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

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China's ODI vs. FDI

Total ODI Total FDI

Source: Ministry of Commerce

2

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.

1


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.

3

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.

4


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)


Retail10%

Development site33%

Industrial1%

Hotel14%

Office40%

Apartment2%

5

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)


Total value (US$ million) Total number of deals

6


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.


Investment by region (2015)

Africa 0.3%

Asia37.9%

Europe20.7%

North America22.1%

Oceania19.0%

7

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


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.

9

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

10

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.

Our prior written consent is required before this report can be reproduced in whole or in part.

To see a full list of all our publications, please go to cushmanwakefield.com or download the Research App

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

china outbound investment capitalwatch · according to analysis by dtz/cushman & wakefield ,...

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