There has been a huge surge in Chinese outward investment into real estate in recent years, led by the softening of Chinese market conditions and government policy encouraging overseas investment by Chinese firms. This has led to increasing investment levels in gateway markets globally – particularly in Australia.
According to Knight Frank’s latest report, Chinese Outward Real Estate Investment Globally and Into Australia, the total value of Chinese outward real estate investment globally skyrocketed from US$0.6 billion in 2009 to US$16.9 billion in 2014 – 10% higher than 2013 and a substantial 205% increase from 2012. Already over US$7.8 billion has transacted in the first four months of 2015 (data excludes residential dwellings).
Knight Frank’s Mr Dominic Ong, Senior Director of Asian Markets, Capital Markets, said, “It is expected that 2015 will be another record year for Chinese outward investment, both internationally and into Australia, with the expectation of more than US$20 billion worth of investments transacting globally. So far the majority of the Chinese outward investment has been focused in gateway cities of Australia, the US and the UK.”
According to Mr Ong, “What first started as sovereign funds making exploratory investments has proliferated into buying sprees by Chinese developers, banks, Ultra High Net Worth Individuals (UHNWIs) and institutional investors, such as insurance companies. By 2020, authorities estimate that the Chinese insurance industry will accumulate a further RMB20 trillion worth of premiums, tripling the current pool size.
“This current wave of equity investors and insurance firms are seeking core, value-add and yield-driven opportunities. Amongst the big-cap players, only four of the top 10 Chinese insurance companies have made offshore investments so far, although the remaining six are considering overseas expansion. Sunshine Insurance Group is the only one to invest in Australia, purchasing the Sheraton on the Park Hotel in Sydney for a record AU$463 million, however we expect these groups to be active on Australia listings in 2015.
“A new group of entities is also emerging as a new wave of capital outflow, constituting not only big-name insurance companies, but also UHNWIs, small- to mid-cap state-owned enterprises (SOEs), and smaller, private developers,” said Mr Ong.
“For Chinese investors in the Australian market, the gateway cities – namely Sydney and Melbourne – have been the most active market for Chinese investors. The next wave of Chinese investors are diversifying more and broadening to areas such as Brisbane, Adelaide, Gold Coast, Perth and metropolitan suburbs of NSW and Victoria, which will all start to gain more traction.
“These investors will also diversify by broadening their sector allocation from core office and residential developments into hotels and leisure, student accommodation, industrial assets and mixed-use developments,” said Mr Ong.
According to the report, Australia has recorded exponential growth in investment over the past few years, culminating in just over $4 billion invested into the country by Chinese investors in 2014, across both commercial and development sites. This has exceeded the total Chinese inbound real estate investment which occurred over the prior five years combined (2009-2013).
According to Knight Frank’s Group Director of Research & Consulting, Mr Matt Whitby, one of the most powerful drivers “pushing” capital out of China, has been the continued consolidation of China’s residential real estate market. “In March 2015, all of the 70 major Chinese cities recorded annual house price falls, compared to March 2014 when only one city recorded an annual decline.
“Recent cuts to China’s lending rates and the Reserve Requirement Ratio (RRR), may help boost confidence in the property market. However, we expect property prices to remain under further pressure in 2015, as prices are unlikely to rebound while developers continue to clear inventory and pull back on new projects. While this remains the case, we believe this will continue to make offshore expansion a viable option over at least the short to medium term.
“It is clear that the Australian cities are attracting significant investment, relative to the size of their economies. The economies of London and New York are much larger than the combined economies of Sydney and Melbourne, however they were outpaced in 2014 as a place to invest for the Chinese,” said Mr Whitby.
“Chinese UHNWIs are exploring Australian investment opportunities and their investment strategies are far ranging. They are open to different asset classes, with interests ranging from smaller shopping centres, such as the Campsie Centre, to offices such as 299 Elizabeth Street in the Sydney CBD, residential units and lifestyle properties.
“Alongside increasing capital flows and investment from China, the commercial occupier market is also benefitting as Chinese developers, banks and fund managers go more global and develop and grow their global platforms,” added Mr Whitby.
“Enquiry and deal flow across key Australian cities – namely Sydney, Melbourne and Brisbane, has picked up over the past year for office space, albeit predominately smaller deals sub 1,000m². Examples include Kingold, Ruizean and Hailiang into Gateway in Sydney, Greenland, AXF and Power China into various Melbourne CBD buildings and China Construction Bank into 340 Queen St in Brisbane.
“We expect even greater activity throughout 2015 and 2016, with banks, energy/mining, fund managers and developers taking space in predominantly Premium or A+ buildings with views, which should support greater demand in that segment of the market,” said Mr Whitby.
According to Mr Whitby, the Australian currency has also led to increased investment. “The Australian Dollar has depreciated by around 33% against the Chinese Renminbi since the last peak in April 2011, and 19% since mid-2014, which has largely strengthened the purchasing power of Chinese investors. Overseas investment has become relatively cheaper. Many Chinese and Hong Kong investors see this as a good opportunity to acquire foreign assets.”
Mr Whitby said, “The Significant Investor Visa (SIV) scheme has predominately been taken up by Chinese investors. This process has been refined, with a Premium Investor Visa (PIV), offering a more expeditious, 12-month pathway to permanent residency for those meeting an AU$15 million threshold and will be formally introduced on 1 July 2015. This will be another driver of increased capital flow into Australia more broadly from UHNWIs over the course of 2015/16.”
According to Mr Ong, “After the wave of major developers entering the market, such as Greenland, Dalian Wanda, Poly and Country Garden, we will increasingly also see small- to mid-cap SOEs and private developers actively seeking different options in small- to medium-scale development opportunities in core and non-core markets in Australia.
“In addition to increased office leasing deals, we expect the trend of Chinese banks acquiring buildings for owner occupation, which has been witnessed in other gateway cities, to emerge in key Australian cities. CCB, Bank of China, Agricultural Bank of China and Industrial & Commercial Bank of China have all been active in the commercial acquisition market globally over the past year.
“Going forward we expect a couple of owner occupiers or at least part owner-occupier deals to transact over 2015 and 2016, as we have just started having some enquiry on sales listings in Sydney and Melbourne from Chinese banks,” concluded Mr Ong.