Concrete Analysis

Firms from China to join individuals in new phase of outbound property investment

Institutions will take over from individuals, with the focus on offices, shopping malls and construction projects around the globe

PUBLISHED : Tuesday, 11 March, 2014, 2:23pm
UPDATED : Monday, 31 March, 2014, 5:20pm

Outbound investment from the mainland to markets around the world tripled year on year to about US$8.3 billion in 2013, a recent study by property services company CBRE and research firm Real Capital Analytics found.

Stories of upwardly mobile Chinese scouring markets around the globe and purchasing high-end residences in places like London, New York and Vancouver are now old news.

Last year, investment in real estate entered a new phase, characterised by cross-border institutional investment in commercial real estate. In the future, cross-border investment in real estate will no longer be limited to individuals dabbling in residential real estate. In the new phase, entrepreneurial and institutional investors will increasingly target office buildings, shopping malls, hotels and construction projects.

There are several key trends to watch in the new phase.

Sovereign wealth funds are key participants around the world in cross-border real estate investment. To date, the China Investment Corporation (CIC) has been the mainland's most active sovereign fund cross-border real estate investor.

In the new phase of outbound real estate investment, China's State Administration of Foreign Exchange (SAFE) and the National Social Security Fund (NSSF) will likely join the CIC as active players and may bring to the table substantial capital to deploy into global real estate and real estate funds.

The mainland's policy response to an overheated domestic real estate market has been a mix of restrictive measures designed to cool the market and to gently deflate speculative bubbles.

Developers, finding it difficult to source domestic deals and get approvals, will increasingly look abroad for opportunities.

The commercial real estate market is still relatively new in comparison with developed North American and European markets. Some forward-looking real estate developers will target deals in developed markets now in order to learn how real estate projects are constructed, operated and marketed in developed markets in preparation for the future phases of the mainland's domestic market. One key emerging institutional player is likely to be insurance companies. Reforms in the regulatory framework governing where and how insurance companies can invest have opened the door to outbound investment in real estate assets and in real estate private equity funds.

Amid domestic reforms, these companies are now actively searching for income-producing, stabilised real estate assets around the globe.

The relatively young but rapidly maturing private equity industry is also expected to emerge as a participant. China-based fund sponsors and managers are expected to devise innovative products to channel funds into real estate.

Joel Rothstein is a partner with Paul Hastings, an international law firm