China’s controls on capital outflow are putting a chill on some global commercial real-estate markets.
Since late 2016, policy makers in Beijing have been tightening restrictions on overseas investments and scrutinizing some of the country’s most ambitious deal makers, voicing concerns that deals in certain sectors were disguises for capital flight into havens.
In August, China’s powerful State Council announced that property investments abroad were “restricted,” along with deals in hotels, movie studios and sports teams. The directive called for a move away from “irrational” projects, widely seen by real-estate analysts and brokers as a criticism of the large foreign real-estate investments made by Chinese firms in recent years. At the recent Communist Party congress, where President Xi Jinping solidified his control, officials reiterated concerns about systemic risks stemming from ill-considered purchases abroad.
Outbound capital from China into foreign properties and development sites reached a record $36.8 billion in 2016, according to data firm Real Capital Analytics. Volume for the first three quarters of this year was $19.7 billion. In the U.S. real-estate market, capital from China slowed to $5.1 billion in the same nine-month period, down from a total of $14.8 billion in 2016, said Real Capital. These are deals that are $10 million and greater.
The drop in foreign investments comes as commercial real-estate markets in the U.S. and Europe show signs of slowing growth and years of rising prices. Sales volume is down in most major cities.
Real-estate executives and lawyers in the U.S. said there could be premature sales of Chinese-led American projects.
Greenland Holdings Group, a China state-owned property developer with projects in Los Angeles, New York and San Francisco, is considering selling part of its 42-acre waterfront development site in south San Francisco to Kilroy Realty Corp., according to people familiar with the matter. Greenland, alongside three other equity partners, purchased the project in August 2016.
Greenland USA said its strategy has long included a willingness to work with local developers. “China’s capital controls will have a certain impact on immature companies, but it doesn’t mean it will restrict or affect the development path of companies that have international perspective and core competencies,” it said in a statement.
Investors that follow strict mandates approved by the Chinese government, such as the sovereign-wealth fund Chinese Investment Corp., continue to be active in overseas real-estate markets. CIC bought a warehouse portfolio in Europe from Blackstone Group LP for EUR12.25 billion ($14 billion) in June. And property investments in line with Beijing’s foreign policy initiatives, such as the “One Belt One Road” program to revive the ancient Silk Road trading routes, have been given the green light.
Real-estate companies based in Hong Kong also appear to be less affected by the capital controls. Companies based in Hong Kong this year bought two high-profile London buildings, nicknamed the “Cheesegrater” and “Walkie Talkie.”
But the government policies have pushed some of the country’s most highflying conglomerates, like Dalian Wanda Group and Anbang Insurance Group, to throttle back.
“One thing that’s concerned the regulators, these rich entrepreneurs were leveraged to the hilt, using investors’ money, using [People’s Republic of China] banks’ money, and leaving all the risk to the PRC investors and PRC banks,” said Howard Zhang, a Beijing-based partner at law firm Davis Polk & Wardwell LLP. “There’s a strong sentiment among the regulators, as well as among the general rank-and-file who resent how rich these people have become.”
It now takes longer to get cross-border deals approved. Chinese government approval of such transactions usually takes at least three to six months but now may be delayed, Mr. Zhang said.
Hotel investments also have dropped off. Chinese investors remain wary of drawing the kind of government scrutiny that befell Wu Xiaohui, chairman of Anbang, who made headlines after scooping up Manhattan’s Waldorf Astoria hotel in 2014 for $1.95 billion. Mr. Wu was detained in June by authorities who are investigating corruption. His whereabouts is unknown.
To assuage concerns from foreign contractors and partners, some Chinese companies have made public statements about their offshore funds or their ability to raise money through U.S. dollar bond issuances.
But increasingly, firms are toeing to the party line. “Investors with capital already outside of China will continue to show strong interests allocating capital to U.S. real estate…though those in this category, even ostensively private companies, are progressively less free to ignore what goes on in China,” said Andrew Levy, senior counsel at law firm DLA Piper.
Companies have taken notice of Beijing’s list of “encouraged” overseas investments, and investments in logistics, senior care projects, health care and data centers have been surging.
PGC Capital, a Shanghai-based boutique investment bank, has invested around GBP500 million ($658 million) in U.K. property since 2015. The firm is currently redeveloping a former Birmingham car dealership into apartments. It is also eyeing a land parcel purchase in Warsaw to potentially build a massive complex of 3,000 housing units and high-end hotels to develop a new town.
Denise Li, founder and chief executive of PGC Capital, says that because the company’s planned development projects include new infrastructure construction, they support Beijing’s “One Belt One Road” program to build Chinese-backed ports, railways and pipelines in dozens of countries from Europe and Africa to China. PGC Capital also says it is helping several Chinese state-owned companies find overseas investments for the same purpose.
“It very much follows the guiding opinions of the ‘One Belt One Road’ initiative,” Ms. Li said.
Source: Dow Jones