After being a net recipient of foreign inward investment for decades, China is now turning the tables, with by far the biggest part of its overseas investing going into real estate. In fact, investment in foreign property projects reached a massive US5.4 billion in the first six months of 2014, representing an increase of 17 year on year. So what exactly is driving China and its demand for global property?
There is little doubt that the key incentive for Chinese investors is the slowing of the domestic property market, combined with soaring house prices, which seems to threaten increasing market instability. In contrast, the stable property markets in the West, providing both high yields and a safe haven, look increasingly attractive. This is against the backdrop of the slowdown in the Chinese economy, and the Chinese governments increasing curbs on real estate ownership.
These are some of the "push" factors driving Chinese investors to seek markets abroad, but there are also many "pull" factors making Western markets especially attractive. Education and healthcare systems are a particular draw, along with the ability to own property outright, and the greater affordability of premium properties, thanks to the strength of the yuan. On the continent of Europe, the Golden Visa schemes in Spain and other countries provide residence rights to purchasers of properties over a certain value, along with freedom of travel and education across the Schengen zone.
The result of this in fact is that in 2014, Madrid has moved into 5th place in the table of Chinas top property investment destinations. Top of the list is London, UK, followed by US cities New York and San Francisco. In 4th place is Sydney, Australia, confirming that Chinese overseas investment indeed has a truly global reach.
However, although in cities like London, Chinese property investment has been growing for several years, the pattern is changing, with residential property sales now being outstripped by investment in the commercial property sector. These include massive Chinese acquisitions in the City and Canary Wharf, as well as a huge redevelopment of the historic Ram Brewery in Wandsworth. There is a similar pattern in other key gateway cities, including the 5 billion Atlantic Yards redevelopment in Brooklyn, New York, the acquisition of a large commercial development site in north-west Sydney, and the purchase of a massive skyscraper from Santander in Madrid.
This reflects the fact that although Chinas overseas expansion began with individual investors, looking for properties mainly for personal use, it has increasingly moved into the big league, as developers snap up prime sites. Insurance companies and sovereign wealth funds SWFs are now able to purchase prime assets and strategic property portfolios. These big investors are able to bring economies of scale to the purchase of equipment and materials, as well as plentiful financing through their access to funding from big Chinese banks.
Although the influx of Chinese investment in all these countries has been welcomed as a boost to their economies, it has also given rise to some concerns. In many of the key gateway cities, notably London and Sydney, there is evidence that demand from cash-rich Chinese investors could be pricing domestic buyers out of the market. Local and national governments have to decide how far they are willing to intervene in the market, to protect the welfare of their own citizens.
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