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Has flood of Chinese money really dried up?

There had been rumours for some time about the Chinese government wanting to slow the flood of money out of the country; a few weeks ago Beijing gave its clearest diktat on the issue yet.
The government outlined its plans to curb “irrational” spending outside of its borders, with a particular focus on property, hotels, entertainment, sports clubs and the film industry. Instead, it wants money funnelled into the nation’s ambitious “Belt and Road” initiative, a trade project linking China to the rest of the world.
Graphic: The routes of China's One Belt, One Road initiative
The announcement from China’s cabinet issued on Aug 18 was seen by some as the beginning of the end of a period of prolific spending by some of China’s largest companies.
This activity has been felt across the board, but particularly in the real estate sector: Chinese-linked firms have bought both the “Cheesegrater” skyscraper in the City of London for ?1bn and the nearby “Walkie Talkie” for ?1.3bn, as well as investing heavily in other properties in the Square Mile, this year.
There have also recently been two major takeovers in the property sector involving Chinese investors. Last month it was reported that Global Logistic Properties was being acquired by a Chinese consortium, and in June Blackstone sold its European logistics arm Logicor to China Investment Corporation for €12.3bn (?11.2bn).
But, a week after the Chinese government’s announcement, Dalian Wanda, the property arm of the giant Wanda Group, pulled out of a deal to buy a plot of land in London’s Nine Elms, instead transferring the purchase to Hong Kong-based R&F Properties.
Has flood of Chinese money really dried up?

Wang Jianlin, chairman of the Wanda Group

Credit:
Jason Lee / Reuters
It had been widely reported that the Chinese government had blocked banks from funding some of Wanda’s foreign investment projects, amid fears that it was focused too much on overseas projects. Mike Prew, an analyst at Jefferies who is well-known for his bearish position on the real estate market, called the collapse of the Nine Elms deal “the first casualty of the Chinese capital tide turning”.
He suggested that stepping away from a deal in which contracts had already been exchanged hinted at the severity and immediacy of the Chinese authorities’ measures.
It was reported last week that Wang Jianlin, Dalian Wanda’s billionaire chairman, and his family were stopped at an airport near Beijing as they were about to depart for London, although the company denied the claims.
Prew also pointed out that Hong Kong investor Sammy Lee, who has been increasing his stake in property company and Chinatown owner Shaftesbury, might now struggle to move forward with a rumoured takeover bid for the firm if the sentiment towards Chinese money being invested in London property has turned.
It does appear as if this could mark the peak of Chinese capital flows into London prime assetsTim Leckie, JP Morgan
“It does appear as if this could mark the peak of Chinese capital flows into London prime assets,” Tim Leckie, analyst at JP Morgan, added in agreement.
But, in the longer term, will the changes to the way China’s money can be spent materially alter the UK’s commercial property industry? Or are there simply a slew of other buyers waiting in the wings, who will step forward even as China retrenches?
The four names that have been repeatedly cited as causing the biggest headaches for the Chinese government in relation to spending on UK real estate are Wanda, Anbang Insurance Group, Fosun International and HNA Group. All four have come under increasing scrutiny this year.
Last year, Fosun bought the Thomas More Square office complex in London, and also invested in UK property developer Resolution. Its chief executive has recently praised the capital controls, and denies that the Chinese authorities are investigating the company.
HNA owns at least two major office buildings in Canary Wharf and London’s Olympia Exhibition Centre. Anbang, meanwhile, has been forced to stop buying real estate while its chairman is investigated as part of a corruption probe. Anbang’s ownership is shrouded in mystery, although it is widely regarded as a state-run entity. Chinese interest in overseas property has been slowing since the start of the year.
Has flood of Chinese money really dried up?

Credit:
GREG BAKER
Chinese investors pulled 84pc of overseas property deals globally in the first half of 2017, after the government began officially frowning on a “negative list” of foreign investments that were attracting Chinese cash, according to Morgan Stanley.
But research by real estate consultancy CBRE shows that while deals done by state-owned companies fell this year, deals among private investors and sovereign wealth funds actually increased. The report suggests that the new restrictions would encourage Chinese investors to take new approaches for overseas real estate investments, including using “offshore financial institutions and Hong Kong-based entities”. Hong Kong deals are not subject to the same strict rules as deals originating in China.
They might also look to invest in belt-and-road countries, take positions as limited partners in real estate funds, focus on smaller investments and entering into joint ventures, CBRE explains.
Henry Chin, head of research for the Asia-Pacific region at CBRE, acknowledged that “outbound investment will continue but the pace of capital deployment is likely to slow as investors adjust to the new rules and fine tune their investment strategies”. However, he brushed off concerns that the flow of investment will come to a stop, particularly in Europe.
“Chinese investors have indicated that they will continue to look at major cities in Europe, including London, Paris and Frankfurt, for real estate opportunities,” he said. “Europe remains attractive and there are some strong economic indicators that will continue to drive the real estate recovery in Europe, the Middle East and Africa.”
Chinese investors have indicated that they will continue to look at major cities in Europe including London, Paris and Frankfurt for real estate opportunitiesHenry Chin, CBRE
Closer to home, James Beckham, one of the agents who oversaw the sales of both the Walkie Talkie and the Cheesegrater, in his role as head of central London investment at Cushman & Wakefield, said the new rules will not make as much difference as some people fear.
He pointed out that Hong Kong investors made up 64pc of the Asian property investment market in central London in the first half of 2017, compared to just 25pc from China.
However, Chinese investment has boomed in recent years: back in 2006, it accounted for just 1pc of the market. Chinese investors also became the largest group of foreign investors in US commercial real estate last year. But even if Chinese money is no longer flooding into London, there are other parts of the world that are still vying for a slice of the capital’s property market, he insisted.
From the Walkie Talkie to the Cheesegrater: The UK's five biggest property deals
“Will the Chinese slowing of investment have an impact on turnover?” he asked, adding: “I don’t think so.” He pointed to buyers from Singapore and South Korea, who he thinks will continue to be active in buying larger properties.
Chris Brett, who leads CBRE’s international capital markets team, insisted that demand from international investors for large prime assets shows no signs of slowing in the immediate future.
“London remains a global financial city and is one of the most important real estate markets in the world, something that short-term political uncertainty cannot undermine. It is an obvious place for investors to look when diversifying their portfolios,” he said.
The times of massive Chinese investment into UK real estate may be coming to an end but, with demand from across Asia and the world still strong and investors still keen to snap up trophy assets, things might be about to get interesting.
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