Stepping up their game: a new breed of Chinese property investorJanuary 27, 2015 / By
Media reports in 2014 were awash with stories of Chinese investors buying up trophy assets in global markets such as New York and London. While these stories took centre stage, another important trend has been unfolding behind the scenes in China. During 2014, we also witnessed the emergence of many new sophisticated Chinese investors buying commercial assets within China. These investors are not owner occupiers which historically were a major market driver in China, and they have built up strong investment teams dedicated to understanding the local market and achieving strong returns. I have profiled below three major groups of domestic players that I have observed making significant progress over the past year:
- Domestic Insurance Firms: For years we have been expecting a huge flow of funds from the insurance industry to dramatically change the market in China. This process has been much slower than many initially thought, however, as insurance firms needed to first build up their real estate teams and the government has effectively limited their buying options with a yield requirement for all commercial assets of approximately 7%. While this yield limit remains in place, many insurance companies now have large real estate investment teams and are finding creative ways to put capital to work in China. This has included investments at the corporate level with developers, investments in higher yield sectors like logistics, and finding acquisitions with a guaranteed yield from the seller.
- Chinese Private Equity Funds: The dominant private equity real estate investors in China have long been large international and regional players like Blackstone or ARA. Over the past year, many more locally-raised, RMB-denominated private equity funds have been raised and have entered into major commercial transactions in China’s key markets. Many of these funds are raising money from wealthy individuals that are looking for alternatives to the residential market and as a result we are seeing more capital funnelled into the commercial sector. So far, these local funds have displayed a fairly sophisticated approach and are focusing primarily on the Tier 1 office markets of Shanghai and Beijing. For example, Gopher Asset Management made a major investment in the Shanghai Office sector, buying Suntown Plaza for RMB 3.1 billion in Q4.
- Government-Backed Property Companies: Finally, last year several government-related property firms became involved in commercial asset transactions. These firms traditionally preferred to buy land to develop, but now that land is scarce and expensive in big cities, they are branching out to existing assets.
All in all, the emergence of these types of sophisticated and well-funded local investors is a sign of the maturation of China’s investment market. Moving forward, I expect that domestic property investors will remain key players in China’s commercial real estate investment market. Indeed in 2014, domestic buyers represented 76% of total commercial transactions, the largest share since the aftermath of the GFC in 2009.
Figure: Commercial Investment in China by Purchaser Source of Capital
Source: JLL Research