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Forces shaping Asian investor appetite for Australian real estate

Forces shaping Asian investor appetite for Australian real estate

Real Capital Analytics data for the first nine months of 2017 showed a significant 74% drop in Chinese corporate investment in Australian offices, malls, hotels and development projects to $1.83 billion, from $7.1 billion in 2016. [1]

Our recent sponsorship of two events and discussions with Asian clients offer fresh insights into their appetite for Australian real estate and their ability to fund investment.

This year we sponsored Collier International’s Australian Investment Showcase. Together with PwC and a+ Design Group, we met more than 200 potential institutional investors and high-net-worth individuals in Hong Kong, Singapore, Shanghai, Guangzhou and Chengdu.

We also jointly hosted the 2017 China Australia Capital Flows seminar with China Council for the Promotion of International Trade (CCPIT) and China Chamber of International Commerce (CCOIC) in Sydney.

These forums, together with ongoing discussions with our clients, enable us to shed light on their investment intentions in a climate of falling investment from China.

Real estate investment restricted for some ...

The 74% drop in Chinese corporate investment in Australian commercial property is in part the result of stern measures taken by Chinese authorities to control capital outflows. The authorities targeted what they term “irrational” capital flight, which contributed to continued declines in China’s FX reserves from July 2014 to January 2017.  Direct overseas investment in real estate, hotels and movie theatres, as well as the entertainment and sports industries, was “temporarily” restricted.[2]

The Asian roadshow made it clear that while Chinese interest in Australian commercial real estate remains strong, the capital restrictions are having an impact on some investors’ ability to invest.

That said, the heightened scrutiny of offshore investment has had less impact on the many Chinese investors who have funding platforms in Hong Kong, Singapore, the US and other jurisdictions. For this reason we are still seeing some sizeable transactions, such as the purchase of Intercontinental Hotel in Double Bay, Sydney.

... but interest remains strong ...

The investment roadshow also highlighted the considerable appetite and funding available for Australian real estate among both institutional investors and high-net-worth families in Singapore and Hong Kong. These groups view the easing in Chinese investment activity as a window of opportunity to invest, given that Australian real estate still offers comparatively higher yields than other global cities, such as Hong Kong.

Some Hong Kong family businesses in particular have been cashing in on a 300% rise in the value of HK real estate since 2007 and have been selling non-core real estate assets and placing a portion of their wealth in high cashflow assets in developed markets such as Australia, North America and the UK. The recent interest, particularly in Sydney, for assets such as 20 Bridge, 20 Hunter and 1 Castlereagh is evidence of this, with all assets either sold or likely to sell to Hong Kong investors. This trend is likely to continue in the next year.

September’s seminar with CCPIT and CCOIC provided further evidence of ongoing Chinese interest in Australian real estate. Appetite is greatest for hotels, offices, residential and commercial development sites arising from urban regeneration, plus healthcare and education-associated infrastructure. If anything, the issue is the availability of investment opportunities relative to the level of demand.

... and awaiting clarity 

Our discussions with clients indicate the “temporary” restriction lacks detail and that they are still interpreting the messages coming from the National Congress of the Communist Party of China, held from 18-24 October.

Some investors aren’t clear whether the restriction only covers new capital. They’re also unsure of the implications for Chinese banks lending to Chinese real estate investors. They are seeking clarity in these areas to guide future investment, however, it is clear from our transaction activity that both existing and new offshore investors operating in the Australian market retain active interest in the Australian market.

In summary, Asian investors continue to regard Australia as an attractive destination for real estate investment. Chinese investors, in particular, have a good understanding of the infrastructure that is being developed, the transformation that is taking place in Australian cities, the transparency of the market and Australia’s strong links with the growing economies of Asia.

[1] http://www.afr.com/real-estate/commercial/chinese-investment-in-australian-commercial-property-plummets-20171102-gze1zn

[2] CommBank Global Markets Research, International Economics: China Economic Update, 9 May 2017, page 4

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group and Chi-X Australia.