Chinese and Hong Kong capital target European real estate

By Petra Blazkova

New capital sources have emerged. Cross-border capital from China still seems to be flowing, Long-established Chinese mainland investors have maintained the tide directly or along alternative routes, with Hong Kong’s financial markets playing a role. And the fastest-growing net recipient has been European real estate, where inflows from China and Hong Kong combined raised volumes 45 percent in the first half of this year against a year ago.  

Chinese and Hong Kong investments into Europe have now expanded 67 percent per year on average since the global financial crisis, shifting $44.1 billion into Europe over that time. This rapid expansion is being mirrored in other world property markets.  

FOREIGN PROPERTY INVESTMENTS STILL ATTRACTIVE

For Chinese and Hong Kong investors the attraction of foreign property investment has not evaporated. They want a safe home for their capital as a hedge against domestic risk and are attracted to better returns compared to Asia’s low-yields. Europe’s liquid markets also offers strategic diversification.

Hong Kong investors have targeted European property since the early 2000s’, however, first big deal took place in January 2011 when private investor Chinese Estates bought London’s River Court office building. Similarly, China Investment Corporation, the country’s sovereign wealth fund, emerged as the pioneer mainland investor, partially acquiring its first property - the Walkie Talkie building in London - in late 2010.  

Then in 2012 a strategic change hit the trend. The Chinese government widened insurance companies’ investment options and increased their international real estate acquisition threshold to a 15 percent share. Within two years, this ceiling rose to 30 percent and the hunt for European real estate intensified. Ping An Insurance and Anbang Insurance shone bright, with Ping An taking partial shares on two London offices: The Lloyds Building and Tower Place, and Anbang Insurance buying eight commercial assets in the Netherlands. But, the largest investment by a Chinese insurance company in Europe landed in June 2014 when Canary Wharf Tower went to China Life for $1.3 billion in joint venture with Qatar Holding.

Others joined the run into Europe, some making just one or two transactions to absorb the available stock, among them Hong Kong-listed CC Land and China Resources Land, joined by Shanghai-listed Fosun International.

LONDON TOPS THE LIST OF EUROPEAN INVESTMENT DESTINATIONS

London has dominated as the destination of choice and it remains Europe’s biggest market despite a sharp investment swoon since the Brexit vote to leave the European Union. Some commentators suggest the market is merely in a hiatus but central London volume has halved year-on-year in the 12 months since the decision and property prices are falling. Smaller players have sustained purchasing and new ones have arrived but the Chinese and Hong Kong investors stand out, enlarging their market share by buying from REITs, listed developers and global institutions. In London alone, they spent $5.9 billion in the last 12 months on deals such as the Cheesegrater, known as the Leadernhall Building, or Walkie Talkie at 20 Fenchurch Street.  

Next to London, Germany is Europe’s brightest performer, with real estate demand growing to overtake the U.K. In 2016,  Germany was Europe’s largest real estate transactions market when investment reached $65.4 billion. Cross-border activity grew to a 47 percent share and investor confidence may increase because Germany should benefit from a European safe haven perception shift from the U.K., underlined when Morgan Stanley bought 16,000 residential units on behalf of China Investment Corporation (CIC) at $1.2 billion in October of 2016. This exceptionally large portfolio transaction in Germany also helped drive volumes higher.

A deal count shows Chinese and Hong Kong investments in the Netherlands and the Central Eastern Europe have also accelerated, with the Czech Republic alone attracting close to half a billion US dollars in the last three years. This trend underlines the uncertainty impact of the Brexit vote and a growing Chinese familiarity with markets across Europe.

THE FUTURE OF CHINESE OUTBOUND CAPITAL

Chinese and Hong Kong investors have often accepted development risk when entering new markets but a sizable pool of income-producing assets in all property types has mitigated the need to buy land and build in Europe, so in the sectors offices and apartments have outperformed.

It is hard to believe Chinese mainland and Hong Kong capital outflows into global real estate might halt, despite today’s headwinds. Investment still will flow abroad to diversify a deepening pool of domestic wealth and European real estate markets will be a draw. But perhaps more intense regulation could damage investment commitments and extend project timelines year-by-year, especially if debt markets also turn unfavorable.  

Investors face a mature and fully priced European real estate market and inward transaction yields movement underline how pricing in Europe’s main markets has risen to become historically expensive and yields could still compress. For instance, you pay 4 percent yield in London, 4.5 percent in Paris and 5 percent in Frankfurt in Q2 2017. The only move against the trend has been in the largest six U.K. cities and Amsterdam.  

Now, investors face the problem of how to balance risk and reward in such a competitive environment.

(Editor’s Note: May vary slightly as published.)