Discover London Chinese Real Estate Investors Are Reshaping Their Preferences

Discover London. Chinese Real Estate Investors Are Reshaping Their Preferences

Real estate has become an increasingly important part of the asset allocation of both (U)HNWI and international investors over the past decade. While cross-border capital in real estate markets has historically been predominantly of US and European origin, this pattern has shifted since the Great Financial Crisis.

Asian investors now take up a larger share of global transaction volumes, and investors from China have become the most dominant segment of the Asian buyer group. In 2017, investors from mainland China and Hong Kong directly bought international commercial real estate totalling roughly USD 114 billion, which accounts for 32% of total global cross-border capital flows, according to Real Capital Analytics. The chart on the opposite page depicts the evolution of quarterly transaction volumes since 2007. The data illustrates that these investors have gained significant global importance over the past 10 years. It also documents the sheer scale of bilateral investments volumes between China and Hong Kong. Of this USD 114 billion of cross-border activity in 2017, USD 65 billion was from mainland Chinese investors buying in Hong Kong or else Hong Kong buyers in China.

In 2017, the focus of Chinese investors was on Europe and Asia Pacific while declining activity in the US also reflects the general weakness of transaction volumes in that market. In UK commercial real estate, however, Chinese investors were the most important buyer group not only in terms of transaction volumes but also in terms of making the headlines with the two largest deals since Brexit. The “Cheesegrater” and “Walkie Talkie” buildings in the City of London, with a transaction volume of GBP 1.3 billion and GBP 1.2 billion, respectively, have greatly impacted the market.

Cross-border commercial real estate transaction volumes

Cross-border commercial real estate transaction volumes

As this figure only measures direct discretionary transaction activity, we estimate the true volume of Chinese exposure to international real estate to be substantially higher, as many investors invest abroad by means of real estate funds that are managed by foreign asset managers and these flows do not go into this statistics.

Anecdotal evidence in the last quarter of 2017 points to a slowdown of activity even as the highlighted numbers were still high due to the time lag between signing and closing. This slowdown has been mainly driven by the imposed restrictions on overseas investments by the Chinese government. The motivations behind the imposition of these restrictions are manifold. We believe they are related to concerns of the government with regard to the strong growth of international investments by some Chinese institutions in recent years combined with the high use of domestic leverage when buying international real estate, as well as the limited specialist skills of some of the investors, such as in running hotels.

While we forecast that in 2018 international transaction volumes of Chinese investors will decline versus 2017, we continue to believe they will remain an important player in international real estate markets for the foreseeable future. This is due to the size of the Chinese economy and the need for international diversification of companies and UHNWI abroad.

To successfully implement real estate in an international context, knowledge of local market dynamics, general practices and regulations remains important. In some European markets such as Germany, Spain, France, the Netherlands and the UK, access to private networks in real estate acquisitions, asset management, construction and development as well as financing remains essential to be able to achieve the targeted returns. Real estate continues to maintain the character of a private market, with the strong benefit of local networks. That’s why we recommend to investors who are diversifying into overseas property to go with strong partners that have a deep understanding of the local situation of each market and possess a consistent track record. Ongoing personal contact with that partner remains equally important as we believe trust is the essential element of a successful professional relationship. This is based on our historical experience in Switzerland, where we have a trust-based relationship with many companies from non-financial industries for over 150 years.

We believe we are well positioned to become a preferred partner for many Chinese investors who want to invest. Our team of 160 real estate professionals brings the necessary expertise to the table. Proximity and understanding client needs are equally important. We have a regional presence with a team of real estate specialists in Singapore. Additionally, the dedicated asset management distribution teams and the client relationship managers can connect clients with the real estate professionals. Depending on their needs, different approaches to diversify into international real estate will be applied. As a first step, we recommend investing in diversified European or global funds. Such funds give access to a diversified professionally managed portfolio. They also typically give clients who want to co-invest with the fund access to co-investment opportunities that they wouldn’t be able to access without the proper network. Other clients prefer discretionary solutions or large deals.

In any case, the individual solution can be defined with the client in cooperation with relationship management and real estate professionals.

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