China property

Decline in China’s outbound property investment to hit prices from Hong Kong to London, says Morgan Stanley

Morgan Stanley expects Chinese property ODI to fall 84pc to US$1.7bn for the full year

PUBLISHED : Thursday, 03 August, 2017, 2:37pm
UPDATED : Thursday, 03 August, 2017, 9:10pm

Tighter capital controls imposed by Beijing are slashing China’s outbound property investment, affecting property prices from London to Hong Kong, Morgan Stanley said in a recent report.

The report said outbound property investment by mainland Chinese firms was already down 82 per cent from a year ago, and is expected to plummet 84 per cent to US$1.7 billion for the whole 2017, and down another 15 per cent to US$1.4 billion next year. That trend will create headwinds for prices in Hong Kong, the US, Britain and Australia over the medium term.

“Property developers are now struggling to transfer capital offshore and regulators are tightening offshore financing,” Morgan Stanley analysts wrote in the report.

Late last year, policymakers spoke out against “irrational” overseas investment in sectors such as real estate, hotels, cinema, media and sports club businesses, which are perceived as a means of moving wealth offshore. These sectors are on Beijing’s so-called “negative list”, which are considered no-go areas for Chinese investors.

Over the past month, pressure has intensified, with the China Banking Regulatory Commission reportedly cutting off funding for Wanda Group’s overseas deals, sending a chill through China’s business community. On July 20, the government urged the business community to allocate financial resources to the Belt and Road initiative instead of outbound activities that “blindly chase after profit”.

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Morgan Stanley said overseas property investment is the largest and fastest growing sector on the negative list, accounting for 6.3 per cent of China’s outbound direct investment (ODI) in 2016, larger than the combined share of the remaining four sectors on the negative list.

Analysts said property ODI was little affected in the second half of 2016 when most Chinese companies had offshore subsidiaries and funding channels that were beyond the scrutiny of the Chinese government. But with ever tighter regulation, the situation is changing as offshore Chinese banks are required to curb loans to these subsidiaries, and there are higher penalties for parent companies not reporting deals conducted by offshore subsidiaries.

Chinese property investors still getting overseas deals done despite tighter capital controls

Illustrating the increasing difficulty of getting offshore financing, Real Capital Analytics, a US-based private data provider tracking global property deals by both onshore and offshore China investors, observed thatthe number of pending deals has surged in the first-half. These are deals where a purchase agreement has been made but the buyer has not yet paid the money.

Morgan Stanley said the slump would hit major overseas destinations for Chinese commercial property and development investments, especially those in Hong Kong, the US, Britain and Australia. The office property sector is the most exposed, with Manhattan in New York City, central London and Hong Kong “markets of focus”, the report said.

China’s outbound real estate investment to fall on forex curbs

Not all are convinced. Elysia Tse, head of Asia Pacific research and strategy for LaSalle Investment Management, said despite the rapid rise in ODI the market share of Chinese capital is still small in the global context – accounting for only about 4 per cenet of global transactions in 2016. Additionally, the Chinese government is not shutting down all overseas investment.

“Other sources of capital are likely to take the place of the Chinese mega-buyers, as long as the world remains awash in liquidity,” Tse said.

But Morgan Stanley said that although Chinese capital was small in terms of the global market, it had a disproportionately high impact in some markets. For example, mainland Chinese companies have bought 80 per cent of Hong Kong residential sites sold via public land tender in 2017 to date and have accounted for half of Hong Kong office sales transactions since 2012.

Chinese capital accounted for a 30 per cent share of Manhattan’s transaction volumes in 2016 and a quarter of all central London commercial property acquisitions in 2016.