China’s curbs on overseas deals pose property risk
Experts warn of threat to UK’S real estate prices after Beijing increases scrutiny of foreign M&A deals
FALLING Chinese investment in UK real estate could pose a serious risk to commercial property prices as demand softens, analysts have warned.
China’s cabinet yesterday issued guidelines to regulate overseas activity in a change that could signal the end of the country’s frenzied M&A activity in recent years. Beijing will limit deals in property, hotels, entertainment, sports clubs and the film industry, stepping up its campaign against what the state planner described as the “irrational” acquisitions of foreign assets.
But some experts have indicated that this might have an effect on prices for property in the UK because demand has been driven by Chinese buyers in recent years. Mike Prew, analyst at Jefferies, said: “We believe commercial real estate prices are factoring in unrealistic income growth as the influx of Chinese money tails off.
“The next foreign buyers in the queue will pay a lower entry premium as headline rents fall, so the REIT majors risk another de-rating.”
Eric Pang, head of JLL’S China desk, said he expected the same volume of investment from Chinese companies, but it would be “more regulated, more targeted, and from more mature, experienced investors”.
Recent years have seen a huge range of Chinese investors in UK real estate, many of whom are investing outside of their home market for the first time. These sorts of investors could be limited in future.
Chinese companies account for a huge number of deals across a variety of UK sectors. Earlier this week, Chinese businessman Gao Jisheng bought a controlling stake in Southampton Football Club, and Chinese billionaire Tianqiao Chen’s Shanda group of companies reportedly agreed a deal to increase its stake in US hospital company CHS.
In recent months, Chinese investors have bought both the “Cheesegrater” skyscraper in the City of London for £1bn and the nearby “Walkie Talkie” for £1.28bn, as well as investing heavily in other properties in the Square Mile.
Anthony Duggan, head of capital markets research at Knight Frank, said that companies could look to raise money through Hong Kong or Singapore-based entities in order to get around the restrictions. The Chinese authorities have set out three categories – banned, restricted and encouraged – outlawing investments in gambling and sex industries, while encouraging companies to support the nation’s ambitious “Belt and Road” initiative, the State Council, China’s cabinet, said yesterday.
Unveiled in 2013, the Belt and Road project aims to boost trade and investment along two routes – one along the ancient Silk Road, connecting China by land and sea through central Asia and the Middle East to Europe, and the second linking it to south-east Asia and Africa.
“Profound changes are taking place in international and domestic situations, and Chinese enterprises face not just relatively good opportunities but also various risks and challenges in overseas investments,” the State Council said.
In a separate statement, the National Development and Reform Commission (NDRC), the state economic planning body, hit out at “irrational” overseas investment in some sectors.
However, it said it would encourage investment that would enhance China’s technical standards, research and development, oil and mining exploration, agriculture and fishing.
The NDRC also cited unspecified security risks for Chinese companies investing abroad.
China has been keen to curb rapid outflows of capital, which could damage the value of its currency, as well as reducing its leverage in financial markets, in order to limit risks ahead of a leadership transition later this year.
Overseas deals by Chinese companies hit a record $170bn (£132bn) in 2016, prompting the Chinese government to scrutinise some companies.
In June, authorities in Beijing began gathering financial intelligence on bigspending conglomerates, sparking fears of a cap on foreign purchases. The China Banking Regulatory Commission (CBRC) requested information on exposure to Dalian Wanda, which owns Odeon Cinemas and the yacht builder Sunseeker, and Fosun, which last year acquired Wolverhampton Wanderers, among others. At the time, the CBRC said it was interested in “systematic risks” to the financial system.