China Investment Deals Up 10% as HK Market Activity Doubles

Investment into Chinese real estate assets grew to US$2.8 billion in the first quarter of 2016, up by 10 percent compared to the same period last year, according to figures released this week by property consultancy JLL.

The increase in purchases of properties on the mainland comes as mainland investors helped double investment transaction volumes in Hong Kong, and despite slowing economic growth in China. By contrast, sales of property assets were down across the Asia Pacific region in general.

JLL attributed the rise in transaction volumes to a scarcity of assets in first tier cities which contributed to rising competition among buyers seeking investment opportunities in what are seen as the mainland’s safest economic havens.

Prices Rise in China’s Biggest Cities

“The large price gap between buyers’ & sellers’ expectation resulted in a scarcity of assets. However, a number of deals are currently under negotiation,” said Anthony Couse, Head of Capital Markets for JLL China.

Couse, who will take over as the consultancy’s APAC CEO starting June 1st, predicted that, “Institutional investors will continue to seek core stabilised assets in major cities, which are scarce to come by given strong rental growth and after a record year of investment in 2015. Looking ahead, there may be more diversity of transactions as opportunistic investors are likely to look for assets in other asset classes or distressed assets in secondary markets.”

While China’s $2.8 billion in investment deals was up compared to the same period last year, it was significantly lower than the transaction volume for the fourth quarter of 2015, with the Chinese New Year holiday period denting investor activity. JLL attributed the year-on-year increase in part to a lack of willing sellers, which drove up prices for the assets which did trade during the period.

Just as in the residential markets, the consultancy saw China’s investment sector bifurcating between the prosperous first tier cities of Shanghai, Beijing, Guangzhou and Shenzhen, and the less active second and third tier centres.

Mainland Buyers Help Hong Kong Double Investment Volume

While China’s domestic market showed increasing activity, mainland buyers were also a significant source of new deals in Hong Kong, where transaction volumes more than doubled year on year to US$2.9 billion in 1Q16, according to JLL’s figures.

“Chinese investors continue push the boundaries of the market as evidenced by China Everbright’s US1.3 billion purchase of Dah Sing Financial Centre during the quarter,” Denis Ma, Head of Research at JLL in Hong Kong explained in a statement.

“Chinese investors have now been involved in three of the four largest en-bloc office transactions on record, which have all occurred in the past 6 months,” Ma added, in reference to Evergrande’s purchase of the Mass Mutual Tower in Wanchai last year for HK$12.5 billion ($1.61 billion), and China Life’s acquisition of a commercial complex in Kowloon from Wheelock for HK$5.86 billion ($755 million). Both of those earlier transactions occurred in November of 2015. China Everbright bought the Dah Sing Financial Centre in Wanchai this February for HK$10 billion ($1.29 billion).

Apart from these mega-transactions, however, investment activity was down overall, due to a correction in the residential market. However, JLL predicted that more assets should come to market in the coming months, as current high pricing levels may prompt developers to be opportunistic by locking in profits and selling non-core assets to shore up their balance sheest.

“Tight vacancy, limited supply and a resilient leasing market continues to draw investor interest back to the sector,” JLL’s Ma said, in reference to Hong Kong’s office market. “In the first quarter of 2016, investment into the sector topped the HK$15 billion mark for the second consecutive quarter, double the average quarterly levels recorded over the past five years.”

APAC Transaction Volumes Slide

While the mainland and Hong Kong markets saw investment volumes grow, the real estate investment markets were not climbing at the same rate across the region.

Asia Pacific’s real estate transaction volumes for the first quarter of 2016 fell five percent from the same period a year earlier to US$23.7 billion, according to JLL. The company attributed the regional slide to weakness in Japan, the region’s biggest market, where deal activity dropped 26 percent year-on-year by dollar value, and outweighed gains in Hong Kong, Australia and South Korea.

Japan’s sales volumes of US$9.6 billion in the first quarter of 2016 still represented a 65 percent increase in total investment transactions compared to the fourth quarter of 2015.

Helped by Chinese investments into Hong Kong and other locations in Asia Pacific, cross-border deals within the region rose to US$4 billion in the first three months of this year, up from US$1.1 billion the same period of 2015.