Savills World Research Shanghai

Snapshot China Plc ventures overseas August 2013

savills.com.cn/researchsavills.com.cn/research 01 Spotlight | China Plc ventures overseas – Who's buying and why? August 2013

Spotlight China Plc ventures overseas – Who's buying and why?

Chinese investments to date are the opening salvo or the exploratory foray for what is SUMMARY expected to be a much bigger wave of capital in  China’s economy and its property market have grown by leaps and bounds over the last two coming years. decades, with the economy growing from RMB1.86 trillion in 1990 to RMB51.9 trillion in 2012 (28 times Introduction China’s market proved so large 1990 levels). The property market meanwhile has shown even higher levels of growth, with real estate After Zheng He's voyages in the and underdeveloped that many investment rising from RMB25.3 billion to RMB7.2 15th century, China adopted an opportunities presented themselves without the need to travel overseas. trillion over the same period (283 times 1990 levels). increasingly isolationist foreign policy. As China’s property markets have developed, Companies were operating at a very This remained largely intact in one competition has increased and scope for further rapid rudimentary level and economic form or another until the country growth has become more limited. In order to maintain development had been set back embarked upon a series of economic growth and dynamism, companies, developers and by the Cultural Revolution (1966 to reforms in the 1970s. This started by investors are increasingly turning overseas to find increasing trade volumes (primarily 1976). This meant that for the longest new opportunities. export trade) with the rest of the time, there was no need nor means world, followed by encouraging for China to explore opportunities  For large Chinese companies it is important to foreign direct investment into China to overseas. diversify to mitigate risks and smooth out cycles. This establish manufacturing facilities. This can take the form of exploring new business lines, in turn developed into investment in The last decade or so has seen revenue types or geographical locations. Companies other components of the supply chain the country develop in terms of can also benefit from overseas exposure by learning (including R&D, product development, its economy, competitiveness, how other markets work and bringing that know- how back to their domestic markets, and by building sales and marketing) as well the culture and confidence. There has their brand image overseas, which will make it easier entrance of yet more companies as also been an increasing outflow of for them to raise capital in international markets in the country’s consumer market and people moving overseas, or visiting the future. The once-in-a-generation revaluing of intellectual resources improved. This for schooling and tourism, and a rising demand for exposure to real estate assets in North America and Europe and was accompanied by an influx of the strength of the renminbi have also presented other countries and cultures. This, western culture and business know- significant value propositions for Chinese developers combined with increasing competition how in the form of media, brands and and investors willing to bet on these still fragile in the domestic property market and values, as well as expatriate workers economies. and tourists. the weakness of overseas markets,  One of the more interesting characteristics of the Chinese overseas corporate purchase trend is GRAPH 1 that it follows on the back of an explosion in Chinese China ODI outflow and stock, 1990–2011 individual purchases of luxury western products, overseas holidays and residential properties. This Flow (LHS) Stock (RHS) 80 400 already large and growing consumer base gives Chinese companies venturing into overseas markets 70 350 for the first time a base of experience which can be leveraged 60 300  Navigating the regulatory, tax and market

50 250 complexities can be a struggle though, for even the US$ billion best companies. Out of the vast number of Chinese 40 200 companies there will no doubt be some who will US$ billion become global giants to rival the best firms from

30 150 the US, UK, Europe, Japan or Korea, but it will take time and not all will necessarily succeed. Those who 20 100 do will be at the head of the pack – much as Haier was able to turn itself around under the stewardship 10 50 of Zhang Ruimin in 1985 when they placed quality control at the forefront of company priorities. Haier 0 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 is now the largest white goods manufacturer in the world. Source: UNCTAD, Savills Research

savills.com.cn/research 02 Spotlight | China Plc ventures overseas – Who's buying and why? August 2013

has presented good opportunities GRAPH 2 for China to acquire land, resources, ODI by country, 2008–2011 companies, brands and real estate. 2008 2009 2010 2011 2009-2011 Overseas investment 450 While still small compared with other 400 countries, overseas direct investment (ODI) activity in China since the 350 global financial crisis (GFC) has been 300 significantly higher than during the ten years prior to this (average ODI 250 from 1998 to 2007 was US$7.9 billion compared with average ODI from 200 US$ billion 2008 to 2011 of US$60.7 billion). 150

Mainland China was the ninth 100 largest investor in overseas markets from 2008 to 2011. If combined 50 with Hong Kong, through which a 0 large proportion of mainland China investment passes, greater China would be the second largest source of investment in the world after the US Source: UNCTAD, Savills Research with US$146 billion. Individual investors in GRAPH 3 residential properties Chinese outbound tourism, 1994–2012 Why? Outbound tourists YoY growth For high net worth individuals (HNWIs) 90 45% who have a significant percentage of their investment tied up in real 80 40% estate there are several advantages to investing overseas. The most 70 35% important is portfolio diversification but to this advantage can be added 60 30% capital security as well as a desire to enjoy the material and social benefits 50 25% afforded by advanced western democracies. 40 20% million persons

Tourism/greater integration with the 30 15% rest of the world As China opens up to the rest of the 20 10% world in terms of investment and 10 5% business opportunities, a natural consequence is the greater exposure 0 0% of its citizens to the outside world. 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Chinese outbound tourism, along with Source: CEIC, Savills Research overseas expenditure, has already had an incredible impact on some key overseas markets. Total outbound ranks third (2.4 million) and Taiwan Case-Shiller 20-City Composite Home tourism totalled 83.2 million people in fourth (1.8 million) after loosening Price Indices, fell by 35%, rising 2012 up from just 10.5 million people controls on mainland arrivals. The thereafter by 14% through to April in 2000 prior to China’s joining of the biggest growth has been in Southeast 2013. As values have fallen and rents World Trade Organization in 2001, Asian countries, however, with have remained more stable, residential equivalent to a compound annual Cambodia recording a 446% growth yields have increased in New York and growth rate of 19%. In 2012, total in mainland tourist arrivals from 2009 currently stand at 5% to 7%. overseas expenditure by Chinese to 2011, followed by Malaysia (185%) tourists totalled US$102 million. and Thailand (144%). The UK market peaked in October 2007, according to Nationwide Index, While the vast majority of tourists Market fundamentals and bottomed out in February 2009 head to the usual spots of Hong The US market peaked in April 2006 having fallen by 19.4%. Since then, Kong (28.3 million) and Macau (19.8 and eventually bottomed out in prices have recovered 11% of their million), the second level of tourist February 2012. During that period value through to June 2013. London destinations is changing. South Korea house prices, according to the S&P/ has performed much better, according

savills.com.cn/research 03 Spotlight | China Plc ventures overseas – Who's buying and why? August 2013

to the seasonally adjusted quarterly GRAPH 4 index from Nationwide. London prices Chinese outbound tourism by destination, 2011 peaked in Q4/2007, fell 20% through to Q1/2009 and have since increased 2.9% 3.2% 28% through to Q2/2013, with prices 2.7% Macao now 3% above their previous peak. South Korea 3.6% 2.4% Again, rents have kept pace with 1.9% Taiwan prices and yields have consequently Malaysia 1.6% remained relatively healthy at around 3.9% Japan 4% to 6% for prime downtown 1.4% Thailand USA London. 0.9% 47.1% 52.9% Cambodia 4.1% 0.9% While markets such as New York and Vietnam Singapore London have some of the highest Russia yields of key international cities, 4.4% Australia they also have some of the lowest Indonesia interest rates in the world (US 30- 13.2% Italy year mortgage rates were 4.29% 5.6% UK on 3 July 20131; UK five-year fixed Other mortgage rates were 3.96% in May 20132), giving investors a healthy yield Source: CEIC, Savills Research spread and return on investment, GRAPH 5 even if values remain unchanged. This compares with China where Residential yields by city, Dec 2012 mortgage rates are in the region of 7% 6% to 7% but rental yields for strata- title properties are typically only 2% 6% to 3%. This may not matter if the buyer is putting up 100% equity, as 5% is still often the case in China, but if financing is needed this becomes very 4% important.So buyers in the US and UK markets are currently faced with healthy rental yields the prospect of 3% further capital value appreciation and low interest rates – a compelling story 2% for many investors. 1% Emigration A recent report by China Merchants 0% Bank and Bain & Co, 2011 China Private Wealth Report, highlighted the extent to which emigration is Source: Savills 2013 World Cities Review considered by China’s HNWIs. According to the report, among GRAPH 6 those mainland business owners Chinese HNWIs’ attitudes toward investment immigration, 2011 who possess over RMB100 million, 11% have already emigrated, while No, Never think about it a staggering 47% are considering Yes, have considered but have not made decision yet Yes, have decided to apply for investment immigration in future emigrating. Key reasons for Yes, already completed investment immigration considering emigration include education, wealth security and 11% preparation for retirement. 12% 42% Policy support/citizenship/pro- investment In order to stimulate job creation and economic growth, many countries hit by the GFC are actively looking at encouraging inward investment. 35% Countries reciprocate by offering some form of permanent residency, conditional on the overseas investors

1 Freddie Mac. Source: 2011 China Private Wealth Report, China Merchants Bank and Bain & Co 2 Mortgage Advice Bureau.

savills.com.cn/research 04 Spotlight | China Plc ventures overseas – Who's buying and why? August 2013

satisfying certain conditions. These GRAPH 7 criteria will vary by country, and Chinese HNWIs’ reasons for investment immigration in many cases by region within a country, and as such can be a minefield for investors. These Children's education 58% regulations are also often changed, making it that much harder to compare countries’ investment Wealth security 43% hurdles. Investment volumes currently range from roughly US$100,000 up to Preparation for retirement 32% around US$5 million. Most will require a minimum term of investment and Convenience of overseas investment / business the money to support employment. development 16% In some, but not all cases, permanent residency will be extended to families Ease of travel abroad 7% as well.

Some of the countries which currently Have more children 6% have citizenships for investment schemes include: Lower tax rate 6% - Antigua & Barbuda - Austria Source: 2011 China Private Wealth Report, China Merchants Bank and Bain & Co - Australia - Bulgaria GRAPH 8 - Canada Chinese tertiary student populations, 2009* - Dominica - Germany 140,000 - Hong Kong - Latvia 120,000 - New Zealand - Panama 100,000 - Portugal

- Saint-Kitts and Nevis 80,000 - Singapore - UK 60,000 - Uruguay Students - US 40,000

Wealth security 20,000 Despite significant improvements in the rule of law, there are still concerns 0 about wealth security in China, with this issue being the second most important consideration highlighted in the recent China Private Wealth Source: OECD Statistics, Savills Research Report. The US, UK, Australia * Data unavailable for a number of countries, eg, France, Japan, South Korea. and Canada are viewed as having significantly better protection of possible, but will also look good on indicators has become the second wealth, although tax regimes can their CV, enable them to establish a fastest in the world. Nevertheless, present an obstacle to HNWIs. network with other high achievers/ China is still an emerging or middle- privileged families and give them income country and the pace of Supporting children studying overseas greater international exposure, and economic growth and prosperity The one-child policy has placed a improve their English language ability, which has been generated has come lot of emphasis on the support and which, as China continues to integrate at a cost. education of the younger generation. with the rest of the world, becomes While China has many good more important. Law and regulations have failed to secondary and tertiary education keep pace with the market or have facilities, they remain second place Quality of life (pollution, hygiene, been poorly implemented, while to some overseas institutions. Many food safety, healthcare, environment, corruption is still a major issue. As Chinese families tend to view the recreation, education, individual consumption rises so do prices UK as having the best secondary freedoms) as demand often outstrips supply, education and the US as having the Over the past 30 years, China has especially in the case of food. best tertiary institutions. Studying reached its target of lifting 500 million This can also lead to food safety overseas is not only expected to people out of poverty, and the rate concerns, as with the case of baby give their child the best education of increase in human development milk powder.

savills.com.cn/research 05 Spotlight | China Plc ventures overseas – Who's buying and why? August 2013

Air and water quality are also major Hong Kong now has three types of stamp duty: concerns as heavy industry, energy Buyer's Stamp Duty (BSD) – specific to corporate and non-Hong Kong permanent residents (HKPR) of production and car exhausts increase residential properties; 15% on the stated consideration or the market value of the property (whichever is the number of fine particulates. higher). Beijing’s PM2.5 readings generally range somewhere between 100 and Special Stamp Duty (SSD) – relating to the holding period of residential properties. 500 µg per m3 with slightly lower Holding period % levels in Shanghai, compared with air ≤6 months 20 quality standards for the European Union at PM2.5 <25 µg per m3. >6 months–≤12 months 15 >12 months–≤36 months 10 According to the World Bank, total <36 months 0 health expenditure (both public and private) accounted for just 5.2% of Source: Savills Research GDP for China in 2011 versus 17.9% Double Stamp Duty – dependent on property values and whether the property is the primary residence in the US, 11.2% in Canada, 9.3% in of a HKPR, applicable to both residential and commercial properties. the UK and 9.0% in Australia. China’s expenditure is low when compared Value (HK$ million) HKPR primary residence Others (%) to first-world countries, but is on a ≤2 HK$100 1.50 par with other developing countries >2–≤3 1.50% 3.00 in Asia and has improved over recent years. >3–≤4 2.25% 4.50 >4–≤6 3.00% 6.00 Status symbols >6–≤20 3.75% 7.50 While conspicuous consumption is becoming slightly less common <20 4.25% 8.50 among ultra wealthy individuals, Source: Savills Research status symbols are still important. Many wealthy Chinese may own TABLE 1 high-end properties in China’s main Prime London residential market share by global region, 2012/2013 cities of Beijing and Shanghai, while fewer have properties in Hong Kong Global region – share of prime Share of total prime Share of resale Share of new-build and Singapore, and yet fewer in New London market London sales (%) market (%) market (%) York, London or Sydney. However, UK 53.7 61.4 25.9 as wealthy individuals purchase properties in these markets there is Western Europe and Nordic 13.6 15.9 5.3 a strong incentive to keep pace or Hong Kong and China 7.4 2.1 26.6 to go one step further by investing Asia Pacific and Australasia 6.4 3.0 18.4 in a vineyard in Bordeaux, a castle in Scotland or a resort in Bali. Middle East and North Africa 5.4 3.6 11.7 Eastern Europe and The CIS 5.1 4.1 8.6 Who is buying properties? South Asian subcontinent 3.4 3.9 1.4 The first wave of Chinese buyers North America 3.3 3.8 1.4 comprised the ultra HNWIs. They travel often and typically have Africa 1.7 2.0 0.6 business operations overseas, and Latin America <0.5 <0.5 <0.5 therefore they have money overseas. Source: Savills Research The second wave of buyers has been looking at buying properties for their countries witnessed a trend of has encouraged mainland Chinese to offspring or to achieve permanent individuals buying properties as early look to other markets such as the UK, residency. The third wave is likely to as 2005 but this has gained significant US, Canada and Australia. be investors, chasing higher yields momentum over the last four years, and more reasonable prices. so much so that barriers to overseas In the UK, mainland Chinese and buyers have had to be erected in Hong Kong buyers now account for Where are they buying? order to protect local first-time buyers 7.4% of transactions in the prime The first forays tend to be into safer, from being priced out of the market. London market and more than a more established, transparent, liquid As these regulations have just recently quarter of the first-hand market, even and international markets in those been implemented, they have had an beating UK nationals. jurisdictions with cultural or linguistic/ impact on transaction volumes, but ethnic ties with China or with a large this has yet to flow through to pricing The US has also been a significant Chinese migrant population. The in a significant way. destination of investment for Chinese markets which first saw Chinese HNWIs. According to a recent report investment were therefore Hong This, along with better value-for- published by the National Association Kong, Macau and Singapore. These money propositions in other markets, of Realtors (NAR) in June 2013,

savills.com.cn/research 06 Spotlight | China Plc ventures overseas – Who's buying and why? August 2013

Chinese buyers accounted for 12% GRAPH 9 of international sales, up from 11% in Distribution of international sales in the US by country of origin 2012. This is equivalent to just over US$8 billion, versus total international (selected countries), 2007–2013 sales of US$68.2 billion and total Canada China Mexico India UK Argentina Germany existing home sales of US$1.08 Brazil France Russia Korea Venezuela Japan Other trillion. 100%

According to the NAR, approximately 90% 53% of reported purchases by 80% Chinese nationals were in California. There was an even mix of detached 70% single-family and multi-family housing with a median price of US$425,000 60% (the highest out of the key buyers), 50% and about 69% of purchases were reported as all-cash purchases. 40%

30% 11% Similar trends have been seen in 8% 8% 8% 12% Australia, with a number of high- 20% 5% profile transactions such as the A$50 5% 10% million (US$46 million) sale of Altona, a home in the Sydney suburb of 0% Point Piper. Investment in Australian Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 property is not limited to this segment, Source: NAR, Savills Research however, with China ranking third behind the US and Singapore for overseas investment in commercial GRAPH 10 and residential real estate. This Chinese migrant population, 2010 accounts for A$4.19 billion, or 7%, of the A$58.40 billion of overseas Chinese immigrants Chinese as % of immigrant population investment in the year ending 30 June 2.5 100% 2013, according to Australia's Foreign Investment Review Board. Even markets like Australia have restrictions 2.0 80% on purchases by overseas nationals, with non-residents unable to buy 1.5 60% an existing home, and temporary residents who purchase a home having to sell it when they leave. 1.0 40%

What are they buying? million persons Given the relative youth of the 0.5 20% Chinese property market, many individual buyers of high-end

properties are used to buying first- 0.0 0% HK US UK hand developments. This preference Italy Spain Japan Macao Jordan Ireland France

seems to have made the transition Canada Sweden Belgium Panama Thailand S. Korea Australia Malaysia Mauritius Germany Myanmar Indonesia Singapore into overseas markets as well, with Philippines Netherlands New Zealand New

Chinese buyers largely focusing N. Mariana Is. on new-builds. As was seen in the Source: The World Bank, Savills Research previous table of prime London purchases, mainland Chinese and Chinese buyers also tend to cluster lump sums or unit prices in more Hong Kong purchases accounted for in specific communities within value-defensive locations. just 2% of second-hand properties countries and cities, typically but 27% of first-hand properties. where relatives and family friends Chinese companies already live/work. The purpose of investing overseas Developers’ sales teams will also be the property acquisition will also Why are Chinese companies going more familiar with handling overseas dictate the location and type of overseas? buyers, with certain high-end property purchased – with many While company and brand purchases developments having aggressive properties bought for offspring have been around for a number overseas sales campaigns. Also, in studying overseas, proximity to the case of Australia, overseas buyers schools and universities can be a of years, it has only been recently are limited by recent legislation to only key consideration. Purchases for – really the last year or so – that new-build purchases. investment tend to have slightly higher investors and developers have started

savills.com.cn/research 07 Spotlight | China Plc ventures overseas – Who's buying and why? August 2013

acquiring commercial properties and TABLE 2 development sites overseas. Overseas acquisitions by Chinese companies

Diversification and spreading risk Chinese acquiring company Target company Year Diversification has been something Lenovo IBM’s Thinkpad division 2004 that Chinese developers have lacked in the past, having focused Sichuan Tengzhong Heavy Industrial Machinery Company Hummer 2004 primarily on residential development Nanjing Automotive MG Rover 2005 for the sales market. Recently, more Zhejiang Geely Holding Volvo 2010 developers have been entering the commercial sector (less susceptible China Aviation Industry General Aircraft Cirrus 2011 to government regulations) and Fosun Folli Follie 2011 many more developments are being YGM Trading Aquascutum 2012 released to the leasing market (less susceptible to weak sales markets) Bright Food Weetabix 2012 as they look to broaden business Shandong Heavy Industry Group Ferretti 2012 operations within China. Dalian Wanda AMC 2012

Brand image Dalian Wanda Sunseeker International 2013 Source: Media sources, Savills Research As with companies such as Lenovo, which acquired IBM’s Thinkpad division in 2004, developers are GRAPH 11 looking at building their brand image Renminbi appreciation, Jan 2005–Jan 2013 at home and overseas by investing in key landmark developments which USD JPY EURO GBP AUD will carry their name. This is becoming 20% increasingly important as developers, 10%

tired of having their credit lines RMB

controlled by the government through Weakening state-owned bank lending quotas, 0% are looking to overseas financing avenues, such as corporate bonds and stock listings. -10%

Value purchases -20% A combination of weak western Strengthening markets, and falling values, combined with a strong Chinese market and -30% asset inflation at home, as well as a RMB strengthening of the renminbi, has -40% meant that for Chinese investors, overseas acquisitions are a much -50% better value proposition than they Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 have been for a very long time. Source: The World Bank, Savills Research

While net office and retail yields investments rely a lot more on value developers and investors to dip into in markets such as Shanghai and appreciation, which, based on overseas markets and gain more Beijing range between 4% and 5% aggressive rental appreciation or yield direct and in-depth knowledge about (sometimes even lower), in markets compression, is a lot more risky. how to operate there. such as London’s West End it was still possible to achieve net yields Learning process Utilising sales networks in China of 4.75% in Q1/2013, and with Operating solely in China, many As individuals and non-real estate lease terms typically 15+ years with developers and investors have a very corporations start to move overseas upward only revisions, rental income China-centric approach to real estate. in greater numbers (whether it be is relatively secure. At the same As more overseas developers and Hong Kong, Singapore, Canada, time, as with the individual market, investors enter the market, Chinese Australia, the US or the UK), Chinese lending rates are much lower than players are understanding more developers and investors have a in China, allowing a positive carry about the value of their approaches distinct advantage over overseas on the investment. While forecast to property and are eager to learn players with their extensive sales internal rates of returns tend to be more. This can be achieved through networks at home. Products lower in the UK than in China, a joint ventures, and overseas operators launched to mainland buyers or higher proportion of this return is from are also very eager to work with occupiers are likely to be much more rental revenue rather than capital domestic companies to leverage their successful in China should they have appreciation, making the investment relationships, networks and scale. the backing of a domestic real estate much more secure. However, Chinese The other approach is for domestic giant.

savills.com.cn/research 08 Spotlight | China Plc ventures overseas – Who's buying and why? August 2013

Where? Who? What? GRAPH 12 Chinese developers and corporate Renminbi appreciation, Jan 2005–Jan 2013 investors are following similar patterns in terms of countries in which they invest, looking at mature, prime and stable locations to make their first purchases. The largest receiver of Chinese money over the two-year period ending 19 June 2013 was the US, with US$5.0 billion worth of investment in commercial projects and development sites, followed by the UK at US$2.2 billion. Developers Currently, it is primarily Chinese developers who are making the largest push overseas, but even this is just the tip of the iceberg, Source: Real Capital Analytics, Savills Research with their overseas schemes paling in comparison with their China operations. Vanke recently acquired a TABLE 3 75% stake in a development project Top Chinese buyers of overseas properties, Jan 2007–Jun 2013 in San Francisco in conjunction with Acquisitions No. of Tishman Speyer for US$175 million; Buyer Capital type (US$ million) properties this is equivalent to 1.1% of their 2012 revenues. Vanke had a net income China Investment Corp Sovereign wealth fund 5,472.1 105 of US$2 billion (RMB12.55 billion) in Zhang Xin HNWI 1,949.2 2 2012 on revenue of US$15.4 billion (RMB96.9 billion) from selling 12.95 SAFE Sovereign wealth fund 1,853.0 13 million sq m of property, while its net State-owned enterprise Agricultural Bank of China 629.0 1 asset value was close to US$23.2 (SOE) billion (RMB142 billion) in June 2013. China Construction Bank SOE 600.3 4

Other recent investors overseas have China Vanke REOC 583.2 3 included the likes of Dalian Wanda (London and New York), Greenland Hao Yuan Investment Developer/owner/operator 525.8 3 Group (Sydney, Los Angeles and HNA Group Developer/owner/operator 501.7 3 Spain), Xinyuan Real Estate (New York), China Overseas Land (London), Source: Real Capital Analytics, Savills Research ABP (London) and SOHO’s Zhang Xin (New York). TABLE 4 Chinese developers by sales volume, 1H/2013 There have also been a number of less high profile deals recorded within (RMB (RMB # Developer Type # Developer Type the Asia Pacific region involving billion) billion) Greenland Group (Thailand), Country 1 Vanke Public 83.0 11 Longfor Public 23.5 Garden (Malaysia), Vanke (Singapore and Hong Kong), Shanghai Wanfeng 2 Greenland Public 65.3 12 Sunac Private 23.5 Group (Laos) and Zhouda Real Estate China Overseas 3 SOE 64.5 13 CITIC SOE 22.0 Group (Malaysia’s Iskandar). Land

Moreover, many developers have 4 Poly SOE 63.5 14 China Merchants Property Private 20.8 invested in South Korea’s Jeju Island 5 Evergrande Public 48.2 15 R&F properties Private 20.1 located off the country’s south coast. According to a report by the Korea 6 Dalian Wanda Private 35.1 16 Sino Ocean Public 17.5 Times at the start of 2013, Jeju Free 7 Country Garden Public 34.0 17 Gemdale Public 16.9 International City Development Center (JDC) has attracted a total of 12 8 China Resources SOE 33.0 18 China Fortune Land Private 15.9 investment projects worth KRW5.6 9 Shimao Public 32.5 19 Agile Property Holdings Private 15.3 trillion (US$5.2 billion) since 2006, of which ten projects were financed and 10 Greentown Private 28.3 20 Beijing Financial Street SOE 14.5 undertaken by Chinese developers Source: CRIC

savills.com.cn/research 09 Spotlight | China Plc ventures overseas – Who's buying and why? August 2013

China’s real estate development TABLE 5 industry is very fragmented with the Chinese banks’ market capitalisation, 30 Apr 2013 top 20 property developers having only roughly a 20% market share. As Assets Pre-tax Return on Return Loan-to- Tier 1 capital the market continues to mature, this is Rank Bank (US$ profits capital on assets asset ratio (US$ million) changing and the leading developers million) (US$ million) (%) (%) (%) are evolving their business models. Many of the largest developers are 1 ICBC 160,646 2,788,906 49,076 30.6 1.8 50.4 controlled by the central government, and as such may meet with some 5 CCB 137,600 2,221,435 39,974 29.1 1.8 53.3 resistance when investing overseas, especially in more politically sensitive 9 BOC 121,504 2,015,996 29,790 24.5 1.5 63.2 areas, where investment is seen to be directed by Beijing rather than 10 ABC 111,493 2,105,619 29,877 26.8 1.4 48.6 being driven purely by commercial considerations. Bank of 23 57,613 838,375 11,958 20.8 1.4 62.1 Communications Banks 47 China Citic Bank 31,171 470,579 6,615 21.2 1.4 56.2 According to a report by the China banking regulatory committee, by the China Merchants 50 28,868 541,847 9,470 32.8 1.8 67.2 end of 2012 there were 3,747 banking Bank institutions in China with RMB20.3 Source: The Banker trillion in assets. China also has four of the ten largest banks in the world: Industrial & Commercial Bank of China (ICBC), China Construction TABLE 6 Bank (CCB), Bank of China (BOC) and China’s SWFs Agricultural Bank of China (ABC). Assets Fund Inception Origin The mainland entities of Chinese (US$ billion) banks are currently unable to acquire real estate for investment SAFE 567.9 1997 Non-commodity purposes; however, they are able CIC 482.0 2007 Non-commodity to buy commercial assets for self use. Indeed, they have become a NSSF 160.6 2000 Non-commodity significant contributor to commercial sales in many cities throughout China-Africa Development Fund 5.0 2007 Non-commodity China. Source: The Banker In June 2013, China Merchants Bank acquired a 57,000-sq m development in Beijing’s Financial Street for Many of the larger Chinese banks RMB800 million, and in Beijing’s RMB3.9 billion, one of the biggest have Hong Kong investment banking Diamond Building (Shangdi) and deals in recent quarters. In Shanghai functions and these entities are not Silicon Valley T4 (Zhongguancun) in 2009, CCB and ABC agreed to prohibited from investing in real estate. in Q2/2013 for RMB660 million. buy the then under-construction first Some of the key banks include: Investments tend to be focused on phase of CITIC Pacific’s Shipyard China deals with few having been project, two office towers totalling - China­ International Capital transacted in other territories. 180,000 sq m and costing roughly Corporation (CICC) RMB43,000 per sq m. Insurance firms ­- CCB International (CCBI) There are an estimated 142 insurance Aside from the larger banks owned firms (2012) with 524,400 employees by the central government, there ­- Bank of Communications (2011) with RMB7.7 trillion in assets are many provincial- or city-level (BOCOMM) (May 2013) in China. banks which are also actively buying headquarter space in the key markets ­- BOC International (BOCI) The China Insurance Regulatory of Shanghai and Beijing, although on Commission (CIRC) permitted a smaller scale, typically 10,000 to ­- ICBC International (ICBCI) insurance companies to diversify 20,000 sq m developments. ­- ABC International (ABCI) investments into real estate with the Chinese banks that have overseas release of the Interim Measures for branches have also been active in BOCI has been the most active, the Administration of Utilisation of acquiring space for self use in these having recently invested in Shanghai’s Insurance Funds, effective 31 August other markets. Daning the Life Hub in 2009 for 2010.

savills.com.cn/research 010 Spotlight | China Plc ventures overseas – Who's buying and why? August 2013

The real estate regulations provide the fact that up to 10% of this can The second was a joint venture that an insurance company, subject be invested in the property market, with GLP, Canada Pension to meeting certain qualification the potential scope of investment Plan Investment Board (CPPIB) requirements, can invest: activity both at home and overseas is and Government of Singapore - up to 10% of total assets in real quite substantial, although the pace at Investment Corporation (GIC) to estate; and which the investment will materialise acquire a portfolio of 34 stabilised is still uncertain. Initial investment assets and one development ­- up to 3% of total assets in real targets are likely to be core stabilised project primarily located in São estate related financial products, eg, commercial assets in gateway cities. Paulo and Rio de Janeiro for a real estate fund US$1.45 billion in 2012. CIC owns Social security funds/ a 34.2% stake in the joint venture. - (the aggregate of all such pension funds investments cannot exceed 10% of Social security funds had total assets The third was a joint venture with total assets). of RMB1.11 trillion at the end of Goodman, CPPIB and All Pensions 2012, along with RMB1.08 trillion in Group, of which CIC owned 12.4%, Late in October 2012, the CIRC equity, while pension funds had an to invest in an industrial portfolio promulgated rules which allow accumulated balance of RMB2.39 focused on Australia but also Chinese insurance companies to trillion at the end of 2012. Pension including assets in Germany and make overseas investments, which funds are currently prohibited from Spain for US$2.5 billion in 2011. allowed insurance companies to investing in property, apart from invest in real estate and real estate the National Social Security Fund Aside from these portfolio investment trusts (REITs) in 45 (NSSF) which, from 2007, can invest acquisitions, CIC became one of designated countries and regions up to 5% in social housing and the largest shareholders (19%) infrastructure. This may change in the which are deemed “developed in Songbird Estates, the majority future; however, discussions have not markets”. Investments are limited to owner of Canary Wharf in 2009. yet started. commercial and office buildings with State-owned stable returns and that are located Sovereign wealth funds in prime locations within main cities. enterprises (SOEs) (SWFs) The State-owned Assets Total offshore investments (property China had two of the five largest Supervision and Administration and non-property) by mainland SWFs in the world at the end of Commission (SASAC) is the insurance institutions should not June 2013, namely SAFE Investment government body responsible exceed 15% of their total assets by Company with US$568 billion (third for managing 117 large national the end of the previous year. largest) and China Investment SOEs. According to Xinhua, by the Corporation (CIC) with US$482 billion end of 2011, there were 144,700 As insurance companies move (fifth largest). China has the most SOEs with total assets of RMB85.4 overseas, several things have assets in SWFs at US$1,215 billion trillion, revenues of RMB39.25 happened: they are building a versus the United Arab Emirates at trillion, and profits of RMB2.6 presence in Shanghai – a mainland US$816 billion. trillion (43% of China’s total gateway to the rest of the world industrial and business profit). – and Hong Kong, another, more The SWFs have been active in removed, gateway to the rest of the alternative real estate investment Real estate funds world. After these two locations they classes, and in some cases are Chinese funds are still at a start to look at the other key gateway believed to be supporting the central very nascent stage, with most cities of London and New York. government’s broader international continuing to focus on property investment strategy, eg, logistics, investment in China, primarily real The most active domestic insurance warehousing and student housing. estate development. According company of late has been Ping’an At the same time, stabilised secure to the report Promise Advisors, Insurance, which acquired a number investments in key gateway cities in 2012 China had approximately of properties in China, including seem to be on the rise. Most deals 100 fund management companies in 2011 and 2012, a development tend to be in a consortium and and 224 real estate private equity site in Shenyang from SOCAM, an through a portfolio purchase. companies, managing roughly office development in Beijing and RMB100 billion in assets. Real Wuhan, and a development site in CIC estate funds are still too small and Hangzhou through public auction. CIC has been active in the warehouse fragmented to build an international Ping’an Insurance was also the and logistics fields primarily in three presence at the moment. first Chinese insurance company to key portfolio deals: invest overseas with the acquisition The first was a partnership with Global Challenges of Lloyds Building in London for Logistic Properties (GLP) in a 50:50 Challenges will be numerous. GBP260 million (RMB2.4 billion). joint venture to acquire 15 storage Navigating the different market facilities mostly located in Tokyo and characteristics, and tax and legal Given the current assets under Osaka from LaSalle for US$1.6 billion regulations, while competing with management of RMB7.7 trillion and in 2012. strong incumbents will initially

savills.com.cn/research 011 Spotlight | China Plc ventures overseas – Who's buying and why? August 2013

prove very challenging for Chinese “Half of international acquisitions are domestic companies. Nevertheless, going to fail, especially for China, this is a process which all companies which is just going international, but have to go through in order to improve Chinese companies will become and expand their horizons, and international companies sooner or become truly global heavyweights. later, so we have to take this step. Failures are our tuition.” Dalian Wanda Chairman Wang Jianlin summed this up very succinctly in an interview with the Wall Street Journal on 19 June 2013:

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