China, Singapore, Hong Kong, South Korea & Japan deploy a total of US$65 billion in 2016
SINGAPORE – Asian real estate investors have launched themselves onto the global stage over the last few years to become one of the most important global capital exporters – with China (11%) ranking number two behind the US, Singapore (7%) in sixth position, Hong Kong (5%) in seventh position, South Korea (3%) in eleventh position and Japan (1%) significantly further down the list in sixteenth position of the top 20 list.
Chinese capital was second only to the United States (19%) which topped the table. However, it is Chinese capital that has been the key driving force behind global real estate transaction volumes over the past few years, especially across the Super City1 markets, according to Knight Frank’s inaugural Active Capital Global Report.
Despite recent geo-economic uncertainties around the world, Chinese appetite for mega-assets seems insatiable. However, some target locations are beginning to feel uneasy around the sustainability of Chinese investment as questions are being raised on the government’s latest capital outflow controls and the health of the domestic economy.
With recent deals involving Chinese capital including HNA Groups purchase of the iconic 245 Park Avenue in New York for US$2.21 billion, CC Land’s acquisition of The Leadenhall Building, also known as the Cheesegrater in London for £1.15 billion and China Investment Corporation’s securing Blackstone’s European logistics business Logicor for more than €12bn (£10.5bn), capital outflow controls are not necessarily proving a hindrance
Also, the latest Chinese GDP growth figure, 6.9 per cent YoY growth in the first quarter this year, has dispelled doubts on the country’s overall economic health. Some of the previous concerns, such as the domestic home inventory glut, paled in comparison with impacts of external surprises like Brexit and the US election result. Even those shocks have now been gradually digested as investors have taken advantage of factors such as exchange rate dips.
Origins of Cross-Border Capital – Top 10 Countries (2016)
|Country||Cross-border investment in 2016 (US$)||% of Global Cross-border Capital|
In terms of the emergence of Chinese outbound capital, the global marketplace was initially crowded with big name Chinese insurance firms, large developers and State Owned Enterprises (SOEs). However, more recently since 2015, private conglomerates or more niche developers including HNA, Fosun and R&F have made their presence felt globally. Some of these new entrants operate differently; they are nimble and are able to make decisions quickly, often transacting higher up the risk curve. Their sophisticated play is expected to result in less of a rush for trophy assets and more methodical behaviours that are commonly observed from mature players.
Mr Nicholas Holt, Head of Asia-Pacific Research, Knight Frank, says, “The emergence of an array of Chinese investors, institutional, SOEs, developers and privates, in the global real estate markets has undoubtedly been the largest single trend over the last decade. Despite the more stringently applied capital controls and a slight lull in outbound activity in 2017, over the longer term – with the opening of the capital account and the internationalization of the RMB – Chinese capital will continue to have a significant impact in the major property markets around the world.”
The transaction volumes of Chinese investments evidently depict the cross-border investment narrative in China, where cross-border activity has increased by 26-fold over the last ten years. In 2016 alone, Chinese capital cross-border real estate transactions amounted to US$26.6 billion, accounting for nearly 40 per cent of all Asian cross-border capital invested; and also more than half what was invested domestically in China (excluding land sales).
Chinese investor transaction volumes
The key markets that Chinese investors are focusing on are gateway cities such as London, New York and the other Super Cities given their stability and depth. Other key locations including cities on the “Belt and Road” route, e.g. Singapore and key Southeast Asian hubs, will also continue to attract significant investor interest.
“The bullish bids for the collective sales and Government Land Sale sites over the last six months are evident testimonies of our local and foreign developers’ strong interest for real estate development opportunities in Singapore. The developers’ hunger to replenish land bank and to park investments in safe havens have outweighed the previous sombre sentiment towards Singapore’s property market prospects, and they are coming out stronger and faster than expected to invest in Singapore real estate. This fever is likely to continue for at least a year as market sentiment improves along with firmer economic growth seen over the last six months, signs of stabilization in business activities and release of pent-up demand from both institutional, high-net-worth individuals and retail investors for property,” says Ms Alice Tan, Director and Head, Consultancy & Research, Knight Frank Singapore.
Japanese investors are expected to be increasingly important in the outbound markets in the next two years as the Japanese government policies are encouraging them to shift to a wider range of investment products. Currently many large Japanese institutions are largely conservative, with 50% of assets in financial deposits and just 5% in investment trusts. Recent estimates from AMP Capital show that Japanese institutions have US$4.4 trillion under management. A 5% allocation would see US$230 billion directed towards global real estate.
“With the ongoing low growth and interest rate environment, Japanese pension funds are beginning to look at their exposure to real estate – an asset class where they have traditionally been underweight. We are seeing major players, such as GPIF, start to look more closely at listed and non-listed property, both domestically and overseas. The potential for institutions like GPIF to significantly impact offshore major city markets globally in the coming years is considerable,” says Mr Kenji Nagamine, Senior Manager for Japan Desk at Knight Frank
GPIF, the world’s largest pension fund, recently set out a global real estate investment strategy following a major shift in policy in late 2014 that allows it to include alternative assets as part of its portfolio.
Over the last decade, Japanese cross-border investment was at its lowest in 2010 at only US$193 million. This shot up to US$3 billion in 2016, an increase of more than 15 times. However, this is not the largest investment outside its shores; that record was set in 2014 at almost US$4 billion. The strong outbound showing last year, however, could be a foreshadow of more capital outflows in the years to come.
Japanese investor transaction volumes