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.
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.
The information provided herein constitutes marketing material. It is not investment advice or otherwise based on a consideration of the personal circumstances of the addressee nor is it the result of objective or independent research. The information provided herein is not legally binding and it does not constitute an offer or invitation to enter into any type of financial transaction.
The information provided herein was produced by Credit Suisse Group AG and/or its affiliates (hereafter "CS") with the greatest of care and to the best of its knowledge and belief.
The information and views expressed herein are those of CS at the time of writing and are subject to change at any time without notice. They are derived from sources believed to be reliable.
CS provides no guarantee with regard to the content and completeness of the information and does not accept any liability for losses that might arise from making use of the information. If nothing is indicated to the contrary, all figures are unaudited. The information provided herein is for the exclusive use of the recipient.
Neither this information nor any copy thereof may be sent, taken into or distributed in the United States or to any U. S. person (within the meaning of Regulation S under the US Securities Act of 1933, as amended).
It may not be reproduced, neither in part nor in full, without the written permission of CS.
Investment principal on bonds can be eroded depending on sale price, market price or changes in redemption amounts. Care is required when investing in such instruments. Investments in foreign currencies involve the additional risk that the foreign currency might lose value against the investor's reference currency.
Private equity is private equity capital investment in companies that are not traded publicly (i.e., are not listed on a stock exchange). Private equity investments are generally illiquid and are seen as a long-term investment. Private equity investments, including the investment opportunity described herein, may include the following additional risks: (i) loss of all or a substantial portion of the investor’s investment, (ii) investment managers may have incentives to make investments that are riskier or more speculative due to performance-based compensation, (iii) lack of liquidity as there may be no secondary market, (iv) volatility of returns, (v) restrictions on transfer, (vi) potential lack of diversification, (vii) high fees and expenses, (viii) little or no requirement to provide periodic pricing and (ix) complex tax structures and delays in distributing important tax information to investors.
Equities are subject to market forces and hence fluctuations in value, which are not entirely predictable.
The key risks of real estate investments include limited liquidity in the real estate market, changing mortgage interest rates, subjective valuation of real estate, inherent risks with respect to the construction of buildings and environmental risks (e.g., land contamination).
Commodity investments and derivatives or indices thereof are subject to particular risks and high volatility. The performance of such investments depends on unpredictable factors such as natural catastrophes, climate influences, hauling capacities, political unrest, seasonal fluctuations and strong influences of rolling-forward, particularly in futures and indices.
Emerging market investments usually result in higher risks such as political, economic, credit, exchange rate, market liquidity, legal, settlement, market, shareholder and creditor risks. Emerging markets are located in countries that possess one or more of the following characteristics: a certain degree of political instability, relatively unpredictable financial markets and economic growth patterns, a financial market that is still at the development stage or a weak economy.
Investments in hedge funds may involve significant risks, including the loss of the entire investment. The funds may be illiquid, as there is no secondary market for interests in the funds and none is expected to develop. There may be restrictions on transferring interests in the funds, investments may be highly leveraged and the investment performance may be volatile.
Investments in insurance-linked strategies, including the investment opportunity described herein, are speculative and risks include, among other things: (i) loss of all or a substantial portion of the investment due to leveraging, short-selling, use of derivatives or other speculative practices, (ii) incentives to make investments that are riskier or more speculative due to performance based compensation, (iii) lack of liquidity as there may be no secondary market for insurance-linked interests and none is expected to develop, (iv) volatility of returns, (v) restrictions on transfer, (vi) potential lack of diversification and resulting higher risk due to concentration, (vii) higher fees and expenses associated that may offset profits, (viii) no requirement to provide periodic pricing or valuation information to investors, (ix) complex tax structures and delays in distributing important tax information and (x) fewer regulatory requirements than registered funds.
The underlying indices are registered trademarks and have been licensed for use. The indices are compiled and calculated solely by licensors and the licensors shall have no liability with respect thereto. The products based on the indices are in no way sponsored, endorsed, sold or promoted by the licensors.