Chinese investors bid up prices as they bring capital home
Domestic buyers purchased $564.9 billion worth of commercial real estate last year
Chinese investors have been buying commercial property domestically at the fastest rate ever as new institutions and funds join the market and traditional players focus more on their home shores in response to government-imposed capital controls on offshore investment.
Domestic buyers purchased a record $564.9 billion (U.S.) worth of office buildings, shopping centers, development sites and other commercial property in China last year, according to real-estate data firm Real Capital Analytics. By comparison, domestic buyers did $395.8 billion in such deals in 2016, the firm said. The lion’s share of the deals each year involved development sites.
Domestic investors pulled back slightly in the early part of this year as Beijing began raising concerns about debt and financial risk. But the government has eased that pressure lately to stimulate a softening economy and ease market worries over escalating trade tensions with the U.S.
“There is obviously more domestic capital chasing transactions in China,” said Rush Desai, chief executive of the Asia and Pacific region for Allianz Real Estate, the real-estate investment unit of Allianz SE, the Munich-based financial-services firm.
The sharp increase in investment by Chinese investors is helping turn the Chinese realestate market into one of the largest in the world. Including acquisitions by Hong Kong firms and other foreign investors, there was a total of $633.4 billion in deals last year, up from $456.2 billion in 2016, Real Capital said. At the same time, the surge in domestic activity is driving up prices making the market trickier for foreign investors to compete. Some have moved to the sidelines. Others are still very much in the game but are fine-tuning their investment strategies.
Chicago-based LaSalle Investment Management Inc., which has about $60 billion in real-estate assets under management, in April acquired Shanghai International Plaza, a mixed-use tower with 24 stories of office space on a six-story retail podium, for an undisclosed price. LaSalle is planning to make the investment work partly by converting some of the retail space into more desirable office space.
LaSalle is confident it can do this because it has more than a decade of experience investing in the country, said Claire Tang, the firm’s head of acquisitions for China. “We are foreign capital, but our team has local expertise,” she said.
The Chinese real-estate market is young compared with those in the U.S. and Europe. Until the development surge of the past two decades, major markets didn’t have enough buildings with the design quality or leasing structures to appeal to institutional investors.
The first foreign investors in Chinese property didn’t start showing up until the 1980s, after the government eased restrictions on such deals. Since then a wide range of major foreign players have done deals in the country including Morgan Stanley, New York developer Tishman Speyer and mall giant Simon Property Group and Brookfield Property Partners, one of the world’s largest commercial real-estate investors.
The appeal: diversification and the high growth rate of the Chinese economy, which is expected to translate into higher rents and occupancies.
“We are trying to participate in the Chinese economy whereby it’s transitioning from being a manufacturing [econo- my] to where it’s becoming more of a service-based economy,” said Mr. Desai of Allianz, which has invested about 1 billion euros ($1.17 billion) of equity in China since 2016.
Allianz’s deals this year includes its venture with Gaw Capital Partners, a Hong Kongbased private-equity firm, to purchase two of the four offices blocks in Sky Soho complex in Shanghai. “The location is where you would expect the central business district to expand,” Mr. Desai said.
Chinese domestic investors used to be mostly individuals and family offices. But in recent years more institutional players like insurance companies and homegrown private-equity firms have become more active.
“There’s a local saying that the Chinese real-estate industry has come into the second round,” said Megan Hu, managing director of World Union Investment, a Shanghai-based firm which currently has about six billion yuan ($880 million) under management.
Ms. Hu’s firm was formed in 2014 as the investment arm of Shenzhen-based World Union, one of China’s largest real-estate services firms, which specializes mostly in residential property. Most recently, it ac- quired Cross Tower, a 24-floor office building in Shanghai, for 2.7 billion yuan.
Domestic investors have had more firepower lately because of pressure from Beijing for them to pull back on their yearslong foreign buying spree. For example, Chinese investors in the U.S. became net sellers of commercial property in the second quarter of this year, for the first time since 2008. “With China capping the amount of money that can go out of the country, that traps capital in the country,” said Michael Cole, founder of the realestate website mingtiandi.com.
Ms. Hu said that domestic investors often have an advantage over foreign investors, who may have to face more government restrictions. Big Chinese institutions also “may have access to cheaper financing” than their foreign competitors, she said.
But other foreign investors believe they can still hold their own. “We have differentiated ourselves by being able to do all cash deals,” said Mr. Desai of Allianz Real Estate. “We bring certainty of execution because we don’t need leverage all the time. That helps us find transactions that are attractive to the rest of the market.”