Listen to this article
The global commercial property market owes the Chinese a collective hug.
Transaction volumes across the world are expected to rise 15 per cent this year to $600bn, thanks in large part to a significant jump in Chinese overseas investment.
Knight Frank, the property consultancy, predicts that Chinese money flowing into international property will double before the year is out, with the number of deals originating from China expected to reach their highest levels since 2007.
Peter MacColl, the consultancy’s global head of capital markets, refers to the rise in outbound Asian capital – particularly from China – as “seismic”, adding that the flow of capital into commercial property shows no signs of slowing.
Knight Frank has an obvious interest in talking up the market, but it is clear that MacColl’s argument has substance. Indeed, demand is even stronger in the residential sector: in April, the Chinese became the biggest foreign buyers of apartments in Manhattan for the first time, according to estimates from property brokers – a title that once belonged to the Russians.
All this is welcome news for investors, but comes at a time when China’s own property market appears vulnerable and its economy continues to splutter, begging the question of whether investors should be worried about China’s hold over the global property sector.
Chinese growth slowed in the first quarter of this year to 7.4 per cent from 7.7 per cent at the end of last year. Schroders, the London-based investment manager, predicts it “will slow further”. The investment house adds that financing conditions “remain tight”, the country’s domestic property market “looks soft” and “headwinds” will continue to hamper “China’s dash for growth”.
One New York-based property fund manager, who wishes to remain anonymous, says: “It is perhaps not a time for alarm bells, but I am definitely concerned.”
Don Jordison, managing director of Threadneedle Property Investments, agrees. Talking specifically about the UK market, he likens China’s appetite for UK property to that once demonstrated by Irish and Icelandic buyers.
“There are interesting historical parallels when looking at Chinese investment in UK commercial property,” he says. “The past has seen many incursions overseas by foreign investors with overleveraged domestic economies, going back as far as the Scandinavians in the late 1980s, followed by the Irish and Icelanders leading up to the latest crash in 2008.
“While I am not saying the Chinese economy resembles that of Iceland in 2008, I would urge caution in a market where investors could be exporting some of the excesses of their domestic economy.”
Some perspective is needed, however. While Chinese investment in overseas deals is set to double this year to $30bn, that figure will still only make up some 5 per cent of total transaction volumes – a number many investment experts are comfortable with.
Richard Gwilliam, head of property research at the real estate arm of M&G, the asset manager, says: “Global property is not over-reliant on Chinese buyers and investors have little reason to worry.”
He points out that in the majority of markets, purchases are still predominantly carried out by domestic investors and, even if this were not the case, investment from China has a long way to run.
“Recent legislation in China has made it easier for Chinese insurers to invest in overseas real estate,” Gwilliam says. “There is massive potential from this source of capital. Even if China’s economy was to see a slowdown, investment in overseas property would still probably grow rapidly. Arguably, it could increase at a faster rate in this scenario, as Chinese investors look to diversify away from their weaker home economy.”
Experts from ING Investment Management, Knight Frank and Deutsche Asset & Wealth Management concur. And Chris Taylor, chief executive of Hermes Real Estate, the property manager, says simply: “While a correction in the Chinese economy would undoubtedly have serious implications for the global economy, this should not in itself be of particular cause for concern for domestic real estate investors.”
On balance, fund managers appear comfortable with the situation. According to them, the commercial property fraternity does indeed owe the Chinese a hug. But with China’s economy looking fragile and some investment experts expressing caution, investors should perhaps be wary of it turning into a bear hug.