China outbound property investment seen dropping as capital curbs bite

[HONG KONG] China's recent clampdown on capital outflows is expected to bite into outbound overseas property investment this year, real estate advisory firms said on Tuesday.

DTZ/Cushman & Wakefield said in a report it expected the deal volume of China's outbound property investment would drop slightly in 2017 under the clampdown, after 2016 investment into overseas commercial real estate reached a record high of US$38.3 billion.

In a separate statement, Jones Lang Lasalle (JLL) said it may be challenging for China to see a similar increase in 2017.

China's outbound investment in 2016 was up 49 per cent from 2015, DTZ/Cushman & Wakefield said, with the United States still the top destination, recording a more than fourfold increase from the previous year to US$18.3 billion.

Second and third destinations were Hong Kong and Australia, while Britain, ranked fifth, saw investment volume rise 32 per cent from a year ago as investors took advantage of the pound's weakness after Brexit.

"Demand for outbound investment will likely remain strong in 2017 as Chinese investors continue to look for diversification on the back of the expectation of lower cap rates of core assets in China," said Catherine Chen, DTZ/Cushman & Wakefield's head of capital markets.

"Nevertheless, the recent government controls on capital outflows will likely lengthen the time it takes to complete a transaction, and as a result we expect deal volume to decrease slightly in 2017."

The strong rise in overseas property investment has alarmed Chinese authorities and they have stepped up measures to stem capital outflows in the face of a weakening currency. The yuan slipped around 6.6 per cent against the US dollar last year and is now at more than eight-year lows.

China's State Administration of Foreign Exchange (Safe) has begun vetting transfers abroad of US$5 million or more and is increasing scrutiny of major outbound deals - even those with prior approval, sources with knowledge of the new rules told Reuters in November.

In terms of asset class, the office market absorbed around 45 per cent of Chinese outbound investment, while hotel deals rose 13 percentage points from 2015 to 27 per cent - "a surprisingly high level that may be difficult to match in 2017", DTZ/Cushman & Wakefield said.

The surge in hotel buying was boosted by the purchase of Strategic Hotels and Resorts by Anbang Insurance for more than US$6 billion, JLL said.

Investment in development sites, however, fell 18 percentage points to account for 15 per cent.

REUTERS