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China’s Mixed Signals for Outbound Investment

Chinese outbound capital flows reached c.US$25bn in 2015, a 46 percent increase compared to 2014. Will this momentum continue into 2016?

China’s commercial real estate markets ended 2015 with a flurry as investment volumes finished the year at US$28bn, up 47 percent from 2014, driven by a mixture of domestic players and foreign private equity funds seeking a safe haven in real estate amidst wider global economic uncertainty.

But after a year of stock market volatility the Asian powerhouse is sending mixed messages to investors; GDP growth in 2015 was the slowest in 25 years while the Shanghai Composite Index has lost 15 percent of its value year-to-date, and the RMB/USD exchange rate has weakened by nearly 1.5 percent to a five-year low.

However, China’s stock market tells us little about China’s real economy according to Joe Zhou, Head of Research at JLL China, who says that recent exchange sales by China’s central bank show a commitment to keep the currency stable, rather than manage a desired depreciation to drive exports.

“Recent economic data suggests that the slide in China’s growth may have stopped: the consensus forecast GDP growth is 6.5 percent for 2016, with expected policy stimulus to help support growth,” he says.

“A two-speed economy will persist with weak growth in manufacturing & construction, but healthy growth in services and we are unlikely to see the implementation of a large stimulus package like in previous years.”

“We’re likely to see an ‘L-shaped’ path in the short term, supply-side reform on labour, capital markets, tax regime, regulatory barriers and administration will generate new growth engines for China’s long-term economic stability and sustainability.

So what does 2016 look like for China and what’s the impact for global real estate markets?

Just returned from a tour of 15 cross-border investors and developers in China, Darren Xia, Head of JLL’s International Capital Group in China, and Eric Pang who heads up the firm’s China desk in the U.K, share their insights on where, how, and why Chinese investors are likely to park their capital this year.

Chinese outbound capital flows reached c.US$25bn in 2015, a 46 percent increase compared to 2014. Will this momentum continue into 2016?

Darren: Yes, we continue to see interest from the established market players in investing into the global gateway cities, especially given the current domestic situation.

Will the ongoing volatility in China’s stock market, currency and the wider global economy affect outbound capital flows?

Eric: While the short-term foreign exchange policy may give mixed signals, outbound investments have become a long term strategy for quite a number of Chinese institutional investors and property companies. China Life’s acquisition of 99 Bishopsgate in London last October is a good example of this as the Chinese insurance companies continue to re-balance their real estate portfolio to include more allocation to global cities in order to diversify the volatility risks in the domestic market.

The U.S. is the top destination for Chinese capital, globally, seeing US$6bn invested in 2015. Will its appeal endure into 2016?

Darren: Being the largest real estate market in the world, the U.S. is particularly appealing to Chinese investors looking for market liquidity and a variety of opportunities across all asset classes. The Boston project Joint Venture between China Life and Ping An Trust is a good example of this.

When looking at Europe, London is the preferred destination for new Chinese investors & developers? Why is it so appealing?

Eric: Amongst the gateway city markets, London is the absolute standout, absorbing more than GBP2 billion Chinese capital in the first three quarters of 2015. The city will continue to be a focus for Chinese investors given its legal framework, market transparency, tax advantages, stability and security of long income stream, as well as the recent political support following President Xi’s state visit last year. The positive dynamic between the UK and China at a national level will further enhance the bilateral investment activities in the next cycle. JLL has facilitated the state-owned developer, Poly Land, and the multi-business conglomerate, HNA, to enter the London market with their respective acquisitions of 5 Fleet Place and 30 South Colonnade – strong evidence of the sentiment of the new entrants.

Outside the UK, which other markets in Europe are attracting Chinese interest?

Eric: Some Chinese investors with presence in London are now looking to diversify into other European markets and the office and hotel sectors of continental gateway cities like Paris and Frankfurt are top on their list.

Coming in at second place, Australia is also popular with Chinese investors with $4.5bn invested last year – what are the pull factors towards this market?

Darren: Over the past 20 years Australia has seen a large amount of Chinese overseas students and skilled migrants in addition to the country remaining a favorite travel destination for Chinese tourists. As a mature market, Australia’s high level of transparency coupled with its currency depreciation and strong yields relative to other markets have drawn Chinese investors for the past couple of years. We are also seeing a large number of Chinese invest into the Australian residential market as they look to buy real estate for family studying at Australian universities.

Looking ahead, how should we expect to see the evolution of outbound strategy from Chinese investors?

Eric: Some Chinese investors, especially the insurance groups, have become more sophisticated in their outbound practice and strategies with many looking towards Joint Venture and club deals as well as investing into the new sectors. For example, Ping An together with Blumberg, has recently acquired a warehouse portfolio across the U.S. Looking ahead, we believe there will be a shift in towards the student accommodation and real estate funds product area, in addition to other potential new markets.

This article is from The Investor, a web portal and a newsletter by JLL, featuring the latest news, insights, and investment opportunities from the global commercial real estate market.