China's Outbound Boom: The Rise Of Chinese Investment In Global Real Estate

CHINA’S OUTBOUND BOOM THE RISE OF CHINESE INVESTMENT IN GLOBAL REAL ESTATE A Cushman & Wakefield Research Publication

OCTOBER 2014

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CHINA’S OUTBOUND BOOM

EXECUTIVE SUMMARY

CHINESE CASH MEETS FOREIGN PROPERTIES • In recent years, China has emerged as a major global exporter of capital. A striking example of this trend can be seen in the rapid growth of Chinese outbound real estate investment.

From office buildings in Manhattan to shopping malls in Singapore, Chinese cash is surging into foreign properties, driven by economic forces and evolving business strategies in China and abroad.

• Data1 indicate that Chinese outbound real estate investment reached a total of about US$33.7 billion in the period from 2008 to June 2014, growing more than 200-fold during that time. Recent huge and highly-publicized real estate deals around the world highlight the growing presence of Chinese investors in overseas property markets.

• Domestic restrictions and cooling growth in the Chinese real estate sector are pushing many investors to diversify to markets in developed countries, where signs of economic recovery and the prospect of asset appreciation promise attractive returns. Encouraging policies in China and abroad, the gradual strengthening of the renminbi, and the desire of many Chinese firms to internationalize are further fueling these capital outflows.

• A variety of investors – including large private developers, state-owned banks and insurance firms, sovereign wealth funds and high-net-worth individuals – are jumping into foreign property markets. Cushman & Wakefield analysis shows that while state-owned enterprises and private firms each contributed around 50% of the total value of outbound real estate investment from 2008 to June 2014, private enterprises and individual investors accounted for a larger share of the number of deals.

• Chinese investors prefer developed and mature markets in Asia, North America and Europe. The U.S. is the top destination, followed by Britain, Hong Kong, Singapore, Australia, Malaysia, Japan and Brazil. China’s investments in U.S. property are concentrated in so-called “gateway cities” in the eastern and western coastal areas as well as the Great Lakes region. However, investors are increasingly tending to diversify their asset choices and spread their investments across the country.

• Britain is the first choice for Chinese real estate investors in Europe, with London alone taking 62.7% of the European total. In the aftermath of the global financial crisis, EU leaders are looking abroad for foreign direct investment to create job opportunities and stimulate economic recovery. Over the past couple of years, the European real estate sector has emerged as a popular target for Chinese investors.

• Asian destinations are also seeing a significant influx of Chinese funds. From 2008 to the first half of 2014, Hong Kong attracted the greatest percentage of mainland Chinese investment among all Asian regions, followed by Singapore and Malaysia. Southeast Asia is a favorite location due to its proximity to China and the strong presence of ethnic Chinese communities. In Singapore, Chinese investors prefer to invest in offices, whereas in Malaysia, land development is the preferred vehicle. Many Chinese developers view the Iskandar Malaysia development zone as having huge potential.

• The two most popular investment models for Chinese buyers are greenfield investment and mergers and acquisitions (M&A).

Chinese developers often forge partnerships with international firms and institutions to reduce investment risks and gain access to a wider range of financing channels.

• Investors face an array of challenges in the form of government controls on capital flows; talent shortages; differences in corporate and management cultures; and unfamiliarity with foreign legal and regulatory environments, including sometimes-daunting tax laws.

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From Real Capital Analytics (RCA) CUSHMAN & WAKEFIELD

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INTRODUCTION

RISE OF AN ODI POWER China, the world’s second-largest economy, is now the world’s third-largest source of outbound direct investment (ODI), behind only the U.S. (in first place) and Japan. From 2006 to 2013, annual outbound investment flows grew from US$21.2 billion to US$107.8 billion, an increase of 5 times.

China’s ODI is growing so rapidly that it’s catching up to inbound investment flows, or foreign direct investment (FDI); a Chinese Ministry of Commerce spokesman remarked in January 2014 that ODI may surpass FDI within a few years. The Ministry of Commerce also predicted that China’s total outbound investment may reach US$150 billion in 2015, hitting an annual growth rate of approximately 17% during the 12th Five-Year Plan period of 2011-2015.

Historical trends lend some plausibility to these claims. In 2006, the gap between China’s ODI and FDI stood at around US$46 billion; by the end of 2013, this had shrunk to nearly US$11 billion.

China’s climbing ODI spans across a vast range of countries and sectors. The nature of this investment is changing; historically, the great majority of outbound capital targeted natural resources and infrastructure in developing countries, but the years since 2008-2009 have seen sharply rising Chinese investment in goods and services in developed economies.

The rapid growth of Chinese outbound real estate investment provides a striking example of this trend. With huge investments in office, retail and residential properties in major cities around the world, China has recently emerged as a powerful force in global real estate markets. Data1 indicate that Chinese outbound investment in commercial property reached a total of about US$33.7 billion in the period from 2008 to June 2014, with the first half of 2014 seeing around US$5.1 billion of new spending, nearly as high as the total for 2012. In the period from 2008 to 2013, such investment grew more than 200-fold.

FIGURE 1: CHINA’S ODI CATCHING UP TO FDI

Figure 1: China's ODI catching up to FDI

Total ODI & FDI (US$ billion)

140 120

US$10.8 billion

100 80 60 US$46 billion

40 20

Forecast

0 2006

2007

Source: Ministry of Commerce, NBS 1

From RCA

4

2008

2009 Total ODI

2010

2011 Total FDI

2012

2013

A string of recent high-profile deals has drawn attention to the growing presence of Chinese investors in global property markets. State-owned, Shanghai-based developer Greenland Holding Group has bought into major projects in the U.S., Britain, Australia, Malaysia and other countries over the past year, notably including huge investments in an apartment redevelopment in Sydney (Sydney Greenland Center, March 2013), a mixed-use project in downtown L.A. (Metropolis, July 2013), a residential development in Toronto (announced March 2014), and a mixed-use development in Brooklyn (Atlantic Yards, later renamed Pacific Park, July 2014). Competitors China Vanke, Dalian Wanda, Fosun International, Xinyuan Real Estate and Country Garden have also poured money into overseas assets, from 1 Chase Manhattan Plaza in New York (Fosun, October 2013) to a luxury hotel in London (Dalian Wanda, June 2013), to name only two examples.

Cushman & Wakefield introduced Oceanwide Real Estate Group, a Beijingbased developer, to the hotel, residential and retail project Fig Central in Los Angeles, which Oceanwide purchased for US$175 million in December 2013. Big institutions and wealthy individuals are buying prestige properties at record prices, too, such as London’s Chiswick Park (China Investment Corporation, January 2014) and New York’s General Motors Building (Zhang Xin, June 2013).

CHINA’S OUTBOUND BOOM

WHY ARE CHINESE REAL ESTATE INVESTORS GOING INTERNATIONAL?

appreciate, adding the prospect of currency appreciation to medium- and long-term asset price appreciation. Chinese investors have noticed this potential upward trend and are actively reallocating their asset portfolio to include a higher proportion of fixed assets in North American and European markets.

Cushman & Wakefield see a variety of fundamental forces driving this burgeoning outbound investment in real estate. We break them down into four key areas: macroeconomic trends, industry factors, diversification needs, and policy changes.

The appreciation of China’s currency, the renminbi, in recent years has also boosted the buying power of Chinese investors, driving more ODI into real estate in these Western markets. The renminbi has gained roughly 25% in value against the U.S. dollar since May 2005, when China ended the currency’s fixed peg to the dollar. This long-term appreciation of the currency makes overseas properties cheaper for Chinese buyers, and hence more attractive.

MACROECONOMIC TRENDS: REBOUNDING ECONOMIES, RISING RENMINBI Many Chinese investors sense that the time is ripe to snap up overseas properties. The global financial crisis of 2007-2008 caused a significant devaluation of real estate in developed economies. However, rich countries appear to be recovering from economic hard times, fueling a rally in property prices. Economic data suggest that the U.S. economy, for example, improved in the first half of 2014, with GDP growing 4% in the second quarter.

Cushman & Wakefield believe the U.S. economy has entered a period of sustained above-trend growth that will last for the next two years. GDP growth is forecast at 3.5% in 2015 and 3.4% in 2016. This is expected to lead to faster employment growth and improving fundamentals for all classes of commercial real estate. The result should be continuing increases in asset values driven by rising rents across most markets. The phasing out of quantitative easing by the U.S. Federal Reserve, which will tighten the money supply, is expected to cause the dollar to

INDUSTRY FACTORS: COOLING MARKETS, LIQUIDITY GALORE In recent years, China’s central government has taken action to cool an apparently overheated residential market. An array of policies from tightened bank lending to home purchase restrictions have succeeded in reigning in soaring residential prices.

These controls, combined with slowing GDP expansion in 2014, have led to a slowdown in residential and commercial real estate development. The cumulative year-on-year growth rate of investment in both commercial and residential real estate across China has steadily declined since the end of 2013. Investment growth in residential development slowed from 19.4% to 13.3% in the first seven months of 2014.

For office and non-office commercial property, investment growth fell from 38% and 28%, respectively, at the end of 2013, to 19.3% and 22.3% in July 2014. In general, the industry appears to be entering a consolidation period. For commercial real estate, conditions vary widely across markets in China, depending on local macroeconomic factors and investor sentiment; markets in first-tier cities are quite healthy, while some second- and third-tier markets are struggling. Overall, however, the office sector is cooling, with falling demand, high levels of supply, and vacancies on the rise.

This ongoing market cooling can be regarded as a rational structural readjustment, which may in turn lead to an even healthier real estate market in the long term. However, the slowdown seems to be largely driven by ongoing legal and regulatory restrictions on the market.

These local restrictions, in concert with high property prices, oversupply in the commercial real estate market, and other factors, have created a perception that some overseas real estate markets – especially those showing signs of economic recovery – offer more growth potential than many Chinese cities.

The abundant liquidity of many large developers, investment institutions, and wealthy individual investors is another key factor stimulating the current capital outflow. Decades of breakneck growth, which have transformed China into the world’s second-largest economy, have

FIGURE 2: MONTHLY AVERAGE EXCHANGE RATES 0.25 0.23 0.21 0.19 0.17 0.15 0.13 0.11 0.09 0.07

CNY/USD

CNY/EUR

CNY/GBP

CNY/SGD

7/31/2014

1/31/2014

7/31/2013

1/31/2013

7/31/2012

1/31/2012

7/31/2011

1/31/2011

7/31/2010

1/31/2010

7/31/2009

1/31/2009

7/31/2008

1/31/2008

7/31/2007

1/31/2007

7/31/2006

1/31/2006

7/31/2005

1/31/2005

0.05

CNY/AUD

Source: RCA, Cushman & Wakefield

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generated a staggering amount of wealth.

Forbes magazine found this year that China has 152 billionaires, while the Boston Consulting Group has counted over two million millionaires (as of 2013). These high-net-worth individuals are increasingly looking overseas for places to park their assets. China’s vast accumulation of money has enabled potential investors and investment institutions to build a strong liquidity foundation for their overseas investment expansion.

Perhaps just as important as the burgeoning fortunes of the wealthy has been the explosive rise of the middle class.

For various reasons, much of China’s middle class has traditionally invested in real estate, rather than a diversified portfolio of financial instruments such as stocks and bonds. Over the past decade, as the Chinese middle class became wealthier, its investment strategy remained the same, so ever-larger volumes of capital were invested in property; a survey in 2013 showed that some two-thirds of the nation’s family wealth was tied up in housing. As cooling measures were applied to China’s property market, investment continued to flow into real estate – but for the first time in large volumes overseas.

The big developers began acquiring sites overseas in response to the demand they were seeing from their portfolios of local Chinese investors.

DIVERSIFICATION NEEDS: GOING GLOBAL, SPREADING RISK The accelerating flows of outbound capital also reflect a rational investment strategy.

Having made fortunes in the boom years of Chinese real estate, many investors are now over-reliant on the performance of the Chinese market, with little to hedge against a decline. Chinese investors are seeking to diversify their asset base and ensure steady returns, while protecting themselves against a risky home market.

Cindat Capital Management’s purchase of a 65-story office building in Chicago in March 2014 serves as a case study. Cindat partnered with locally-based Zeller Realty Group to buy the property for US$304 million. Sale prices in Chicago grew at a rate of around 26% year-on-year in the second half of 2013. The target building is

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defined as a mature property with a relatively high occupancy rate of around 90% and a stable rental income. This high-quality asset located in a major recovering economy can be viewed as an excellent choice for Cindat’s global portfolio management strategy.

Moreover, these are early days for Chinese ODI, which is expected to greatly expand as time goes on. Most Chinese investors at present lack experience and expertise in foreign legal environments, business practices, markets, and cultures. Perhaps for this reason, many of the recent real estate acquisitions by Chinese companies appear to be tentative, quasi-experimental investments designed not so much to make money, as to learn the ropes of overseas markets and apply this knowledge and experience to business development in domestic real estate. Overseas experience thereby enables these companies to internationalize – to project a more international image while enhancing their business practices to become more globally competitive. Domestic demand for foreign property is also driving China’s real estate developers to go global. Big Chinese developers such as Vanke and Greenland are ramping up construction of residential projects in foreign locales from the U.S. to South Korea and Malaysia to meet the needs of wealthy Chinese looking to emigrate, educate their children at prestigious foreign institutions, or simply buy a second home overseas. A September 2014 survey by Barclays found that almost half of high-net-worth Chinese were considering relocating to a more-developed country within the next five years.

POLICY CHANGES: LETTING IT FLOW Favorable policies in both China and abroad have helped ease the flow of capital to foreign markets. Burdened with massive debt and economic uncertainty, many developed countries are now actively courting investment from abroad to help create jobs, reduce unemployment rates and in turn drive economic growth. U.S. federal regulators are arguably taking a more welcoming approach to big Chinese buyers in recent years, while American companies and state governments are

aggressively seeking Chinese investment.

British leaders flew to Beijing last October to secure investment and trade deals.

Australia’s Significant Investor Visa program, rolled out in November 2012, is intended to lure wealthy foreigners by offering permanent residency in exchange for an A$5 million (US$4.7 million) minimum investment in the country; the vast majority of applicants have been Chinese nationals.

At the same time, the Chinese government is relaxing barriers to capital outflows.

Outbound investment, like FDI into China, is an economic policy objective of the state.

Beijing’s “Go Global” policy, introduced in 1999 and reinforced by China’s 12th Five-Year Plan for 2011-15, calls for domestic companies to invest overseas.

Property-related outbound investments encouraged by the state include construction, infrastructure, hospitality, and the trading of construction materials in certain countries.

Notably, authorities have given the green light to insurance companies to invest in overseas real estate. In October 2012, the China Insurance Regulatory Commission (CIRC) issued rules allowing insurers to invest a percentage of their assets in office buildings in prime locations abroad. China’s insurers are sitting on $1.19 trillion in assets and they have started pouring this money into properties such as London’s iconic Lloyd’s Building (Ping An Insurance, July 2013) and Canary Wharf (China Life, June 2014). Analysts expect further big purchases by Chinese insurance firms; in a December 2013 survey by auditor PricewaterhouseCoopers, 81% of Chinese insurance executives said real estate was their first choice among industries to invest in.

CHINA’S OUTBOUND BOOM

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FOLLOW THE MONEY GENERAL OVERVIEW

Total investment (US$ millions)

Although the annualized figure for 2014 suggests a dip in outbound investment, we consider this a short-term adjustment driven by temporary factors including the slowdown of the domestic real estate market and the central government’s adherence to a tight monetary policy over the past year, which have recently made investors cautious. Despite such inevitable setbacks and adjustments, we believe the long-term trend of growing investment will continue.

FIGURE 3: TOTAL OUTBOUND INVESTMENT AND DEALS FROM CHINA (ALL PROPERTY TYPES) 2008-2014 18,000

80

16,000

70

14,000

60

12,000

50

10,000

40

8,000

30

6,000 4,000

20

2,000

10

0

Number of deals

Cushman & Wakefield have analyzed data including 353 deals made by Chinese investors from January 2008 through June 2014, with disclosed deal size and investors.1 Total investment during this period reached about US$33.7 billion. As Figure 3 shows, Chinese investors in 2008 spent a mere US$75.2 million on foreign real estate. Huge annual leaps in outbound investment began around 2009, with spending growing by roughly US$2.0 billion from 2009 to 2010. In 2013, that figure jumped to more than US$15.8 billion, a more than 200-fold increase over the 5-year period. The first half of 2014 has seen around US$5.1 billion of new investment, nearly as high as the 2012 total.

0 2008

2009

2010

2011

2012

2013

2014*

Total investment made by private enterprises/investors (US$ millions) Source: RCA, Cushman & Wakefield

*Annualized

Total investment made by state-owned enterprises (US$ millions) Total number of deals made by state-owned enterprises Total number of deals made by private enterprises

Data are provided by RCA and include all transactions from mainland China to overseas destinations (including Hong Kong) of $US2.5 million or greater in value from January 1, 2008 to June 30, 2014. Property types include apartment, hotel, industrial, office, retail, and development site. Deals include sale, entity-level, and <50% interest transactions 1

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CHINA’S OUTBOUND BOOM

Sovereign wealth funds have historically played a leading role in China’s outbound investment, including China Investment Corporation (CIC) and the investment vehicles affiliated with the State Administration of Foreign Exchange (SAFE).

In 2013, CIC made clear its intention to increase the proportion of alternative assets like real estate in its holdings.

In addition, large real estate developers with strong capital bases and good financing channels are normally active in overseas real estate investment. For example, Shenzhen-based China Vanke, the country’s largest residential developer, entered the American market by partnering with New York’s Tishman Speyer to build a luxury condo project in San Francisco (the deal was announced in February 2013).

In the financial sector, large state-owned financial institutions are the key players in outbound real estate investment, especially state banks and insurance firms. In June 2014, China Life, one of the country’s largest life insurers, together with Qatar Holding, a subsidiary of Qatar’s sovereign wealth fund, spent RMB 8.4 billion (around US$1.4 billion) on the landmark 10 Upper Bank Street in London’s Canary Wharf in June 2014. Large state-owned asset management firms have also entered the fray in 2014.

The purchase of a 40% stake in New York’s General Motors Building by a group of investors including the family of Zhang Xin,

Despite the dominance of office investments, residential and mixed-use deals by big Chinese developers have made headlines. Greenland stands out for its aggressive overseas moves in recent years, with a string of residential acquisitions in 2013-14: a US$500 million residential project in Sydney announced in March 2013; a US$1 billion stake in the mixed-use Metropolis project in L.A. purchased in July 2013; the Hertsmere development site in London’s Canary Wharf bought in March 2014, where Greenland plans to build the tallest residential tower in Europe, expected to be worth US$1 billion when complete; and a majority stake in the US$4.9 billion mixed-use Atlantic Yards (later renamed Pacific Park) project in Brooklyn purchased from Forest City Enterprises in July 2014. Other major developers are stepping up their residential outlays, such as China Vanke’s luxury condo deal mentioned above, a project with a US$620 million price tag.

WHAT ARE THEY BUYING? Breaking down Chinese investments by asset class from 2008 to June 2014, we can see that office buildings are by far the preferred property type, accounting for over 48% of total aggregate investment.

Office investments experienced a spike in 2013, reaching US$8.4 billion – greater than the sum total for all other asset classes of US$7.4 billion that year. In the first half of 2014, office investments also led the way at US$2.8 billion, with development sites (US$1.7 billion) trailing behind.

FIGURE 4: TOTAL OUTBOUND REAL ESTATE INVESTMENT BY ASSET CLASS, 2008-2014.6 Hotel 7%

Industrial 9% Development Site 25% Apartment 4%

Figure 5: Outbound real estate investmentRetail by asset class, 2008-2014.6 9,000.0

Source: RCA, Cushman & Wakefield

Office 48%

7%

8,000.0

FIGURE 5: OUTBOUND REAL ESTATE INVESTMENT BY ASSET CLASS, 2008-2014.6 7,000.0 6,000.0 10000 Investment Value

State-owned enterprises and private firms each contributed around 50% of the total value of outbound investment in the real estate industry from 2008 to June 2014.

However, private enterprises and individual investors accounted for a larger share of the number of deals – around 62.6% – while state-owned enterprises accounted for 37.4%. Therefore, private enterprises and individual investors are the key force pushing forward China’s outbound real estate investment. At present, Chinese overseas real estate investors are mainly real estate developers, finance and investment enterprises, sovereign wealth funds and individual investors.

CEO of SOHO China, in June 2013 highlights a growing amount of outbound investment by wealthy individuals. Given the continuing transition of the domestic property market and the rising demand for housing driven by immigration, we anticipate that the trend of individual outbound real estate investment will only grow in significance.

Investment Val

WHO IS INVESTING?

8000 6000 4000 2000

2008

2009

2010

0 Development 2008 Site 2009 Apartment 2010 Development Site Source:RCA,Cushman & Wakefield Office

2011

2012

2011Retail 2012 Office 2013

2013 Hotel 6.2014

Apartment

Retail

Hotel

Industrial

7.2014 Industrial

Source: RCA, Cushman & Wakefield

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WHERE ARE THEY INVESTING? GLOBAL MARKET Figure 6 shows the regional distribution of outbound investment flows from 2008 to and June 2014. Asia, North America and Europe are the top three regions attracting Chinaâ&#x20AC;&#x2122;s real estate investment, accounting for 34%, 29%, and 24%, respectively. These figures indicate that Chinese investors tend to prefer developed and mature markets around the world. This holds true in Asia, with the exception of Malaysiaâ&#x20AC;&#x2122;s Iskandar region, a less-developed market that is viewed as having large potential to grow given its close proximity to Singapore.

On the country level, Figure 7 indicates the U.S. is the top destination for Chinese real estate investment, registering a total of US$9.72 billion and 124 deals. The next top recipients, in descending order, are Great Britain (US$ 5.80 billion), Hong Kong (US$3.84 billion), Singapore (US$3.23 billion), Australia (US$2.14 billion), Malaysia (US$2.07 billion), Japan (US$1.62 billion) and Brazil (US$1.20 billion).

FIGURE 6: TOTAL OUTBOUND REAL ESTATE INVESTMENT BY REGION, 2008-2014.6

Europe 24%

Asia 34%

Source: RCA, Cushman & Wakefield

FIGURE 7: DISTRIBUTION OF CHINESE OUTBOUND REAL ESTATE INVESTMENT 2008-2014.6

12,000

Total Value

8,000 6,000 4,000 2,000

U.S. Great Britain Hong Kong Singapore Austrialia Malaysia Japan Brazil Bahamas Taiwan Poland Spain Belgium Russia Netherland Germany New Zealand South Korea Czech Republic South Africa Canada Ireland Austria Sri Lanka Mexico Iceland

0

Total Value (US$ millions)

Source: RCA, Cushman & Wakefield

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Total Number of Deals

Total Number of Deals

140 130 120 110 100 90 80 70 60 50 40 30 20 10 0

10,000

KEY DESTINATIONS IN THE U.S. One of the most striking aspects of this Chinese investment is how rapidly it has grown in the U.S. market in the recent years. Chinese investors in 2013 spent more than US$7.05 billion in the U.S. property market. This figure represents an almost 65-fold increase from 2011 and is more than the total tracked in the previous decade.

Oceania 7% South America 6% Africa 0.15%

North America 29%

CHINAâ&#x20AC;&#x2122;S OUTBOUND BOOM

FIGURE 8: DISTRIBUTION OF CHINESE OUTBOUND REAL ESTATE INVESTMENT IN THE UNITED STATES, 2008-2014.6

2010 2011 2012 2013 2014

Market Preference Los Angeles, California Los Angeles, California Chicago, Illinois Manhattan, New York Houston, Texas

Note: measured by number of deals

Asset Preference Apartment Office Various Various Various

Value (US$ millions) Manhattan 5,965.39 Other NYC Boroughs 717.10 Long Island 21.25 Westchester 7.40 New York

No. of Deals

12 5 1 3

1

9. Washington: 94.58 18. Wisconsin: 6

12. Michigan: 261.45 13. Ohio: 18

Illinois: 361.64

3

17. Massachusetts: 9 6. New Jersey: 139.63

2

5. Maryland: 150.4 10. Delaware: 41.53 16. North Carolina: 9.52 15 South Carolina: 10.18 11. Georgia: 27.82 7. Arizona: 133.1

California Los Angeles San Francisco Orange Co East Bay

Value No. of (US$ millions) Deals 793.2 16 558.0 111.0 77.3

6 5 4

San Jose

37.0

Inland Empire

21.3

Scotts Valley

12.2 8.1

San Diego

4.Texas: 305.2

8. Florida: 94.58

14. Tennessee: 13.65 Percent of Overall Investment

Percent of Overall Investment in California

55.26% 5.26% 10.53%

Percent of Overall Investment in New York

3

Apartment Development Site Hotel

28.23% 15.32% 16.94%

19.05% 28.57% 28.57%

2

Industrial

10.48%

7.89%

-

1

Office

21.77%

18.42%

23.81%

1

Retail

7.26%

2.63%

-

Note: measured by number of deals Note: Unit: US$ millions. Source: RCA, Cushman & Wakefield

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China’s investments in U.S. property are concentrated in eastern and western coastal areas and the Great Lakes region, among which the first three states are New York, California and Illinois, with investment volumes of US$6.71 billion, US$1.62 billion and US$360 million, respectively. Breaking down these markets further, Manhattan attracts the largest amount of capital, followed by Los Angeles and then other New York City boroughs.

and understanding of the American real estate market, Chinese investors are distributing their investments across the whole country, not only focusing on selecting assets in prime locations in their historical preferred destinations of California and New York, but also paying more attention to those cities with lower prices and greater growth potential, like Chicago and Houston.

Moreover, residential property is the preferred asset, comprising 28.2% of the total number of deals, and offices rank second, accounting for 21%. In the most popular regions, Chinese investors prefer hotels and development sites in New York.

However, in California 55% of the total number of deals targeted the residential market, while offices were the second choice, comprising only 18.4%.

Six years after the onset of the global financial crisis, European economies lag behind the pace of recovery in the U.S., with most of Europe facing the prospect of deflation and weak economic growth. Debt problems continue to plague many

Chinese investors, therefore, gravitate to the largest, wealthiest urban centers of the U.S., also known as “gateway cities,” and cities well-known to migrants. Their residential and office purchases also highlight their demand for housing and their preference for commercial real estate in the core submarkets of such cities.

Cushman & Wakefield find that Chinese investors are increasingly tending to diversify their asset choices and spread their investments across the country. In 2010, Chinese capital was concentrated in California’s apartment market, but since then the range of targeted assets has expanded widely to include offices, hotels, industrial property and even land development. In 2012, investors began to shift their focus inland to the Great Lakes region, notably Chicago, Illinois. Then, in 2013 and the first half of 2014, New York and Houston, Texas became the major target regions for these diversified investment flows.

The diversification of Chinese investment reflects the varied nature of the investment bodies and their growing expertise. At first, private investors dominated the scene, but over time large developers and an assortment of institutions assumed a greater role. With their evolving experience

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European governments. Therefore, it is with some urgency that EU leaders are looking abroad for foreign direct investment to create job opportunities and stimulate economic recovery. China as a new force in global investment seems happy to oblige, with plans to invest hundreds of billions of dollars in the European continent. Over the past one to two years, the real estate sector in Europe has emerged as a popular target for Chinese investors. Counting deals with disclosed investors and deal size, China’s real estate investment in Europe totaled more than US$8 billion over the past five years. In the three years from 2011 to 2013, total investment shot up nearly 87-fold, reaching US$4.6 billion in 2013.

KEY DESTINATIONS IN EUROPE

FIGURE 9: DISTRIBUTION OF CHINESE OUTBOUND REAL ESTATE INVESTMENT IN EUROPE, 2009-2014.6 2010 2011 2012 2013 2014

Market Preference London, Moscow London, Madrid London London, Frankfurt London, Madrid

Asset Preference Office Industrial, Retail Office Office, Hotel Office, Hotel

Note: measured by number of deals

Europe Office Retail Development Site Industrial Hotel Apartment

% of Total Value 79.47% 13.61% 6.60% 0.26% 0.07% -

% of Total Number of Deals 59.38% 9.38% 3.13% 3.13% 25.00% 5. Russia: 338.13

1. Great Britain: 5799.63

6. Netherland: 204.01

7. Germany: 161.02

2. Poland: 536.61 8. Czech Republic: 55.06

9. Ireland: 41.28 4. Belgium: 402.81

10. Austria: 26.84

3. Spain: 476.22

Note: Unit: US$ millions. Source: RCA, Cushman & Wakefield

CHINA’S OUTBOUND BOOM

As Figure 9 shows, Britain is the first choice for Chinese real estate investors in Europe. Over the past few years, total real estate investment in the UK by Chinese investors accounted for 72% of total real estate investment in Europe. Investment in the London real estate market alone reached over US$5 billion, accounting for 62.7% of the European total.

The British government welcomes foreign investment and actively promotes Chinese inflows through agencies such as UK Trade and Investment (UKTI). Britain is a global economic center boasting a mature, transparent and stable market environment, making it a highly attractive target for foreign capital. The country’s preferential investment policies and favorable geographic location further support its status as the top choice for Chinese property buyers in Europe.

Chinese investors in Europe prefer commercial real estate assets. Investment in office buildings has attracted the majority of Chinese capital, accounting for 79.5% of total investment, followed by hotel and retail properties at 13.5% and 6.6%, respectively. Most of the office investment has been focused on London, arguably the world’s financial center. The

global financial crisis had a damaging effect on many tenants in London, leading to a gradually rising vacancy rate as occupiers shed surplus space. While the increase in vacancy was mild by historic standards, rising from 4.3% to 7.9%, it did contribute to a 35% drop in Grade A rentals for the City of London and its surrounding office areas compared to pre-crisis levels. Low prices, however, indicated a good opportunity to invest in high-quality property. For a recent example, in August 2014 Gingko Tree Investment, a Chinese sovereign wealth fund affiliated with the State Administration of Foreign Exchange, bought a 50% stake in a GPB 345 million (US$576 million) joint venture with Britain’s Crown Estate for Fosse Park, the country’s largest retail shopping park.

Although Chinese investors have paid reasonable prices to acquire many key high-quality office buildings in London, they face a more challenging environment going forward. Escalating investment demand as well as a falling availability of modern space for occupiers has led to a sharp recovery in values in the last two years. As a result, a growing proportion of new demand from Chinese investors is now looking further afield at British regional markets and at other main cities in Europe. In the short

term, Chinese investors can mitigate the risks by forming global partnerships with professional real estate consultancies to enhance their leasing strategies, tenant portfolio analysis, and other practices.

KEY DESTINATIONS IN ASIA Although recent major deals in the U.S. and Europe may have received more media coverage, Asian destinations are also seeing a significant influx of Chinese funds. From 2008 to the first half of 2014, Hong Kong attracted the greatest percentage of mainland Chinese investment among all Asian regions – around US$3.84 billion, accounting for 33.7% of total investment value – followed by Singapore and Malaysia.

Hong Kong also has the largest share of total deals in Asian region, accounting for half the total number of deals in this area.

Offices are the top asset choice in terms of the total number of deals, accounting for over 34%. However, in terms of value, land development is the preferred investment.

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FIGURE 10: DISTRIBUTION OF CHINESE OUTBOUND REAL ESTATE INVESTMENT IN ASIA, 2008-2014.6

2010 2011 2012 2013 2014

Market Preference Hong Kong Hong Kong Hong Kong, Japan Hong Kong, Singapore Hong Kong

Note: measured by number of deals

Asset Preference Apartment Development Site, Office Industrial, Office Development Site, Office Development Site, Office

6. South Korea: 73.29

5. Japan: 161.03

1. Hong Kong: 3844.12

7. Sri Lanka: 23.44 3. Malaysia: 2073.38

4. Taiwan: 545.93

Hong Kong

% of Total Value

Apartment Development Site Hotel Industrial Office Retail

1.86% 35.63% 14.39% 2.61% 43.05% 2.46% % of Total Value

Singapore 2. Singapore: 3225.94

% of Total Number of Deals

5.88% 11.76% 9.80% 3.92% 54.90% 13.73% % of Total Number of Deals

Apartment

13.90%

11.76%

Development Site Hotel Industrial Office Retail

50.00% 10.00% 2.35% 23.75%

58.82% 5.88% 11.76% 11.76%

Note: Unit: US$ millions. Source: RCA, Cushman & Wakefield

Southeast Asia is a favorite location due to its proximity to China and the strong presence of ethnic Chinese communities.

From 2008 to June 2014, Chinese investors spent a total of US$3.23 billion on real estate in Singapore, and US$2.07 billion in Malaysia. In Singapore, Chinese investors prefer to invest in strata-titled offices.

However, in Malaysia, land development is the preferred vehicle; development site deals accounted for almost 97% of total investment value in the country.

Various factors are turning Malaysia into a

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top destination for Chinese developers.

The country offers cheaper housing and higher returns than its neighbors, along with policies to attract foreign buyers; mortgage terms in Malaysia are better for non-residents than in Singapore and Hong Kong. Well-established immigration policies and strong, steady economic growth also serve to encourage Chinese investment in Malaysia. Over US$1.89 billion of Chinese greenfield investment has gone into Johor Bahru, the second-largest city in Malaysia, located 20 minutes’ driving distance from

Singapore. Government planners are pushing to turn the city, part of the Iskandar Malaysia economic development zone, into a boomtown which will complement Singapore in the way New Jersey complements New York or Shenzhen complements Hong Kong.

Housing prices in Johor Bahru currently stand at just 15% to 20% of Singapore’s, which is the key reason many Chinese developers are seeing huge growth potential in this area. Country Garden’s massive Country Garden Danga Bay

CHINAâ&#x20AC;&#x2122;S OUTBOUND BOOM

TABLE 1. BIG DEALS: TOP 10 LARGEST OVERSEAS TRANSACTIONS OF 2008-2014.6 RANKING

ANNOUNCEMENT DATE

INVESTOR

LOCATION

COUNTRY/ REGION

APPROX. DEAL SIZE (US$ MILLIONS)

TYPE

PROPERTY NAME

1

2013.05

ZHANG XIN (P), M. SAFRA & CO

MANHATTAN

U.S.

3,400

OFFICE

GENERAL MOTORS BUILDING

2

2013.12

GUANGZHOU R&F PROPERTIES CORPORATION (P)

JOHOR BAHRU

MALAYSIA

1,396

DEVELOPMENT SITE

JOHOR BAHRU LAND

3

2014.06

CHINA LIFE ASSET MANAGEMENT (S), QATAR HOLDING

LONDON

GREAT BRITAIN

1,332

OFFICE

CANARY WHARF TOWER

4

2013.12

CHINA INVESTMENT CORPORATION (S)

LONDON

GREAT BRITAIN

1,277

OFFICE

CHISWICK PARK

5

2011.10

ZHANG XIN (P)

MANHATTAN

U.S.

1,181

OFFICE

PARK AVENUE PLAZA

6

2010.04

CHINA STATE ENGINEERING (S)

NASSAU

BAHAMAS

990

DEVELOPMENT SITE

BAHA MAR

7

2013.12

FOSUN INTERNATIONAL LTD (P)

MANHATTAN

U.S.

725

OFFICE

ONE CHASE MANHATTAN PLAZA

8

2013.03

GINGKO TREE INVESTMENT (S), HANWHA GROUP, AXA REAL ESTATE,

LONDON

GREAT BRITAIN

716

OFFICE

ROPEMAKER PLACE

9

2012.04

AGRICULTURAL BANK OF CHINA (S)

HONG KONG ISLAND

HONG KONG

628

OFFICE

50 CONNAUGHT ROAD

10

2013.08

BRIGHT RUBY RESOURCES (P)

SINGAPORE

SINGAPORE

590

RETAIL

KNIGHTSBRIDGE

Note: S stands for state-own enterprises; P stands for private enterprises or investors. Source: RCA, Cushman & Wakefield

project, kicked off in December 2012, launched 9,000 residential units in 2013 and has apparently received strong interest from home buyers in Malaysia, Singapore, China and elsewhere.

HOW ARE THEY INVESTING? The two most popular investment models for Chinese buyers are greenfield investment and mergers and acquisitions (M&A). In the majority of greenfield investments, domestic developers establish a joint venture with local partners due to their unfamiliarity with the local market, tax codes and regulations; through such cooperation, domestic developers are able to minimize related risks. M&A deals are

always accompanied by the purchase of the existing property. Chinese investors prefer properties that offer steady cash flows, such as office buildings, hotels and high-end apartments. They tend to build their international image through investments in landmark buildings. For instance, Dalian Wanda bought Spanish Mansion in the center of Madrid, planning to convert it into a luxury hotel and shopping center.

Cushman & Wakefield observe that Chinese M&A deals are especially popular in the U.S., the UK and Singapore.

Currently, the major Chinese acquirers are real estate developers, insurance and investment firms, and sovereign wealth funds, and they prefer buyouts or majority

stakes. For example, Fosun International entered the Japanese market indirectly through the unprecedented acquisition of IDERA, a Japanese real estate fund management company with around US$1.57 billion of total assets, including office, residence building, real estate funds, etc.

Collaboration has been an obvious trend for Chinese developers investing overseas.

Their partners include financial institutions from both home and abroad, local property developers, international consulting firms and law firms. The idea of international partnership is to reduce investment risks due to legal and cultural challenges as well as gain access to a wider range of financing

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channels. For example, China Vanke teamed up with U.S. developers RFR Holdings and Hines to develop the 610 Lexington Avenue project in Manhattan, with China Cinda AMC providing the financing support.

As for financing, firms have sought overseas channels, such as backdoor listing, beyond the traditional domestic guarantees including annexation loans and off-shore loans under domestic guarantee. Through backdoor listing abroad, firms are able to issue overseas bonds, thus alleviating financial pressures. Last year, China Vanke purchased a 73.9% share in Winsor Real Estate, a Hong Kong-listed property developer, and named it Vanke Hong Kong, aiding in both its financing channels and internationalization strategy.

Due to the diversity and low cost of overseas financing channels, a growing number of Chinese investment institutions would like to benefit from cooperation with foreign companies. In the acquisition

of the Metropolis Los Angeles project in 2013, Greenland obtained a minimum lending rate through mezzanine financing.

In January 2014, Fosun International bought 80% of the shares of Caixa Seguros, Portugalâ&#x20AC;&#x2122;s largest insurance company, for EUR 1 billion (US$1.35 billion). In addition to the benefits of low-cost financing and risk reduction, overseas cooperation also offers Chinese enterprises mature business models and management experience, further improving their overseas expansion and domestic operations.

SHIFTING STRATEGIES Most of the sites acquired by the big Chinese developers have been fully entitled or â&#x20AC;&#x153;shovel ready.â&#x20AC;? This suited the larger developers, who were keen to immediately sell apartments back into the China market.

Now, however, we are observing a second and third wave of capital guided by a more long-term strategy to invest in and develop site opportunities. Such projects, where long-term value is unlocked by redevelopment, involve more risk but also offer higher potential rewards for savvy investors.

CHALLENGES FOR CHINESE INVESTORS The recent surge of outbound real estate investment is only the beginning of what seems likely to be a rising tide. While the future looks bright for Chinese companies going abroad, they must educate themselves about

16

local market conditions and learn to hold their own against sometimes-fierce local competition.

Although Chinese investors have powerful incentives to splurge on overseas properties, an array of challenges stand in their way. Getting large amounts of money out of China is complex; lengthy approval procedures within both China and the receiving countries impede the flow of capital into foreign real estate markets. This can be a significant issue in fast-moving markets where deals need to be closed within a short time frame. Fortunately, the Chinese government is gradually relaxing capital controls on overseas investment and simplifying the approval process.

Chinese investors also face a steep learning curve with differences in corporate and

CHINA’S OUTBOUND BOOM

management cultures, divergent business practices and unfamiliarity with foreign legal and regulatory environments. Most investors from China for example are used to having a higher level of control over their assets than is available in Western countries. Even for experienced companies, a maze of national and local tax laws, market regulations and rules governing everything from labor to zoning can present formidable disincentives; the heavily taxed and regulated real estate sector in the U.S. notably offers many such roadblocks.

To successfully navigate these obstacles, enterprises can work through Ministry of Commerce-affiliated institutions and the relevant national chambers of commerce, and can also cooperate with local real estate companies, private equity funds, and intermediaries. This type of cooperation may be costly and may even require investors to sacrifice part of their equity.

But what these organizations can offer – rich experience in transnational investment, a better understanding of business rules in foreign markets, and a wide-ranging information and business network – often

proves necessary to make up for the Chinese investors’ deficiencies in multinational operations.

Recruiting talent is another issue for Chinese companies venturing into foreign markets. Investing abroad, as well as post-investment integration and overseas asset operation, requires a range of complex and advanced skills. This expertise is hard to attain in the short term.

Enterprises need to have a long-term strategic vision and exercise patience in their talent investment. The success or failure of their overseas ventures may hinge on how companies handle this process.

Localization of talent strategies is crucial.

Despite the global nature of these investments, real estate markets are regional, so Chinese investors must be flexible enough to make good use of local resources. Recruiting the right local talent will help enterprises reduce the risks of post-investment management to a great extent and thereby to maximize investment returns.

project sourcing through financing, site procurement, design and construction, property management and sales. Instead of limiting their focus to the acquisition of assets itself, they should consider how to integrate their enterprise into the local culture and establish a sense of corporate citizenship and social responsibility. This integration entails not only a thorough understanding of local laws and management patterns, but also skillful public relations, appropriate staff training and development, and attention to the needs of local communities. Over time, thoughtful corporate image displays will help generate positive perspectives on Chinese investment globally, which will assist the internationalization of Chinese enterprises in the long run.

Chinese investing in overseas real estate need to take a global view of each link in the process – from feasibility studies and

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CONCLUSIONS AND FUTURE DIRECTIONS Cushman & Wakefield believe that Chinese outbound investment will continue its growth trend, as wealthy individuals and capital-rich firms in China look to further diversify and expand their global presence and sophistication. The ongoing recovery of major developed economies and the rise of Asian hotspots such as Malaysia will offer attractive destinations for expanding capital flows.

New York City, Los Angeles, San Francisco, London and Sydney will remain top investment destinations for Chinese outbound investment in the West, while cities like Seattle, Dallas, and Melbourne will become more relevant as Chinese capital increasingly taps these “second-tier” destinations.

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The trend until now has been top-tier, well-known developers and investors in China – names like Greenland, Wanda, and Fosun – leading the outbound path. Now, however, smaller, lesser-known firms are starting to follow the trail blazed by the early movers. We expect to see increasing involvement from lesser-known mid-tier developers and investors. Deals will likely increase in volume and decrease in investment size as smaller regional players follow the bigger ones. Major investors will also become savvier once they have turned a profit from their first projects and look to reinvest.

THINKING GLOBALLY The Chinese government strongly supports the outbound investment surge in the real estate market. New regulations allow domestic firms to invest overseas without

government approval for deals up to US$1 billion in value, lifting the previous cap of US$100 million. In pursuing a “Go Global” strategy, the central government is seeking an outlet for the country’s vast accumulation of foreign currency reserves, while aiming for the creation of global homegrown companies and brands. These state objectives align with large-scale economic trends.

As Chinese people and investment are increasingly going out into the world’s major cities, it’s only natural that major real estate companies that are well-known and trusted in China are following suit. We anticipate that rising outbound capital flows over the coming years will have major implications for investors and property markets around the world.

SIGRID ZIALCITA

JAMES SHEPHERD, MRICS

+(65) 6535 3232 sigrid.zialcita@ap.cushwake.com

+(86 21) 2320 0921 james.shepherd@ap.cushwake.com

JOHN STINSON

TED LI

MARK SUCHY

+(65) 6232 0878 john.stinson@ap.cushwake.com

+(86 10) 5921 0820 ted.li@ap.cushwake.com

+(86 21) 2320 0717 mark.suchy@ap.cushwake.com

MANAGING DIRECTOR, RESEARCH ASIA PACIFIC

EXECUTIVE MANAGING DIRECTOR CAPITAL MARKETS, ASIA PACIFIC

EXECUTIVE DIRECTOR, HEAD OF RESEARCH GREATER CHINA

NATIONAL DIRECTOR, CAPITAL MARKETS NORTH CHINA

DIRECTOR, CAPITAL MARKETS EAST CHINA

The information presented above/collected hereunder is made available solely for general information purposes. All statements and/or opinions of any third party are solely the responsibility of the party which provides the information, materials or opinions, and do not necessarily reflect the opinion of C&W. C&W do not warrant the accuracy or completeness of such information or opinions, and disclaim all liabilities or responsibilities arising from any reliance on such information or opinions.

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