New outbound investment controls widely anticipated; Chinese buyers set to turn more selective towards real estate acquisitions


China Market Flash | New outbound investment controls widely anticipated; Chinese buyers set to turn more selective towards real estate acquisitions

On November 28, 2016, The National Development and Reform Commission (NDRC), The People’s Bank of China (PBoC), The Ministry of Commerce and The State Administration of Foreign Exchange (SAFE) issued a joint statement affirming that all outbound investment transactions remain subject to existing registration and filing procedures. Authorities also indicated they would scrutinise cross-border investment deals more closely to better manage risks.
 
The move comes amid speculation that authorities are drafting new restrictions on outbound investment. Possible measures reported by media include the strict monitoring of outbound investment deals worth more than US$10 billion; the increased scrutiny of mergers and acquisitions worth over US$1 billion if they do not involve the Chinese buyer’s core business; and the close examination of real estate transactions worth over US$1 billion by State-owned Enterprises (SoEs).
 
While none of these measures have been confirmed, and a major announcement is unlikely as it would be viewed as backtracking on the government’s liberalisation policy, CBRE Research believes stricter controls on outbound investment are likely to be implemented in a low key manner in the coming months. This is due to several factors, including:

  • The continuous outflow of capital, which hit a new high in October 2016, is fuelling the depreciation of the RMB.
  • The NDRC’s introduction of a registration system to simplify outbound investment procedures in December 2014 prompted a surge in capital flight. This has led to concerns that money laundering is being disguised as investment deals, along with worries that Chinese buyers are purchasing real estate assets without the necessary expertise or due diligence.

Recent data suggest that authorities have already placed new restrictions on capital accounts. According to Capital Economics, purchases of foreign assets by Chinese companies and households fell to just US$1 billion in October, compared to US$20 billion in September.
 

What does it mean for real estate?

  • Any new restrictions will involve more rigorous due diligence and will lengthen the approval period. Chinese buyers, primarily large SOEs and insurers, will therefore turn more selective towards potential investment targets abroad, although they will continue to prefer core/core plus assets in global gateway cities.
  • The rumoured threshold of US$1 billion for real estate transactions is high, given that 70% of Chinese outbound property deals between 2013 and H1 2016 were below this limit. Once the expected new restrictions are in place, Chinese investors may simply opt to engage in a higher number of smaller deals below the stipulated maximum investment amount.
  • CBRE Research data show that six of the ten largest outbound property transactions by Chinese buyers over the last three years were completed by SOEs. Any restrictions on transaction size would force SOEs to reduce the size of their acquisitions and adopt a more careful and strategic approach.
  • The increased scrutiny of outbound real estate deals, and the longer timeframe and procedures involved, would boost demand for, and capital values of, core commercial assets in domestic tier I and selected tier II cities. The prolonged low interest rate environment continues to motivate Chinese investors to purchase commercial assets in the domestic market.

 
In spite of the widely expected new restrictions, outbound investment, along with the One Belt, One Road initiative and the internationalisation of the RMB, remains a key component of China’s long-term economy policy. The central government will therefore continue to encourage and facilitate strategic outbound investment. Chinese investors will continue to deploy capital overseas, but will turn more selective towards deals and more closely scrutinise the underlying performance of potential acquisitions.

Contacts

Julian Jiang
Associate Director, China Research
T +86 2124011342
Julian.Jiang@cbre.com

 
 

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