China overseas investment measures the lowest Q2 total since 2015

During the second quarter 2018, Mainland Chinese Real Estate Investment Overseas (MCREIO) continued to trend downward with $4.3 billion being deployed, the lowest second quarter total since 2015, according to Cushman & Wakefield.

Increased government scrutiny that took effect on March 1, 2018 (New Measures for the Administration of Outbound Investment — Regulation No.11) was not considered to be the main culprit of declining volume.

In fact, tightened controls on lending (following the Guidance on Regulating Financial Institutions and Asset Management Business) had a more significant impact during the second quarter. Not only has the tightened credit environment impacted real estate acquisitions in China, but it also has had a significant effect on Chinese investments overseas, either when looking to acquire or refinance existing projects. This is largely due to the fact that most Mainland Chinese participants in international markets have been financing projects using banks back home in China — banks that historically have been comfortable with higher debt-to-equity ratios than foreign counterparts.

On the back of both ongoing controls on outbound investment and a clampdown on lending to real estate developers and investors, the number of MCREIO transactions fell 45 percent y-o-y in this quarter. With 27 deals closed during the second quarter, the average quarterly transaction size of $161 million in this second quarter was 99 percent larger than the $81 million per deal average over the last three years.

In second quarter, MCREIO into the United States continued to trend at exceptionally low levels, down again from first quarter to a total of $81 million. With intensifying rhetoric from both the United States and China regarding their trading relationship, this seems set to curb the enthusiasm of Chinese investors for state-side properties for the remainder of 2018 and possibly into 2019.

The office sector staged a comeback in comparison to first quarter with $3.6 billion of investment recorded, up 44 percent q-o-q.

Hong Kong maintained its leading streak for the fourth quarter in a row and accounted for almost 80 percent of global MCREIO investment in second quarter. Transaction volume grew 155 percent y-o-y to the third-highest Hong Kong quarterly volume ever at $3.4 billion. The office sector remained by far the most favored commercial property type, accounting for 88 percent of investment into the city.

Australia followed in second with the United Kingdom and the United States in third and fourth, respectively.

Cushman & Wakefield anticipates MCREIOs will refocus more attention on Hong Kong, Australia and countries linked to the Belt & Road Initiative.

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