Understanding Chinese Growing Investment into Foreign Real Estate
Table of Content (click to read)
The Investment Boom Read Now
The Easing Restrictions Read Now
How to Tap into the Chinese Market? Read Now
The Investment Boom
According to the statistics from Juwai.com, in the calendar-year 2016, for the first time ever, outbound property buying by investors from China has surpassed the $100 billion mark.
In the US alone, Chinese nationals have been recorded pumping $31.7 billion in 2016 (the data comes from China’s National Association of Realtors). This is an increase of at least $4 billion from the previous year. By the year of 2020, that total is expected to reach a staggering $218 billion. The US has emerged on top in terms of Chinese relocation and investment for the third year running.
Outward Foreign Direct Investment (OFDI) of China has sky rocketed, in barely a decade the country’s OFDI climbed from virtually nothing to more than $100 billion each year. In terms of international real estate investment, the capital investment into residential and commercial projects has fuelled the overall dramatic growth, which is currently at an all-time high.
Last year residential and commercial projects hit a record of $33 billion, rising by more than half. Most notably these account for one third of the total OFDI, the highest percentage to date. Moreover, it is projected that the total Chinese global offshore assess will triple from $6.4 trillion in 2015 to $20 trillion by 2020.
With such impressive numbers, it is impossible to ignore the market potential of Chinese investors. While much of the total comes in the form of foreign exchange reserves and portfolio investment, an increasing share will come from direct Chinese investment in developed western countries.
Large sums of capital flowing into commercial property and land has been the most visible manifestation of China’s internationalisation on the global real estate market so far. There are a number of factors that influence this strong trend of growing outbound investment.
China’s gross capital is booming, with an expanding upper-middle class and some of the wealthiest individuals in the world. In the meantime, domestic finances are volatile and the local property market is intensely competitive. The Chinese nationals have faith in the stability of real estate and are looking to secure their wealth in foreign properties.
Discerning Chinese realize investment into bricks and mortar is the safest way for the preservation of assets, particularly in the lucrative real estate markets of North America and urban centres in Europe as well as Australia. With an affinity for property and greater access to information, Chinese investors are now deploying the capital that they have been building up for years.
When it comes to residential investments, there is little to surprise that with the rising standards of living, priorities about education and lifestyle are shifting to the forefront of Chinese investors’ concern, as well as the depreciating RMB.
Capital controls introduced in 2016 have raised questions regarding the future scale and direction of China’s outbound real estate investment. Chinese investors nonetheless continue to be crucial players in the global real estate market. Still we need to acknowledge that relevant activities from that time on were more measured, targeted and in a different structure.
The Easing Restrictions
In spite of actively encouraging domestic spenders to increase exposure to overseas investments several years ago, the Chinese government’s wrath was ignited to see that too much cash had been extracting from within the country and redeploying in real estate abroad.
In 2016, the country started to target “irrational deals”, which often involves high-profile hotels, cinemas and sports clubs. By that time, the outbound investment had reached to its peak, causing the value of RMB to slump and leading to massive exodus of capital. A few of Chinese biggest spenders fell under scrutiny after Chinese President Xi Jinping described the rampant outbound investment as a “national security matter”, some famous names including Wanda, Anbang and HNA Group were among the list.
Last year, China’s National Development and Reform Commission (NDRC), a macroeconomic management agency with broad administrative and planning authority over the country’s economy, set out new rules governing outbound investment. This legislation came into force on 1 March this year and according to which, all foreign investment deals by Chinese firms, including those conducted by their overseas affiliates, must be reported through an online platform under the government supervision. Any deal valued at over $300 million requires specific approval from the government. The purpose is to effectively stem the unbridled capital outflow. This move has prompted many Chinese investors to reconsider their overseas investment strategies.
However, no more than two months after the implementation, an explanation (in NDRC’s reply to some key questions) was inserted to offer Chinese investors a loophole to act without the fear of recrimination from government. The NDRC ruled that Chinese investors can redeploy capital abroad as long as the money is recycled from their existing overseas property holdings or raised by non-Chinese banks. It is also worth noting that the restrictions listed by the NDRC aim at domestic enterprises, not individual investors.
The newly added “clause” provides exemption for “projects that do not involve assets or interests in the territory or provide financing or guarantee in the territory… For enterprises which do not use government investment to build projects, the examination and approval system will no longer be implemented”. In the explanation, NDRC further relaxed investment in infrastructure and developing, covering areas such as business parks, logistics and tech parks. For this kind of investment, official approval is no longer needed regardless of whether the money is taken out of China.
The easing of restrictions is expected to encourage more trading in overseas properties rather than holding them for a long term. It will become more and more compelling for Chinese investors to refinance existing assets and free up equity to redeploy on other property deals without worrying about provoking government’s ire. In addition, given the state approval is no longer required, Chinese investors are free to diversify their overseas real estate holding and expand allocation to business parks, logistics and so on.
How to Tap into the Chinese Market?
Today we are witnessing a significant rise in outbound investment into real estate. Overseas property is seen by Chinese people as more reliable. There is no doubt that China will be a major mover of capital into real estate for many years to come. This is the high time for real estate companies to position and localize themselves to satisfy this huge demand. The question is, how do we attract investment to score a slice of this pie? Click into the articles below to know more about the Chinese market:
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