Mar 9, 2017

Global real estate services leader Colliers International lately releases a report titled “2017- the year in which Asian property capital flows reverse: Fact or Fantasy?”. Colliers points out in the report that as the Renminbi will not fall much further in 2017, Chinese interest in foreign property will shift towards Asian markets from US markets. Asian property capital outflows should slow, but inflows may only rise slowly. Intra-Asian property investment is strong and rising, with China set to play a greater role.

Chinese capital led Asian property investment, US markets were most popular
Colliers report found that Asian capital flows have a pattern of rising outflows, falling inflows, surging intra-regional flows in recent years. Aggregate outflows of capital from Asia to property markets in the rest of the world have risen sharply to reach USD58.9 billion in 2016, while inflows have stagnated at under 30% of this level. This heavy investment outside Asia has been led by mainland Chinese groups, which represented 43% of Asia-to-global flows last year. The 233% increase in aggregate intra-regional capital flows from USD20.8 billion in 2008 to USD69.3 billion in 2016. Of this total, mainland Chinese investors represented USD12.0 billion, or 17%. The strength of intra-regional property investment suggests that financial institutions and developers within Asia are more sanguine about prospects for the region than investors based outside it.

According to Colliers data, Asian investment in the US surged threefold to a peak of US330 billion in 2015, representing 51% of aggregate investment outside Asia in that year. In 2016, Asian investment in the US was USD29.1 billion, representing 49% of aggregate investment outside Asia in that year. Andrew Haskins, Colliers’ Executive Director of Research & Advisory, said that: “mainland Chinese capital accounts for a high proportion of the aggregate Asian investment in the US (43% in 2016), and it is no coincidence that the popularity of the US surged over the years in which the Chinese renminbi was depreciating steadily against the US dollar.”

Outside their own region, Asian investors like office property. In 2016, total investment in non-Asian office property amounted to USD25.2 billion, i.e. about 43% of aggregate outbound capital. The second most popular target market segment was hotel property, accounting for 24% of aggregate outbound capital. In recent years, Chinese groups appear to have assumed the mantle of biggest investors in non-Asian hotels. In 2016, China's Anbang Insurance surprised the real estate investment world by securing a USD6.5 billion deal to purchase Strategic Hotels & Resorts from Blackstone.

China become APAC's top investment market and major capital source in 2016
Year 2016 was a very active year in Asian property investment markets, the chief point to note about 2016 is that property transaction volume in China has strengthened significantly. Over 2016 as a whole, total property transactions in China increased by 10% to USD36.5 billion. This strength accelerated in Q4, which saw a 32% y-o-y increase in transaction volumes to USD14.0 billion. For 2016 as a whole, China accounted for 28% of aggregate property transactions in the region, while for Q4 2016 the proportion was 35%.

Year 2016 was the fourth consecutive year in which mainland China ranked as the largest source of capital in investment flows from Asia to the rest of the world. Colliers analyzed that the US accounted last year for 49% of aggregate property investment outside the region by Asian investors, it is fair to say that mainland Chinese interest in US property assets has been the primary reason for the trebling of property investment outside Asia by Asian investors between 2012 and 2016.

Mainland Chinese groups only have 17% of intra-regional property investment. One market in which mainland Chinese developers and institutions have shown strong interest is Hong Kong. Indeed, Chinese groups were a major force behind the 15% increase in property transaction volume in 2016 that left Hong Kong as the third-ranked urban investment market in Asia. Besides being the largest source of foreign investment in Hong Kong property, mainland China was the largest source of foreign investment in Japan and Malaysia in 2016. In Singapore, Chinese individual investors invested in low to mid-end residential property, while Chinese developers tendered for state and private land for development, mainly in the low to mid-end segment.

Slower RMB depreciation led Chinese investment to shift towards Asian Markets
Colliers believes that the bulk of renminbi depreciation has probably already happened given the recent strong economic news from China: Chinese real GDP growth looks set to reach about 6.3% in 2017; recent trade data have been strong, with exports posting their first increase in January in USD terms since March last year; and China's producer price index (PPI) grew by 5.5% in December, reaching the fastest growth rate in more than five years.

At the same time, Colliers believes that the Chinese government began to impose new capital controls recently, including strict limits on large corporate investments abroad, which will help suppress further depreciation of renminbi.

Andrew Haskins commented that: “perhaps the most important factor behind mainland Chinese investors' rush to purchase property assets overseas, and in particular outside Asia, has been concern about possible further renminbi depreciation. Chinese investors have been especially interested in the US because the economy has been expanding and because the US dollar is the world's most important reserve currency; and to some extent they have probably considered Hong Kong as an extension of the US due to Hong Kong's currency peg.”

According to Colliers’ analysis, the renminbi will not fall much further and this may lower the attraction of US property to the Chinese. Political concerns may also slow the pace of Chinese investment in the US. We predict Chinese interest in foreign property will shift towards Asian markets from 2017. This would be in keeping with the Chinese government's long-term "Belt and Road" strategy. If so, the already heavy flow of investment capital into Asian property assets ought to strengthen further.

Colliers insight: opportunities in key China mainland cities

Shanghai

  • Driven by yield compression and limited opportunities in prime areas such as Lujiazui, Zhuyuan and Jingan, which are the preferred submarkets for most investors, office properties with value-added potential and a size ranging from 3,000 to 20,000 sq metres (33,300 to 215,300 sq feet) in decentralised areas, e.g. Minghang’s Hongqiao Transportation Hub, attract many domestic and overseas buyers for self-use or investment purposes.
  • In the logistics sector, driven by strong occupier demand and stable rental values, standard logistics properties on the fringe of Greater Shanghai remain attractive to both developers and institutional investors.
  • In the retail sector, properties in prime catchment areas continue to attract overseas investors for stronger asset performance while those in emerging areas tend to be more appealing to some domestic and selected overseas investors for value-added potential and capital value growth.

Beijing

  • We see value-add opportunities in upgrading and renovating existing aged office, retail and hotel buildings in core areas as Beijing has banned large-scale new commercial property development in these areas since 2015.
  • Business parks in emerging areas offer opportunities as rents in business parks have continued to rise in recent years.


For more information, please refer to the whole report.

Please click here to down the whole report(English version)

Please click here to down the whole report(Chinese version)


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