Home > Overseas Investment News > Chinese property groups look abroad as local market turns frothy
Chinese property groups look abroad as local market turns frothy
Brief:With Hilton’s $1.95bn sale of the landmark Waldorf Astoria New York Hotel to an obscure Chinese insurance company it is tempting to ask whether history is repeating itself.Outbound property investment from mainland China has soared from less than $70m in 2008 to $16bn in 2013, according to research from real estate services company Colliers International.
With Hilton’s $1.95bn sale of the landmark Waldorf Astoria New York Hotel to an obscure Chinese insurance company it is tempting to ask whether history is repeating itself.

Outbound property investment from mainland China has soared from less than $70m in 2008 to $16bn in 2013, according to research from real estate services company Colliers International.

Chinese investors are now the biggest foreign buyers of property in New York City, London and Australia.

A key incentive for Chinese buyers is high and frothy prices at home and a worsening slump in domestic markets across the country – also an important motivator for Japanese investors during their shortlived offshore buying spree.
 
Some analysts believe Chinese global property purchases are likely to be around a lot longer and that the trend has only begun.

One major difference is size, not just of the domestic Chinese market but also of its main participants, who are all looking beyond the country’s borders as they seek to renovate their business models for a future beyond shovelling concrete.

Of the top 10 listed global developers by revenue, seven of them are now mainland Chinese, according to S&P Capital IQ. China Vanke, the country’s largest residential builder, had sales last year of $20.4bn, almost three times higher than Lennar, the biggest player in the US.

For now, the sector remains almost entirely reliant on selling physical property. At Wanda, China’s top commercial developer, unit sales still account for almost 90 per cent of revenue.

While that model worked well during the boom, it is coming under increasing stress as the market turns. Nationwide property sales in China this year have dropped more than 10 per cent compared with 2013, while prices in 68 of the 70 most-watched cities fell in August, the highest number on record.

“After 15 years of vigorous growth, the Chinese property market is approaching a point of maturity. The Chinese economy is looking to consolidate – that pushes the developers to look for new opportunities,” says Albert Lau, head of China research at Savills.

Chinese developers now have projects under way in cities stretching across four continents, from Sydney to San Francisco via south London.
 
Shanghai-based Greenland has announced the biggest deal so far, investing $5bn in the Atlantic Yards redevelopment in Brooklyn.

Chinese insurance companies such as Anbang, buyer of the Waldorf Astoria Hotel, were only given permission to buy offshore property in late 2012.
So far there have been few high-profile deals, including Ping An Insurance’s purchase of London’s Lloyd’s Building, and China Life’s acquisition of a Canary Wharf office tower.

But many more deals are expected to come as the Chinese insurance companies look to diversify away from the shaky domestic market.

They will join individual buyers who are already piling in to major western markets in a huge way.

In London, Chinese were the top foreign buyers last year, according to property consultancy Knight Frank, accounting for 6 per cent of all purchases of more than £1m. Russian buyers accounted for 5.2 per cent.

Mainland Chinese were also the top foreign investors in Australian property last year, accounting for 11.4 per cent of total foreign investment in real estate with $5.9bn in purchases, according to Australia’s Foreign Investment Review Board.

The decision by major Chinese developers to venture abroad is the clearest sign of the waning enthusiasm for China’s home market.

Yet in going overseas, developers are still hoping to target the same set of buyers as they look to capitalise on the rising trend of Chinese people moving overseas for work or study.

In spite of their inexperience abroad, Chinese developers have some advantages. As the largest builders in the world, they bring economies of scale when it comes to materials and equipment, while their access to Chinese funding – both through commercial and policy banks – often provides attractive financing.

Aside from finding new markets, mainland companies want to learn from the most experienced western players. Vanke is working on a project in San Francisco in partnership with Tishman Speyer, one of the best-known US property companies. Such tie-ups offer Chinese developers a chance to learn new skills, such as property management.

The ultimate goal is to move away from a near total reliance on property sales towards a sustainable income-based and asset-light model. Such a switch requires willing investors, which might be found among China’s fast-growing insurance and pension funds.

However, while the aims are clear, the paths to achieving them remain fraught with risk, say analysts. Any such overhaul requires time, money and the willingness to take risks – all things that developers may find in short supply if China’s housing market downturn worsens.

Alvin Wong, analyst at Barclays, cautions that the business of providing services and managing properties is simply too low margin to replace the cash flow that comes from the traditional build and sell model.

“In the next two to three years, developers will still need to focus on sales, lowering debt levels and clearing inventory,” he says. “It’s very difficult to make a big change.”
Relevant Information