITs. The new rules could potentially pave the way for
a portion of the hundreds of billions of dollars managed
by local government pension funds in China to flow into
U.S. real estate. The Chinese government currently
forbids these funds to invest overseas, but this
restriction could plausibly be lifted in the future,
according to a consultation paper on pension fund
management policy published by the state government
– echoing the way rules on insurance firms have been
progressively relaxed.
Source: RCA, DTZ/Cushman & Wakefield
Investment by region (2015)
Africa 0.3%
Asia37.9%
Europe20.7%
North America22.1%
Oceania19.0%
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OUTLOOK
The global commercial property market is expected to
see another robust year in 2016, with 4% growth in
trading forecast (including land and multi-family assets)
– easily higher if the current global volatility improves.2
We anticipate that mainland China will continue to play
a major and growing role in this dynamic market. North
America is forecast to see a 3.8% increase in trading
volumes. In the U.S., real estate fundamentals are
expected to remain good, with an attractive spread of
yields over bonds and further price appreciation likely
for prime assets. The dollar should continue to
strengthen, drawing in further overseas capital,
especially if the economy maintains steady growth –
pointing to the prospect of even stronger Chinese
interest in the U.S. market in 2016.
Although there is a compelling case for moving beyond
headline-grabbing trophy assets into secondary markets in
the U.S. to enhance yields and hedge against uncertainty,
these markets are still a challenging option for many
Chinese investors, who perceive gateway cities as less risky.
Many Chinese buyers are still in the initial stages of investing
abroad, and given their lack of experience in overseas
markets, the risk of moving into secondary locations often
outweighs the increase in yields – a situation that is likely to
hold true for at least the next year or two.
Despite significant political and economic risks in
Europe, the continent overall offers good long-term
investment potential, with positive rental growth
forecasts for most major metros over the next five years
and expectations of strengthening economic growth,
historically low interest rates and further rounds of QE.
China is still a relatively small source of capital into
European markets, accounting for 8.7% of the global
(non-European) investment into the continent,
suggesting there is room for mainland investors to
further grow their share.
In terms of asset classes, the short-term cycle tends to
favor offices, which are forecast to see growth in prime
rents of 4-5% across major gateway cities in the U.S. as
well as London, Sydney, and Tokyo – markets that are
popular with Chinese investors. Retail rental growth
should continue, but at a reduced pace, in key gateway
markets especially in the U.S. Modern logistics space
should see sustained demand, particularly in some U.S.
and European markets, but the growth trends may level
off and it remains to be seen whether Chinese investors
will develop an interest in these properties.
2 Cushman & Wakefield, “Atlas Outlook 2016” 8
CHINA OUTBOUND INVESTMENT
CapitalWatch 2015
Continued fluctuation of the RMB exchange rate will
remain one of the primary macroeconomic risk factors
for cross-border investors in 2016. The U.S. dollar should
continue to strengthen in 2016, driven by the
normalization of U.S. monetary policy since late 2014; at
the same time, global monetary policy remains
stimulative with China, Japan, the Eurozone, and
Australia all engaged in quantitative easing (QE) or
interest rate cuts. China’s moves to lower the reserve
requirement ratio for banks and cut interest rates will
put further downward pressure on the RMB over the
short term. With this prospect in mind, Chinese investors
looking overseas will need to carefully develop risk
mitigation strategies. However, we also note that China’s
continued large current account surplus and low
inflation of around 1 to 2% are conducive to exchange
rate stability, and over the long term, we expect that the
RMB will remain basically stable against a basket of
currencies.
China witnessed an accelerating outflow of funds in the
second half of 2015. These capital outflows are arguably
normal following a long period of generally sustained
annual net capital inflows, and they include productive
Chinese outbound investment and paying off of
foreign-currency debts. However, there is an abundance
of evidence to suggest that China’s authorities are
tightening controls on capital outflows. For instance,
two pilot outbound investment programs – the Qualified
Domestic Limited Partner (QDLP) and Qualified
Domestic Institutional Investor 2 (QDII2) schemes – both
of which were expected to boost offshore property
investment, have reportedly been put on hold. These
and similar efforts to moderate capital outflows may
have a dampening impact on outbound real estate
investment this year, although investor appetite is likely
to remain strong.
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Big deals: Top 10 largest overseas transactions of 2015
RankingAnnouncement
Date Investor Location
Country/Territory
Approx. Deal Size
(US$million) Type
PropertyName
1 2015.12
China Railway (S), KPRJ, Credence Resources
Kuala Lumpur
Malaysia 1,748.88Development
Site
Former RoyalMalaysianAir Force
Base
2 2015.11Evergrande RE
Group (P)Hong Kong
HongKong
1,612.79 OfficeMass
MutualTower
3 2015.03Shanghai
Jinjiang Int'l Hotels (S)
Multiple cities
France/United
Kingdom 1,458.39 Hotel Starwood
portfolio
4 2015.10China
Investment Corp (S)
Multiple cities
Australia 1,142.97 Office9 office
buildings
5 2015.07
China Investment Corp (S),
AEW Capital
Multiple cities
HongKong
France/Belgium
1,110.92 Retail10
shoppingmalls
6 2015.09 Shimao Group (P)
HongKong
905.80Development
Site
NewKowloonInland LotNo. 6542
7 2015.07China Taiping Insurance (S)
New York
UnitedStates
820.00Development
Site
111MurrayStreet
8 2015.11China Life
Insurance (S)HongKong
HongKong
754.79 Office
OneHarbour
Gate(WestWing)
9 2015.01Greenland Group (S)
Plentong Malaysia 682.55Development
Site
TebrauBay
WaterfrontCity
10 2015.05Bank of China
Limited (S)New York
UnitedStates
600.00 Office7 Bryant
Park
Note: S stands for state-owned enterprises; P stands for private enterprises or investors. Source: RCA, DTZ/Cushman & Wakefield
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Contacts
Justina Fan
Head of Outbound Investment Greater ChinaExecutive Director Capital Markets Asia Pacific
Email: [email protected]
Direct: +852 2956 7096
www.cushmanwakefield.com
Disclaimer
This report has been produced by DTZ/Cushman & Wakefield LLP for use by those with an interest in commercial property solely for information purposes. It is not intended to be a complete description of the markets or developments to which it refers. The report uses information obtained from public sources which DTZ/Cushman & Wakefield LLP believe to be reliable, but we have not verified such information and cannot guarantee that it is accurate and complete. No warranty or representation, express or implied, is made as to the accuracy or completeness of any of the information contained herein and DTZ/Cushman & Wakefield LLP shall not be liable to any reader of this report or any third party in any way whatsoever. All expressions of opinion are subject to change.
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James Shepherd MRICS
Executive Director, International Advisory, Greater ChinaEmail: [email protected]
Direct: +86 21 2208 0769
Greg Isaacson
Manager, International AdvisoryEmail: [email protected]
Direct: +86 21 2208 0358
Ming Lu
Senior Manager, Research, North ChinaEmail: [email protected]
Direct: +86 10 8519 8087