Chinese investors prefer European to US property

Europe has replaced the US as the preferred destination for real estate investment by Chinese buyers. Loosened restrictions could extend that trend.
London's Royal Exchange was acquired by Chinese conglomerate Fosun International this year
London's Royal Exchange was acquired by Chinese conglomerate Fosun International this year

Europe has become the preferred destination for Chinese real estate buyers as American properties fall out of favour in the wake of the growing US-China trade spat. Going forward, Chinese investments in European real estate are expected to increase, with a recent relaxation of Chinese regulations restricting investments in overseas property. 

Chinese real estate investment in Europe totalled $1.08 billion in the first half of this year compared with just $380 million in the US, according to Rhodium Group, a US consultancy that tracks Chinese outbound investments.

Although Chinese property investments declined in both the US and Europe, the fall in the US was much sharper than in Europe. From the first half of last year till the first half of this year, Chinese investments in US property plunged 96.2% in the US, compared to 42.3% in Europe, according to Rhodium. 

Real estate also no longer accounts for the biggest share of Chinese investment in the US. The sector accounted for 36% and 38% of overall Chinese investment in the US in 2016 and 2017, respectively, but less than a fifth of the total in the first half of 2018, having been overtaken by the health and biotech sectors, which accounted for 54% of the total.

“Things are more difficult for Chinese bidders with fraying US-China ties,” Derek Roth, a US-based partner at law firm Paul Hastings, told FinanceAsia, citing the growing trade tensions between the two superpowers, which is leading to greater US scrutiny of inbound Chinese investment.

The US Donald Trump administration earlier this year slapped tariffs on at least $200 billion of Chinese goods. It has threatened to impose tariffs on another $267 billion of Chinese products and there are few signs of any resolution any time soon.

“The US investment climate is less attractive for Chinese outbound investment -- a trend it appears will be with us for a while,” said Paul Hastings’s partner in charge of Hong Kong real estate, David Blumenfeld.

He said Chinese investors a few years ago could buy hotels in the US with no questions asked. But now they might even be deemed a possible national security threat and face extra scrutiny if US military personnel ever stayed there or the hotel was near a US military base, he said.

Rod Hunter, an international trade partner at Baker McKenzie, another law firm, said the drop in Chinese investment in US property is partly due to national security concerns on the part of the US government. 

Other factors have also weighed on buying of Chinese overseas properties. 

Among them is the Chinese government’s tightening of outbound capital flows, said Blumenfeld, and a weaker yuan currency, which has eroded the purchasing power of would-be Chinese acquirers.

HOLDING UP BETTER

By comparison Chinese interest in European real estate, whilst also down on 2017 when it totalled $3.24 billion over the full year, is holding up significantly better. 

Despite Brexit, there is also still appetite for trophy UK assets. One eye-catching recent transaction is Resolution Property’s £45 million pounds ($58.4 million) purchase in October of Royal Exchange, a historic property by the Bank of England in London’s financial centre. Resolution Property is a subsidiary of Chinese conglomerate Fosun International.

Real estate accounted for 9% of Chinese investments in Europe in the first half of this year, compared with 4% in 2017, according to Rhodium.

Although there is some evidence that European attitudes towards Chinese investment may be hardening too, with the German government in August blocking the acquisition of German machine tool maker Leifeld Metal Spinning by Yantai Taihai Group, the climate appears more welcoming.

The overall the number of formally blocked Chinese transactions across all sectors in Europe “remains very modest”, said a Baker McKenzie report released in August. 

So with the US-China rivalry intensifying, more Chinese capital could be diverted into European real estate, especially if Beijing loosens its controls further, some industry experts believe.

China’s National Development Reform Commission (NDRC) relaxed its restrictions on outbound investments in property and hotels earlier this year. According to a clarification released in June, outbound investments in real estate and hotels will not be classed as “sensitive projects” and are thus not subject to the NDRC’s stricter verification procedures, provided the financing for these projects is raised overseas.

“We are seeing quite a lot of developers which have money offshore are still working on development deals (overseas),” said Paul Guan, a Hong Kong-based partner of Paul Hastings.

“The Chinese government appears to be sending a signal to Chinese investors that the government will not stand in the way of those investors determining how they will pursue their overseas investment strategy in real estate, hospitality, and the investment fund sectors,” Paul Hastings said in a report published in June. 

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