CIC Dominates Outbound Deals as China Reins in Investors

As China clamps down on cross-border capital flows, sovereign wealth fund China Investment Corporation (CIC) has re-emerged this year as the country’s champion of overseas real estate investment. CIC now dominates the roster of mainland buyers of income-producing properties, with a single mega-deal accounting for more than 83 percent of total pending deal value.

According to figures from data provider Real Capital Analytics (RCA), 11 acquisitions of income-producing property assets by Chinese buyers are currently underway with those deals, which exclude development projects, totalling around $16.5 billion. CIC’s acquisition of Blackstone’s Logicor portfolio accounts for $13.8 billion, or about 83.4 percent of this outstanding deal volume.

CIC’s contribution to the total marks a sharp upswing from recent years. The fund accounted for 19 percent of the value of completed deals in 2016, and even less in 2013 through 2015. In 2012, when China’s outbound investment spree was just getting underway, CIC made up 52 percent of the total completed deal value.

Minus Logicor, Only $2.7B in Pending Deals

Chinese investors closed 57 overseas deals for income-producing real estate in the first half of 2017, ranging from office buildings and shopping malls to warehouses, hotels and housing assets, totalling about $10.1 billion. Development sites have been excluded from these figures as mainland investment in the asset class tends to focus on Hong Kong, and involves a different set of strategies and goals than completed assets.

Adding deals that have already closed in the third quarter, as well as pending transactions, yields a collection of 80 pending or closed deals in 2017 with a total value of $27.8 billion.

Chinese Outbound Deals Decline in 2017

Based on this year’s numbers, China’s outbound real estate investment spree appears to have peaked at $28.9 billion in 2016.

Since the second half of last year, Chinese regulators have taken a series of steps to tighten restrictions on capital outflows which have caused Chinese acquisitions of income-producing property to tumble 15 percent year-over-year in the first half 2017 to a total of $10.1 billion.

According to RCA, Chinese investment in foreign properties tripled every year on average since the global financial crisis, totalling $88.4 billion from the start of 2010 through mid-2017. Mainland investors now own 1570 commercial properties around the world.

The stricter controls culminated last month in a new set of guidelines issued by the State Council that formalize curbs on various types of overseas deals, including property, entertainment and sports. The new rules, which divide investments into “encouraged,” “limited,” and “prohibited” categories, require investors to gain regulator approval for foreign real estate purchases.

The actual total for 2017 is likely to vary from the total of deals pending at the end of August, as some of the deals in progress may fall through or be delayed till 2018, and additional deals may be transacted before the end of the year. However, taking these figures as a rough projection for 2017, the single Logicor deal would account for 49.6 percent of the value of completed transactions during the year – by far the highest ratio of investment contributed by CIC since 2012.

CIC Steps to the Fore as Regulations Crush Rivals

CIC’s dominance results in part from the extraordinary size of its pending transaction with Blackstone Group, the largest real estate deal in history. Through the $13.8 billion deal confirmed by the US private equity giant in early June, CIC will purchase a fleet of investment-grade warehouses spanning 47 million square feet (13.7 million square metres) in 17 European countries, mainly the UK.

The acquisition adds to over $15 billion in completed real estate assets picked up overseas by CIC since 2011, including $1.7 billion of Manhattan properties last year alone. The $814 billion sovereign wealth fund, which manages China’s foreign currency reserves, has emerged as the country’s top outbound investor in recent years with over $200 billion in foreign acquisitions to date.

CIC led the early phase of China’s overseas real estate buying surge, taking 76 percent and 52 percent of deal volume in 2011 and 2012, respectively. The fund’s relative importance receded as an array of private and state-owned corporate behemoths including Greenland Group, Dalian Wanda Group, and Anbang Insurance grabbed headlines with a string of cross-border mega-deals.

Outbound Surge Down But Not Out, Say Some Analysts

Reports of the death of Chinese outbound investment may be exaggerated. “The demand by Chinese investors for overseas commercial real estate investments will not evaporate, however the new rules will influence capital’s behavior and direction,” commented Petra Blazkova, Senior Director, Asia Pacific Analytics in a blog post on RCA’s corporate website.

“Established Chinese investors will be able to maintain their global presence either directly via their existing offshore entities, or indirectly via balance sheets of foreign companies and investment platforms they partially own.”

Similarly, a research note by property agency CBRE points out that some large investors already have money in circulation via offshore investment management platforms and Hong Kong-based entities, which they can use to fund new real estate acquisitions.

“China still accounts for the largest source of capital in Asia Pacific and will continue to play a critical role in the global commercial real estate investment market,” the note observes. “Outbound investment will continue but the pace of capital deployment is likely to slow as investors adjust to the new rules and finetune their investment strategies.”

Despite these rays of hope, aside from the Logicor transaction, we are left with only $2.7 billion in pending mainland deals for income producing real estate assets as of August 30. Among these, the most significant is Hainan-based conglomerate HNA Group’s acquisition of a Singaporean logistics portfolio as part of its $1 billion offer to buy CWT Limited.

At the same time last year, there were $8.2 billion in deals outstanding.