On August 18, the State Council and the National Development and Reform Commission (NDRC) issued formal guidelines restricting or banning Chinese companies from engaging in overseas mergers and acquisitions in certain sectors.

The NDRC listed three categories of overseas investment including those that are banned (e.g. industries related to gambling); those that are restricted (e.g. property, film and sports); and those that are to be encouraged (e.g. investments that support the Belt & Road initiative).

The latest measures come after Beijing began clamping down on overseas investment at the end of 2016 in a move designed to stabilize the RMB, restrict capital flight and reduce financial risk. Since then, capital outflows have slowed substantially, with Ministry of Commerce data showing that overseas direct investment in the property sector fell by 82% y-o-y in H1 2017 (1).

While property’s inclusion on the list of restricted sectors mean any proposed overseas acquisitions by Chinese companies will be subject to additional layers of scrutiny, the impact will be far more nuanced.

What does it mean for real estate?

CBRE Research data show that China remained the largest source of capital in the Asia Pacific commercial real estate investment market in H1 2017. Discrepancies between actual investment turnover and official data suggests that there is already a significant volume of Chinese capital circulating outside of the country.

While the weight of Chinese capital seeking opportunities overseas remains considerable, the composition of buyers has changed. Sovereign Wealth Funds (SWFs) have remained active but State-owned Enterprises (SoEs) have scaled back their activity as they are more policy driven (Click to view table of Overseas property acquisitions by chinese investors).

Regarding the domestic property investment market, CBRE Research believes the new rules will have a positive impact in the short to medium term. Domestic investors needing to deploy capital but unable to do so abroad will return to their home market. The new rules will also create an advantage for foreign investors seeking to engage in offshore deals in China.

In the longer term, however, the controls could hinder investment demand from foreign investors concerned about an exit route and possible difficulties in repatriating their capital abroad. Nevertheless, CBRE Research foresees that capital controls will not exert a significant long-term impact on the domestic property investment market, which will continue to be shaped by broader macroeconomic trends and fundamentals.

The new rules are also set to influence strategy among Chinese investors seeking opportunities abroad. Options are likely to include:

• Using offshore financial institutions: Large investors already have money in circulation via the balance sheets of insurance companies and other investment management platforms they have acquired. They are likely to use these offshore platforms to engage in property acquisitions.
• Invest through Hong Kong: Investors are likely to use their Hong Kong-based entities to purchase assets. The city itself also remains very popular among Chinese investors seeking land and en-bloc assets.
• Export their brand: More investors are expected to export their brands and operational expertise to serve as property operators/managers.
• Other potential options could include investing in Belt & Road countries; taking positions as Limited Partners; purchasing smaller equity stakes of below US$50 million; and participating in joint ventures.

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. 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. Nevertheless, CBRE Research expects to see robust investment by SWFs and a renewed focus on investment related to the Belt & Road initiative.

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