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%.