Interest in the Central London real estate market from Chinese investors is due to increase significantly, with insurance funds alone having more than US$14 billion available for overseas real estate investment, according to the latest research from global property advisor CBRE
Given the present scarcity of investable prime properties in first-tier Chinese cities and the short-term risk from the oversupply in second and third-tier Chinese cities, prime high-end office properties in core international cities, such as London, are expected to be highly sought after. The attractiveness of London property is enhanced given the attractive yields it delivers in a low interest rate environment, according to the research.
Chinese institutional investors are still relative newcomers to cross-border real estate investment strategies, compared to pension funds, insurance funds and sovereign wealth funds from other regions. However, in recent years Chinese institutional investors have started to increase their investment in overseas real estate markets; a trend that has been driven by several factors, including limited investment channels in China, abundant liquidity, local currency (RMB) appreciation, and the relatively lower valuation of overseas assets in the years following the 2008 financial crisis.
In 2012, the total assets of China’s national insurance institutions stood at US$1.2 trillion. New regulations permit these institutions to invest up to 15% of their assets in “non-self-use” real estate. By this measure, there is in excess of $180 billion currently available for real estate
Based on patterns of insurance fund allocations witnessed in developed countries in recent years (with most insurance funds typically allocating up to 6% of their assets to direct property investment) and assuming an 80:20 split between domestic and overseas market, it is
estimated that Chinese insurers could invest up to US$14.4 billion in overseas real estate.
Although the number of investable properties in developing regions has increased sharply in recent years, those of high enough quality are still limited in Asia Pacific when compared with North America and Europe. For this reason, Chinese institutional investors are expected to focus on premier office
investment opportunities in gateway cities, which are capable of generating stable return on investment in the short term.
In Central London the volumes of Chinese investment in commercial property has grown rapidly over the last few years. Exemplifying this is Chinese investment fund Gingko Tree, who has bought three major assets in the city, either directly or in participation together with strategic corporate holdings in certain more specialist property sub-sectors.
Alongside this, London has witnessed the growth of the owner occupation side of the Chinese institutional market, with the acquisition by the Bank of China and ICBC, of their own substantial city headquarters. Furthermore, the market has seen the start of what is expected to be a significant wave of insurance monies arriving in this capital, starting with the acquisition by Ping An on the Lloyds Building.
Similarly, in the residential development market, Dalian Wanda secured the development of Europe’s tallest residential scheme at 1 Nine Elms, further cementing the Nine Elms area as a place that there is likely to see more Chinese activity with the relocation of the embassy. This activity has also been complimented by the increasing number of Chinese students now living in the UK which CBRE estimates to number in the region of 100,000.
Richard Zhang, Senior Director, Central London, CBRE, commented:
“London is, as we know, the most active target for international real estate investors and this has been no exception to Chinese institutions whose activities over the last few years has stepped up very considerably. This is clearly being helped by the series of Government policy changes which is encouraging further interest. In addition, we see a rise in the activities in other sectors such as residential development and student housing – which in itself reflects a growing number of Chinese students in the capital and across the UK. There is little doubt Chinese investment will grow in quantity and sectorially in the future.”
Real estate investing is relatively new for these investors, with Chinese insurance funds only permitted to invest in real estate beginning in 2009 when changes to government policy were made. Further regulation changes now permit insurance companies to invest a maximum of 15% of their total assets as of the end of the last quarter in ‘non-self-use’ real estate.
The new regulations are well measured to encourage sustainable investing through the cycle. For example, investing is limited to “mature retail and office properties with stable income, located at the central areas of the major cities in 25 developed markets,” including the UK, US, Hong Kong, and Australia.
This also includes listed real estate investment trust funds (REITs) in these 25 countries or regions. The investment total is limited to a maximum of 15% of the insurance institution’s total assets at the end of its previous fiscal year.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2012 revenue). The Company has approximately 37,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com