CHINESE OUTBOUND REAL ESTATE INVESTMENT: New waves, New Destinations
Presented by Paul Hart David Ji Executive Director Director, Head of Research & Greater China Consultancy, Greater China Chinese outbound Real estate investment
Two key questions Given the market uncertainties, will there be a reduction of investment from China? What factors bring investors to the market?
To Answer These questions We will look at… Domestic factors that drives outbound capital Global movement of Chinese capital – Who, where and what? Future trends and conclusion
2 How changes in the Chinese market drive outbound capital slowdown in the growth of China’s GDP & Household income
GDP Income 20%
18%
16%
14% Household growth slowed but stabilised at around 12% 8%-10% 10%
8%
6% GDP growth remains positive and stabilised at around 4% 6%-7% 2%
0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F 2017F
Source: CEIC, IMF, Knight Frank Research 4 Chinese residential inventory glut
Million sqm 500
450 Between 2005 to 2015, residential inventory T-1 cities: 34 million sqm 7.5% increased from 86 million sqm to 452 million 400 sqm, an annual compound growth of 18% 350
300
250
200
150
100
50
0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: National Bureau of Statistics, Knight Frank Research 5 Home price divergence between First & second-tier cities
Index Beijing Shanghai Guangzhou Shenzhen (Jan 2011=100) Tianjin Dalian Chengdu Wuhan 180 SZ
170
160
150
140 SH BJ 130 GZ
120
110 T2
100
90
80 2011 2012 2013 2014 2015
Source: National Bureau of Statistics, Knight Frank Research 6 Policy drivers for outbound investment
“Belt and Road” initiative, Asian Infrastructure Investment Bank Chinese policies aimed at channelling investment abroad
US trade law Latest move to remove legislative restrictions on foreign pension funds investing in US properties and REITs will raise interest.
Sino-British, Sino-Australian ties Capitalise on bilateral relationship improvement to drive investment
China’s 13th Five Year Plan Likely impact of changes in foreign-investment policies?
7 Who, Where & What Chinese outbound global real estate investment
US$ billion
35 Volume in 2015 almost double of 2014 Gateways Manhattan, London, Sydney 30 and Melbourne, takes more than 30 40% of total
25
20
15.8 15.1 15
10
5.6 4.4 5 2.3 0.6 0 2009 2010 2011 2012 2013 2014 2015
Source: RCA, Knight Frank Research 9 Note: Data as at end 2015 Outbound investment status of developers & Insurers
Top 20 players who made offshore investments An analysis of the top 10 deals 2014 2015 2014 2015
Developers 10 14 Developers 3 2
Insurance companies 4 6 Insurance companies 2 6 SWF, Banks, Funds 5 2
Developers more active but insurance companies are focused on bigger deals
Source: Knight Frank Research 10 Top 10 Chinese outbound investment deals in 2015
Consideration Date Purchaser Property Name Location Property Type (US$ million)
Feb Anbang Insurance Waldorf Astoria Manhattan Hotel 1,950
Aug Anbang Insurance Heron Tower London Office 1,172
China Investment Corp Jan Meguro Gajoen Tokyo Office 1,170 (JV LaSalle Investment)
Jul Taiping Life Insurance 111 Murray Street Manhattan Dev site 820
Jan Greenland Group Tebrau Bay Waterfront City Malaysia Dev Site 683
May Bank of China 7 Bryant Park Manhattan Office 600
Jan Ping An Insurance Tower Place London Office 506 China Life Insurance Oct (JV Qatar Investment 99 Bishopsgate London Office 420 Authority) Merrill Lynch Financial May Anbang Insurance Manhattan Office 414 Center Jul Fosun International Ltd Palazzo Broggi Milan Office 384
Source: RCA 11 Note: Data as at end 2015 Chinese outbound investment in gatewayS
US$ million London Manhattan Sydney & Melbourne
6,000
5,000
4,000
3,000
2,000
1,000
0 2010 2011 2012 2013 2014 2015
Source: RCA, Knight Frank Research 12 Note: Data as at end 2015 Chinese investment heavily focuses In gateways
100%
90%
80%
70%
60%
50% 88.3% 90.5% 40%
30% 52.3% 20%
10%
0% Manhattan London Sydney & Melbourne
Source: RCA, Knight Frank Research 13 Chinese investment in the US in 2015
Other cities 37.5% The majority of Manhattan 52.3% US$5.78 billion Chinese capital flowed into Manhattan
Houston 1.7%
Dallas 1.7% Seattle 1.9% Chicago 2.2% Los Angeles 2.8%
Source: RCA, Knight Frank Research 14 Note: Data as at end 2015 Chinese purchases in US: key transactions in 2015
Source: Knight Frank Research 15 Chinese purchases in London: key transactions in 2015
Source: Knight Frank Capital Markets, RCA 16 advantages enjoyed by Chinese purchasers over others
Commercial price index in the City of London
GBP USD EUR SGD TWD RMB 140 £: 28% increase 120
100
RMB: 19% 80 discount from Q2 2007 60 price level
40
20
Q22007 Q32007 Q42007 Q12008 Q22008 Q32008 Q42008 Q12009 Q22009 Q32009 Q42009 Q12010 Q22010 Q32010 Q42010 Q22011 Q32011 Q42011 Q12012 Q22012 Q32012 Q42012 Q22013 Q32013 Q42013 Q12014 Q22014 Q32014 Q42014 Q22015 Q32015 Q42015 Q12011 Q12013 Q12015
Source: Knight Frank Research 17 Chinese outbound investment by sector Globally
2015 2014
Industrial Industrial 5% 2%
Dev site Dev site Office 27% Office 36% 42% 40%
Retail 8% Hotel Retail Hotel 18% 14% 8%
Source: RCA, Knight Frank Research 18 New supply’s relative size to total stock (2016-2019)
London
5.2% 12.6 million sq ft
Manhattan
4.7% 10.3 million sq ft
Sydney & Melbourne
10.9% 11.9 million sq ft
Source: NGKF, Knight Frank Research 19 Hong Kong market Major deals completed by Chinese Institutions in Hong Kong in 2015
Consideration Date Purchaser Property Name Property Type (US$ million)
Nov Evergrande Group MassMutual Tower Office 1,612.8
New Kowloon Inland Lot Dev Site Sep Shimao Property 905.8 No. 6542 (Residential)
Nov China Life Insurance One HarbourGate Office 755.1
Tuen Mun Town Lot Dev Site Sep China Poly Group 223.2 No. 542 Castle Peak Road (Residential) Sha Tin Town Lot Dev Site May CITIC Pacific 189.5 No. 605 (Residential) Dev Site Sep Centralcon Group 11 Au Pui Wan Street 144.5 (Mixed) Chinalco Overseas Dec Far East Finance Centre Office 48.0 Holdings Limited
Source: RCA 21 Why the office sector: supply & demand 2009-2019
Grade-A office completion (million sq ft) 4
3 Average annual completion between 2016-2019 is 1.75 million sq ft
Historical annual take up is around 1.9 2 million sq ft
1
0 2009 2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F
Source: HKSAR Rating and Valuation Department / Knight Frank Research 22 Chinese developers in Hong Kong
No of flats
80,000
70,000 67,000 It is estimated that Chinese developers will provide around 6,000 flats, or around 60,000 8% of the total supply in the next 50,000 three years (2016-2018)
40,000
30,000
20,000
10,000 6,000
0 Hong Kong developers Chinese developers
Source: Knight Frank Research 23 Future trends and Conclusion Outbound investment status of major Chinese Developers
Outbound Outbound 2014 Property investment investment Rank Developer sales status status (US$ billion) (2014) (2015) 1 Greenland Group 37.7 In 2014, six of the top 10 developers 2 Vanke Group 33.7 invested off shore, by 2015, this rose to 3 Wanda Group 25.1 eight 4 Poly Real Estate 21.4 Looking at the next 10 in the ranking six 5 Evergrande Group 20.6 also invested in 2015 6 Country Garden 20.2 7 China Overseas Land & Investment 17.6 8 Greentown China 12.4 9 Sunac China 11.2 10 Shimao Property 11.0
2014 Outbound Outbound Premium investment investment Rank Insurance company income status status (US$ billion) (2014) (2015) 1 China Life Insurance 58.2 In 2014, four of the top 10 insurers 2 PICC 51.9 invested off shore, by 2015, this rose to six 3 Ping An Insurance 49.6 4 China Pacific Insurance 30.0 None of the smaller insurers invested offshore 5 New China Life Insurance 17.2 6 China Taiping 12.3 7 Taikang Life 10.6 8 Anbang Insurance 9.1 9 Sunshine Insurance 6.1 Already made investment offshore 10 Sino Life 5.7 No investment offshore
Source: Knight Frank Research, public sources 25 Insurers’ investment in developers Gives Dual Exposure
New China China Life Ping An Anbang Sino Life Foresea Life Hexie Health Life Insurance* Insurance* Insurance* Insurance Insurance Insurance Insurance China Vanke* 7.01% 24.26%
Greenland Group* 20.14%
Country Garden* 9.91%
Sino Ocean Land* 29.99% 29.98%
China Jinmao 9.50%
Gemdale 14.60% 27.63% Corporation* Financial Street 13.35% 15.88% Holdings
Landsea Group* 9.90%
* The firm has also invested in overseas property markets
Source: Knight Frank Research, public sources 26 “Fourth wave” investors Look at Regional hubs
“Fourth Wave” investors - a mixed group of investors consisting of lesser known small- to mid-cap companies and developers, private equity funds and individuals, who were increasingly active in overseas markets. These “Fourth Wave” investors are after quality stock available in primary and secondary locations, especially in the US and Australia. For example:
Kuafu Properties, a New-York based developer backed by a Chinese private fund, acquired four US properties within one year of entering the market, spending over US$500 million.
Landsea Group, a small specialized developer, teamed up with Miami-based homebuilder Lennar to develop a condominium tower in Manhattan.
Wanxiang Group, an auto parts manufacturer, has invested in more than 60 US properties since 2010, including office, retail, industrial, hotel and development sites.
Macrolink Group, an international trader engaged mining, chemicals and financial investment acquired several plots in the Iskandar Development Region in Malaysia, where it plans to develop tourism-related projects.
Nanshan Group, a private-owned Chinese conglomerate, acquired the Pullman hotel at Sydney Airport for US$61 million.
Source: Knight Frank Research 27 Inbound property investment for Shanghai
US$ billion Shanghai inbound investment volume 7
6
5
4
3
2
1
0 2010 2011 2012 2013 2014 2015
Source: RCA 28 Note: Excluding development site deals Top 10 Shanghai Inbound deals in 2015
Consideration Date Purchaser Seller Property Name Property Type (US$ million) Shui On Land Limited Aug The Link REIT JV Brookfield Property Corporate Ave 1 & 2 Office 1,031 Partners Lee Kum Kee JV China Dec Shui On Land Limited Corporate Avenue 3 Office 891 Vanke ARA Asset Management Sep CSI Properties Platinum Tower Office 448 Group Carlyle Group JV CLSA Aug Yuexiu REIT Hongjia Tower Office 423 Capital (Citic) ARA Asset Management Dec Gaopeng Shanghai RE BEA Finance Tower Office 422 Group
Aug Blackstone LVMH JV Arnault family L'Avenue Office 403
Gaw Capital JV He Aug PAG JV Goldman Sachs Ciro's Plaza Office 330 Xiaoqiong Mapletree Commercial Jun Morgan Stanley Sandhill Plaza Office 303 Trust Franshion Properties JV AVIC Joy Holdings (HK) Shanghai Intl Shipping Jan Shanghai International Office 252 Ltd Service Center (Bldg 17) Port Group Co Ltd Manpo International Oct Carlyle Group Yuchang Property Group Office 233 Plaza
Source: RCA 29 Note: Excluding development site deals. Preliminary data as at December 2015. Conclusion
Chinese outbound investment is expected to be strong in 2016, supported by a growing need of diversification from the cooling domestic market. Going forward, the US, given its market depth and diversity, will remain the most important destination for Chinese investors. Large institutions will continue to target major gateways where there is quality pipeline and strong rental and capital value growth prospects. Meanwhile, small- to mid-cap (so-called “Fourth Wave”) investors will seek opportunities in regional hubs. Chinese insurance companies will remain as the key investor in the next few years. They will also continue to take an interest in developers who have extensively expanded overseas. Open, business friendly, and with sufficient supply of quality commercial property, Shanghai has become the focus for inbound investment into China. In contrast to recent curb on outflow of individual funds, the Chinese government’s various initiatives, such as “Belt and Road” and Asian Infrastructure Development Bank, are going to encourage Chinese firms and their investment expand overseas.
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