RESEARCH
CHINESE OUTWARD REAL ESTATE INVESTMENT GLOBALLY AND INTO AUSTRALIA AUSTRALIAN MARKET INSIGHT APRIL 2015
HIGHLIGHTS Softening of Chinese market The total value of Chinese outward The next wave of Chinese investors are conditions and government policy real estate investment skyrocketed diversifying more and broadening to encouraging overseas investment by from US$0.6 billion in 2009 to areas such as Brisbane, Adelaide, Gold Chinese firms, has led to increasing US$16.9 billion in 2014. Already Coast, Perth and metropolitan suburbs investment levels in gateway markets over US$5.5 billion has transacted of NSW and Victoria, which will all start globally, particularly in Australia. in the first quarter of 2015. to gain more traction.
AFTER THE INITIAL WAVES There has been a tremendous surge in Chinese outward investment in overseas real estate in recent years. What first started as sovereign funds making exploratory investments has proliferated into buying “Chinese UHNWIs are sprees by Chinese developers, banks, UHNWIs and getting comfortable with institutional investors, such as insurance companies. new worldwide markets. Outward real estate for new opportunities. Government OPPORTUNITY incentives, such as the relaxation of real investment into the global This surge has been fueled by a estate investment regulations for market by the Chinese hit combination of push and pull factors, insurance companies, have also resulted US$16.9 billion in 2014, with a number of key domestic economic in billions of dollars in extra funding for and policy variables contributing to this overseas investment. 10% higher than 2013 surge. One of the most powerful drivers and a substantial 205% has been the continued consolidation of Meanwhile, the attractiveness of mature increase from 2012.” China’s residential real estate market. gateway markets in the UK, US and Fierce domestic competition, combined Australia, is “pulling” capital out of China, MATT WHITBY with government curbs on home providing quality products and higher Head of Research and Consulting purchases and rising borrowing costs yield returns with diversification benefits over the past two years, has led to and assisting institutions and developers developers’ actively looking elsewhere build their brand internationally.
MAP 1 Chinese UHNWI overseas investment destinations Traditional vs. New or Emerging destinations
Source: Knight Frank
2 CHINESE OUTWARD REAL ESTATE INVESTMENT 2015 RESEARCH
THE PUSH & PULL: CHINA’S DOMESTIC POLICY & ATTRACTIVENESS OF MATURE MARKETS DRIVES OUTWARD EXPANSION
Urban-Rural Development relaxing was raised from US$100 million to US$1 THE PUSH: mortgage down payments, are aimed at billion and in October 2014, the Ministry POLICY INDUCED providing support to the economy and of Commerce removed prior approval for may help boost confidence in the equities most foreign investment. UNCERTAINTY and property markets. On the 19th April, the People’s Bank of China (China’s The total assets of China’s insurance AND WEAKENING central bank) announced that it would industry doubled over the past five years lower the average RRR by 100bps (to to RMB 9.6 trillion (US$1.6 trillion) as at RESI MARKET 18%) for the whole banking sector, which October 2014. By 2020, authorities is the biggest cut since December 2008. estimate that the Chinese insurance One of the push factors for outward industry will accumulate a further RMB investment comes from the slowing Despite this, we expect property prices to 20 trillion worth of premiums, tripling the economic growth and consolidation of remain under further pressure in 2015, as current pool size. China’s residential market. As China’s prices are unlikely to rebound while residential market is policy driven, developers continue to clear inventory Despite generous investment thresholds - Government measures have been and pull back on new projects. While this insurance companies are allowed to effective in mitigating external shocks on remains the case, we believe this will invest up to 30% of their assets in real the one hand, but have caused market impact on developers’ future investment estate, with 15% of total investments fluctuation and uncertainty on the other. strategies, continuing to make offshore allowed offshore - we expect Chinese expansion a viable option over at least the insurance companies to adopt a prudent As a result of rampant construction, short to medium term. approach to real estate and cross-border vacant residential floor space increased investments. That said, the sheer size of by over 80% since 2010. It is estimated Investment policy this insurance pool means that even a that existing inventory nationwide will take small allocation offshore will result in at least two years to absorb. This Another major push comes from some significant deal flows. Insurance oversupply has sparked cut-throat significant easing of overseas investment companies such as Sunshine, will be competition amongst developers, fuelling policies. For example, in late 2013 the active in Australia over 2015 and 2016. buyers’ expectations of further price falls. outward investment approval threshold
China property prices began falling during FIGURE 1 the second half of 2014 and the majority 70 out of 70 cities recorded house price falls have continued to fall into 2015. In March Annual Growth—Major Chinese cities, newly constructed homes
2015, all of the 70 major Chinese cities 70 recorded annual house price falls, compared to March 2014 when only one 60 city recorded an annual decline (see 50 Figure 1). On a month-on-month basis, the downtrend has improved slightly, with 40
50 of the 70 cities recording a decline, 30 compared to the worst point in October 2014, when 69 of the 70 cities recorded 20 monthly house price declines, which was 10 the highest percentage since 2010. 0 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 Recent cuts to lending rates and the Reserve Requirement Ratio (RRR), in NO. OF CITIES THAT RECORDED HOUSE PRICE INCREASE NO. OF CITIES THAT RECORDED HOUSE PRICE DECLINES addition to the Ministry of Housing and NO. OF CITIES THAT RECORDED NO HOUSE PRICE CHANGE Source: NBS, Knight Frank
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THE PULL: THE ATTRACTIVENESS OF MATURE MARKETS SUCH AS AUSTRALIA There are a number of pull factors at play contrast, funding costs can be as low Overseas acquisitions help Chinese fuelling investment in overseas markets: as 4% in Australia and an easing cycle institutions and owner occupiers build is underway. their brand internationally. As these investors and developers already have extensive domestic Deep, liquid and transparent markets Owner occupiers (e.g. big banks) use exposure, offshore investments help with scale – clarity of rules/regulations. investments to help manage their them diversify risk into markets that future occupation costs. Banks such offer better returns and lower funding The quality of life, weather, clean-air as CCB, Bank of China, Agricultural costs. Funding costs in Shanghai and and world class education institutions Bank of China and ICBC have been Beijing are very high, notwithstanding all act as a magnet to Chinese active in the commercial market recent cuts, often at above 8%. In developers and migrants alike. globally over the past year.
TABLE 1 Select recent Chinese buying activities in Australia 2014/15
Consideration Date Purchaser Property Name Location Property Type (AUD$ million) Jan 14 Fu Wah International Park Hyatt East Melbourne Hotel 135.0 Jan 14 Bridgehill Group 52 Alfred St Milsons Point, Sydney Office/Dev Site 80.0 Mar 14 Greenland Leichardt Green site Leichhardt, Sydney Dev site 47.1 Mar 14 Greenland 225-235 Pacific Hwy North Sydney Dev site 56.0 May 14 Aqualand Melrose Park site Melrose Park, Sydney Dev site 135.0 May 14 Chinese Private Campsie Centre Campsie, Sydney Retail 67.0 Jun 14 Chinese Private 299 Elizabeth St Sydney CBD Office 45.0 Aug 14 Dalian Wanda^ Jewel development project Gold Coast Hotel/Resi c 300.0 Aug 14 Aqualand CSIRO Site North Ryde, Sydney Office/Dev Site 170.0 Aug 14 Yuhu Group 221 Miller St North Sydney Office/Dev Site 56.0 Sep 14 Glorious Sun 231-235 Swanston St Melbourne CBD Office/Retail 25.3 Oct 14 3L Alliance 350 Queen St Melbourne CBD Office 130.0 Oct 14 Xiang Xing Developments 58-68 Dorcas St Southbank, Melbourne Office 35.0 Oct 14 Private Chinese Family 617-621 Pacific Hwy St Leonards, Sydney Dev site c 40.0 Nov 14 Kingold Group 75 Elizabeth St Sydney CBD Office 67.0 Nov 14 Shimao Group 175 Liverpool St Sydney CBD Office 392.7 Nov 14 Chinese Private 695-699 George St Sydney CBD Office 41.0 Nov 14 Sunshine Insurance Sheraton on the Park Sydney CBD Hotel 463.0 Nov 14 GH Properties Ashmore/Mitchell Roads Alexandria, Sydney Dev Site c 380.0 Nov 14 Guangzhou R&F Property Co. 1 Cordelia St South Brisbane Dev Site 46.0 Nov 14 Visionary Investment Group 233 Castlereagh St Sydney CBD Office 156.0 Dec 14 Visionary Investment Group 338 Pitt St Sydney CBD Office 102.0 Dec 14 China Poly Group Cambridge Office Park Epping, Sydney Office/Dev Site 110.0 Dec 14 Wanda One (Dalian Wanda) 1 Alfred St Sydney CBD Office/Dev Site 425.0 Jan 15 Wanda One (Dalian Wanda) Fairfax House Sydney CBD Office 73.0 Jan 15 Aqualand 168 Walker St North Sydney Office 157.5 Jan 15 Fosun International * 73 Miller St North Sydney Office 116.5 Jan 15 Lee Shing Hong Ltd 300 Adelaide St Brisbane CBD Office 47.5 Jan 15 Chiwayland 14-20 Parkes St Parramatta, Sydney Dev Site 27.0 Feb 15 Ryan Ouyang Greenwood Business Park Burwood, Melbourne Office 69.5 Feb-15 Aoyuan Property> 130 Elizabeth St Sydney CBD Office/Dev Site 121.0 Feb-15 Jiyuan Li Prince of Wales Hotel St Kilda, Melbourne Hotel/Dev Site 45.0 Mar-15 Huayu Group Sofitel Broadbeach Hotel Gold Coast Hotel 62.0 Mar-15 Hengyi (Shandong HY Group) 170 Victoria Street Melbourne CBD Dev Site 64.8 Apr-15 Chinese Private Compass Centre Bankstown, Sydney Office/Retail/Dev Site 45.0 Apr-15 Chinese Private 143 York Street Sydney CBD Office/Retail/Dev Site 21.3 * JV with local group Propertylink, ^ JV with existing owner of site Ridong Group, > JV with Ecove. NB. Many of the above have been purchased for potential residential development Source: Knight Frank NB. Figures rounded to one decimal place
4 CHINESE OUTWARD REAL ESTATE INVESTMENT 2015 RESEARCH
MAP 2 CHINA’S Select Chinese Deals, Sydney CBD and North Sydney Select Transactions since January 2014 OUTWARD INVESTMENT 225-235 Pacific 168 Walker Highway Street (Dev Site) (Office) INTO REAL AUD$56m AUD$157.5m ESTATE
Targeting gateway 221 Miller 52 Alfred Street Street (Office/ (Office/Dev Dev Site) Site) cities in mature AUD$56m AUD$80m 73 Miller Street markets, such as (Office) AUD$116.5m Australia As a result of the push and pull factors aforementioned, the total value of Chinese outward real estate investment (excluding residential and multi-family dwellings) skyrocketed from US$0.6 billion in 2009 to US$16.9 billion in 2014. 143 York Street Fairfax House 1 Alfred Street 75 Elizabeth Sheraton on (Office/Retail) (Office) (Office/Dev Street the Park Over US$5.5 billion has transacted in the AUD$21.3m AUD$73m Site) (Office) (Hotel) first quarter of 2015, hence if this activity AUD$425m AUD$67m AUD$463m was to continue, 2015 is likely to be another record year for Chinese outward investment, both globally and into Australia, with the potential for more than US$20 billion transacting. So far the majority of the Chinese outward 233 299 Elizabeth investment has been focused in gateway Castlereagh Street cities of Australia, the US and the UK. Street (Office) (Office) AUD$156m AUD$45m
“In 2014; Australia has seen the strongest growth in inbound real estate investment from 338 Pitt Street 130 Elizabeth China, with particular (Office) Street (Office/ AUD$102m Dev Site) focus in Sydney and AUD$121m Melbourne (see Figure 2 on page 6).
Chinese high net worth investors and developers are looking to new 695-699 175 Liverpool George Street Street destinations offering discounts on prime (Office) (Office) property such as Miami in the US and in AUD$41m AUD$392.7m Australia; Brisbane, Gold Coast, Adelaide, Perth and regional suburbs of NSW and Victoria will start to gain more traction. Source: Knight Frank, Google Maps
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Chinese real estate Declaration of Intent for a Free Trade pioneering Chinese developers Agreement (FTA) on 17 November 2014. revealed that they are increasingly investment activity This raised the threshold for private, non- realising the need not just to cater for into Australia state-owned investment from China in Chinese buyers, but to tailor project non-sensitive sectors (such as property) design elements and marketing The gateway cities of Australia, namely to go to the Foreign Investment Review strategies to the broader local markets. Sydney and Melbourne, have been the Board from AU$248 million to AU$1.08 most active markets for Chinese billion. The FTA, which is likely to be They are no longer distinguishing investors. With their relative geographical completed towards the end of 2015, is buyers by nationality or relying primarily proximity, relatively higher yields, market expected to accelerate the flow of on demand from Chinese buyers. stability and liquidity, total Chinese real Chinese investment funds into the Robust local sales conditions have estate investment volume in these two Australian property market. become one of their most commonly cities outstripped both London and New stated criteria for project screening. York in 2014. Somewhat dichotomously the Federal They aim to expand and leverage their Government has proposed changes to brand identity overseas and to take Australia has recorded exponential the foreign investment framework in advantage of this demand. Chinese growth in investment over the past few Australia, announced as part of an developers, however, have the added years, culminating in just over $4 billion “options paper” released on 27 February advantage of being able to attract a invested into the country by Chinese 2015, which went out for community significant pool of Chinese buyers, who investors, across both commercial and consultation (no formal announcement as often purchase off-plan, which helps to development sites. This has exceeded yet). This may impact Chinese de-risk their development projects. the total Chinese inbound real estate investment flows, albeit even if investment which occurred over the prior implemented in their entirety, it is unlikely A few major Chinese developers have five years combined (2009-2013). to deter the large scale development and already begun aggressively expanding investment into commercial and into Australia. For example, Greenland Comparing these gateway cities in terms residential development markets. has invested heavily into Australian of cross border capital flows, it is clear development projects, tapping that the Australian cities are attracting Developers predominately into cities such as significant investment, relative to the size Sydney and Melbourne. Dalian Wanda of their economies (see Figure 3). The targeting the wider Group, one of the largest Chinese economies of London and New York are mixed-use developers, is developing much larger than the combined economy local market major hotel and residential projects in of Sydney and Melbourne, however they For many wealthy Chinese, the risk of Sydney and the Gold Coast. lag behind in attractiveness as a place to buying property in unfamiliar overseas invest for the Chinese. markets such as Australia can be offset by buying projects offered by Chinese Currency play and A further explanation for the intense developers. This provides a sense of its impact on attractiveness of Australia's gateway both familiarity and pride. However, our cities is that China and Australia signed a recent conversations with several buying power Since the end of 2007 and the onset of the GFC, the Renminbi (RMB) has FIGURE 2 FIGURE 3 appreciated considerably against a Chinese outward real estate Chinese outward real estate basket of major currencies, including investment in the gateway cities investment vs GDP Past 5 years 2014 37% against the British Pound, 38% against the Euro, 15% against the US US$ million US$ US$ million billion dollar and 26% against the Australian 3,500 3,500 1,575 Dollar (AUD). This has largely
3,000 1,350 strengthened the purchasing power of 3,000 Chinese investors, as overseas 2,500 1,125 2,500 investment has become relatively 2,000 900 2,000 cheaper. Many Chinese investors see 1,500 675 this as a good opportunity to acquire 1,500
1,000 450 foreign assets. 1,000 500 225 500 In the face of a cooling Chinese 0 0 economy, RMB appreciation is 0 LONDON NEW YORK SYDNEY & 2010 2011 2012 2013 2014 MELBOURNE expected to slow down in the coming CHINESE INVESTMENT IN GATEWAY CITIES (LHS) LONDON NEW YORK SYDNEY & MELBOURNE GDP OF GATEWAY CITIES (RHS) years. Currency fluctuation is a double- edged sword for Chinese investors. Source: Knight Frank, RCA Source: Knight Frank, RCA, Brookings Institute NB. Excluding residential and multi-family dwellings NB. Excluding residential and multi-family dwellings
6 CHINESE OUTWARD REAL ESTATE INVESTMENT 2015 RESEARCH
Kingold Group purchase, $67m Since Greenland’s acquisition of their 75 Elizabeth Street Melbourne Flemington Racecourse site in October 2013, the AUD has depreciated roughly 18% against the Renminbi. On the flip side, this devaluation now favours any Chinese investors who buy into this and any other residential schemes.
The stronger buying power of the Chinese and the weaker AUD will undoubtedly continue to support capital inflow. With an expectation of further interest rate cuts in Australia over the coming months, coupled with a seemingly more entrenched US recovery leading to interest rates rising there in H2 2015, the AUD will remain under downward pressure.
Occupier Markets Alongside increasing capital flows and investment from China the commercial occupier market is also benefitting as Chinese developers, banks and fund managers go more global and develop and grow their global platforms. Enquiry and deal flow, across key Australian cities namely Sydney, Melbourne and Brisbane, has picked up over the past AXF Group leasing 550m² of office Going forward we expect a couple of year for office space, albeit space on levels 16 and 17 of 1 Collins owner occupiers or at least part owner predominately smaller deals sub Street, Melbourne, and circa 1,000m² of occupier deals to transact over 2015 1,000m². office space leased at Gateway in and 2016, as we have just started Sydney to Kingold, Ruizean and having some enquiry on sales listings in Examples of deals in this market Hailiang combined. Sydney and Melbourne from Chinese segment include Bank of banks. Communications leasing 560m² of We expect even greater activity office space in Riparian Plaza, Brisbane, throughout 2015 and 2016, with banks, energy/mining, fund managers and developers taking space in FIGURE 4 predominantly Premium or A+ buildings AUD/RMB exchange rate “Since April 2011 the with views, which should support Last 10 years Australian Dollar has greater demand in that segment of the market. 7.5 depreciated by around 7.08 4.73 33% against the 7.0 In addition to office leasing deals, we expect a trend, which has been Chinese Renminbi, 6.5 witnessed in other gateway cities, to making opportunities 6.0 emerge in key Australian cities. Across London and Hong Kong there have and investment into 5.5 been numerous Chinese banks Australia from China acquiring buildings for owner 5.0 occupation. CCB, Bank of China, appear cheaper (see Agricultural Bank of China and Industrial 4.5 Figure 4)” & Commercial Bank of China have all 4.0 been active in the commercial acquisition market globally over the past year. Source: RBA, Knight Frank
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AFTER THE INITIAL WAVES: WHAT’S NEXT?
The emergence of a flow into Australia more broadly from Sydney for a record AU$463 million in UHNWIs over the course of 2015/16. November 2014, which was followed up new fourth-wave of by acquiring the Baccarat Hotel in investors Amongst the big-cap players, as Table Manhattan, New York for circa US$230 2 highlights, only four of the top 10 million. The first wave of Chinese capital outflow Chinese insurance companies have saw sovereign wealth funds and private made offshore investments so far, Chinese developers, however, have funds investing in core, trophy assets with although the remaining six are been more aggressive, with eight of the examples including CIC and Bright Ruby considering overseas expansion. top 10 players having already made Group acquiring core office assets in the Sunshine Insurance Group is the only offshore investments, seven of which Sydney CBD. Large developers followed, one to invest in Australia, purchasing have been active in Australia, and other looking to diversify with an overseas the Sheraton on the Park Hotel in developers are contemplating such a presence. Currently, the third wave of equity investors and insurance firms are TABLE 2 seeking core, value-add and yield-driven Major Chinese insurance companies and developers and their opportunities. outward investment status
A new group of entities is quickly Premium Already made Already made Expressed Insurance emerging as a fourth wave of capital Rank income investment investment interest to company outflow. This group constitutes not only (US$ bn) into Australia offshore invest offshore big-name companies, but also UHNWIs, small- to mid-cap SOEs, and smaller, 1 China Life 52.9 private developers. UHNWIs are exploring 2 PICC 44.4 Australian investment opportunities 3 Ping An 40.4 mainly for secured income, capital appreciation, risk diversification, personal 4 CPIC 26.3 interest and to link with the strong 5 NCI 16.9 education sector. Their investment 6 China Taiping 13.9 strategies are far ranging, and they are 7 Taikang Life 10.1 open to different asset classes, with interests ranging from smaller shopping 8 Sunshine Insurance 5.7 centres, such as the Campsie Centre, to 9 China Post Life 3.8 offices such as 299 Elizabeth Street in the 10 Sino Life 3.5 Sydney CBD, residential units and lifestyle properties. Total Already made Already made Expressed The introduction of the Significant Rank Developer Assets investment investment interest to Investor Visa (SIV) scheme in late 2012 (US$ bn) into Australia offshore invest offshore intended to target the migration of high net-worth individuals to Australia and 1 Poly Real Estate 82.3 required an investment of at least AU$5 2 Vanke Group 81.8 million into complying investments in 3 Wanda Group 74.9 Australia for a minimum of four years 4 Evergrande Group 68.7 before becoming eligible for a permanent visa. This has predominately been taken 5 Greenland Group 57.5 up by Chinese investors. This process 6 CR Land 48.7 was refined during 2014/15, with a 7 China Overseas 42.6 Premium Investor Visa (PIV), offering a 8 Country Garden 39.5 more expeditious, 12 month pathway to permanent residency for those meeting 9 Shimao Property 32.4 an AU$15 million threshold and will be 10 R&F Properties 27.1 formally introduced on 1 July 2015. This Source: Knight Frank will be another driver of increased capital Note: Information for insurance companies as at end-2013 and developers 2014 YTD.
8 CHINESE OUTWARD REAL ESTATE INVESTMENT 2015 RESEARCH
Greenland Group purchase, $56m
move. Greenland Group, one of to learn about the market and carry out Brisbane and the Gold Coast have Shanghai’s largest state-owned due diligence, given their corporate begun to capture more residential enterprises, has purchased numerous structure and scale. Partnering with development interest from Chinese development sites in Sydney’s CBD trusted property and tax/financial investors and developers. There has and other metropolitan markets in advisors, providing local expertise and been increasing activity in non-core Sydney and Melbourne. Other long-term professional support is areas of Brisbane, such as Newstead, developers currently actively developing critical in the process. South Brisbane and Fortitude Valley, product include Country Garden, and this is expected to broaden to more Starryland, Chiwayland, Bridgehill, Where to invest metropolitan sites and to the Gold Aqualand, Golden Age, JQZ, R&F Coast, where Wanda has co-invested in Properties, Golden Horse and Dalian next? an AU$1 billion beachfront site. These Wanda (Wanda One). We expect to see After heavy investment in prime office markets are underpriced relative to more debuts from these companies and buildings and subsequent yield Sydney and Melbourne, and we expect other smaller private developers in the compression in gateway cities, Chinese Chinese developers to continue to seek coming years. investors have begun to look entry to these markets.
increasingly at opportunities in other Increasingly, we will also see small- to key cities and other property sectors, Adelaide, Perth and more satellite or mid-cap SOEs and private developers and importantly in suburban locations regional suburbs of NSW and Victoria actively seeking different options in in metropolitan Sydney, Brisbane and will start to gain traction/interest from small- to medium-scale development Melbourne, not just within the CBD and Chinese developers and we should see opportunities in core and non-core fringe markets. Whereas investors some stronger price growth occur also. markets in Australia. Given their relative traditionally targeted the core office and lack of international exposure, their residential development sector, they In the commercial sector, retail and efforts to evaluate their overseas are now also targeting a more hotels will start to garner more interest strategy and growth targets will follow a diversified group of real estate assets, following relatively subdued activity steep learning curve. One of their from hotels & leisure to industrial to over the past few years relative to office challenges in gaining market entry is student accommodation and mixed- and residential development sites. that they typically take a longer period use opportunities.
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PUTTING CHINESE INVESTMENT INTO A GLOBAL CONTEXT
Wealth Trends Within the Asia-Pacific region, Global & Asian Australians, along with Japanese, are Immigration, a classic driver for least likely to emigrate, with only 5% of Capital Flows into international property investment, coupled UHNWIs wanting to change their with growing wealth creation, has led to country of domicile; with China (23%), Australia an increasing number of buyers from an Hong Kong (17%) and Malaysia (10%) Analysis compiled by Knight Frank ever-widening list of countries buying all recording double-digits. The top Research on cross border investment property in a growing number of global reasons for wanting to relocate are for a activity over the past two years (2013 hubs. Demand for entry into Australia has better quality of life and education – two and 2014 calendar years) shows that been boosted by strong inflows from major reasons why many consider offshore purchasers have invested across the Asia-Pacific region (China, Australia such a desirable location. The over $29 billion into the Australian Indonesia and India), underlining population of UHNWIs living in Australia property market, with $16.1 billion Australia’s connection into the Asian is projected to grow by 23% over the invested in the office sector alone, region. next ten years. making up 55% of the total activity, Over the last decade, it’s estimated that a followed by the retail sector (11.5%) total 76,200 Chinese millionaires In addition to those relocating to and hotels (10.9%). emigrated or acquired alternative Australia, the number of Chinese tourists citizenship. Wealthy Chinese are a arriving in Australia has reached record While investment from offshore buyers significant force in Europe and dominate levels, more than doubling in the four has reached record levels, foreign Asia-Pacific schemes. Since it was years to September 2014, growing from capital inflows will continue as a result introduced in 2012, around 90% of 347,600 to 801,500 (annually). Short of regulatory restrictions abroad and applicants from Australia’s Significant term Chinese tourists are now second as a wealth preservation measure for Investment Visa (SIV) scheme have been only to New Zealand, however, their many global HNWI and developers, from China. On average, less than half of average spend of AUD$7,460 is around who are actively seeking safe haven UHNWI respondents to Knight Frank’s 50% more than they spend in the UK. investment markets such as Australia. 2015 Global Attitudes Survey around the Increasing tourists numbers and rising Analysing the destination of global world said their clients were concerned average spend is due in part to the rise capital into Australia across all about the impact of the Chinese economy of the middle class and their associated property assets classes, investors slowing. However, not surprisingly, this wealth. By 2030 Asia will represent 66% were still largely focused on Sydney rises to over 70% across Asia and 67% in of the global middle class, equivalent to and Melbourne, accounting for 48% neighbouring Australia. growth of 3.1 billion people from 2009. and 26% respectively of all offshore purchases.
FIGURE 5 FIGURE 6 A large proportion of property Capital into Australian property from Capital into Australian property from Asia region - sector allocation Asia region - country allocation acquisitions has stemmed from Asian Past two CY (2013 & 2014) Past two CY (2013 & 2014) based investors, accounting for 55% of all global purchases into Australia Other South 3% over the past two years. Asian capital Korea 4% inflows have been just over $16 billion, Dev Site Hong Kong 20% 7% with office and hotels highly sought after, but “development site” activity Malaysia 9% Singapore has picked up strongly over the past Office 42% 44% 12-18 months, now making up 20% of Industrial 10% Asian capital flows into Australia. The major sources of this Asian capital by
Retail country are Singapore (42%), China 11% China (35%), Malaysia (9%), Hong Kong (7%) 35% Hotels and South Korea (4%) - see Figures 5 15% & 6.
Source: Knight Frank, RCA Source: Knight Frank, RCA NB. Excluding residential and multi-family dwellings NB. Excluding residential and multi-family dwellings
10 CHINESE OUTWARD REAL ESTATE INVESTMENT 2015 RESEARCH
RISKS? KEY FINDINGS AND Chinese market conditions OUTLOOK FOR 2015 There is an expectation that Chinese investors and developers will continue to expand into real estate markets overseas. Australia’s major gateway cities have been the greatest The softening of Chinese market Having invested heavily in gateway beneficiary of this over the past year. conditions (with its low yield, lack cities, such as Sydney and As the Chinese market continues to of investable stock and depressed Melbourne, Chinese investors are underperform, we expect to see active residential markets) continue to looking to diversify geographically, impact Chinese investors and moving from gateway locations to overseas expansion by these firms. developers. higher yielding leading provincial Given the distinctive policy-driven cities, such as the Gold Coast and nature of the Chinese market, With government policy Miami in the US. however, we should equally be aware encouraging firms to expand of the risk of policy reversals over overseas, we continue to see These investors will also diversify time. active involvement by the Chinese by broadening their sector
institutional investors, developers allocation from core office and Despite China relaxing government and some of the big banks. residential developments into restrictions and easing monetary hotels & leisure, student policy, Chinese house prices have The first wave of Chinese capital accommodation, industrial assets continued to slide, and an early outflow saw sovereign wealth and mixed-use developments. rebound in the sector is unlikely. An funds investing in trophy assets accelerated worsening of the Chinese and banks acquiring property for Due to the policy-driven nature of market may be a double-edged sword. owner occupation. Large the Chinese market, there remains While we may see more players in a developers followed, looking to a risk that China’s outward relatively strong financial position diversify with an overseas investment could be impacted by sustain their overseas investments and presence, and Australia has been policy adjustments. in fact continue to seek safe-haven one of the major destinations for markets like Australia, we may also this capital. The proposed changes to the see some cash-strapped developers foreign investment framework in and investors finding it difficult to In this current third wave equity Australia, announced as part of an continue their expansion efforts, investors and insurance firms are “options paper” released on 27 creating problems such as distressed seeking core and yield-driven February 2015, may also impact properties in the host cities. opportunities. Sunshine Insurance Chinese investment flows, albeit Group is the only Insurance even if implemented in their company to have invested in entirety, it is unlikely to deter the Australian policy Australia, however there is an large scale development and intervention expectation that activity will investment into commercial and increase during 2015 and 2016. residential development markets. In Australia, housing prices have risen by about 8% nationally in Australia We are now seeing the formation We expect 2015 will be another over the past year and closer to 14% of a fourth wave of investors, record year for Chinese outward in Sydney, driven by rising investor consisting of ultra-high net worth investment, both globally and into demand. The Reserve Bank of Individuals (UHNWIs), small to mid Australia, with $20 billion worth of Australia recently stressed the -cap state-owned enterprises investments likely. importance of maintaining rigorous (SOEs), and private developers standards on loans to property who are increasingly evaluating investors and flagged macro- their overseas strategy and prudential intervention. This is being exploring overseas growth. watched closely, as will a formal policy on the foreign investment framework, where the “options paper” is currently out for community feedback.
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