When Beijing-based insurance company Anbang pulled its £750 million ($1 billion; €970 million) acquisition of one of London’s tallest commercial buildings last November alarm bells were ringing.
The decision to withdraw from buying Heron Tower was the latest in a number of last-minute postponements by Chinese real estate investors and a worrying sign that capital from the country may be drying up.
Market professionals, however, have been measured in their response.
“We haven’t seen any significant changes yet, but if there is a slowdown, due to capital flow restrictions, it would probably be the private rather than institutional investors, and it’s going to be on the residential rather than the commercial side of investment,” says Gunnar Herm, UBS’s head of real estate research and strategy in Europe.
Fickle economic policy and a stock market tumble in China have cut the purchasing power of small private investors and prompted them to invest more cautiously. Meaning they won’t drive residential pricing the way they did in the first three quarters of 2015.
However, for institutional investors traditionally focused on core assets, the trend continues to point upwards.
Robert Scholten, head of real estate finance Asia Pacific at ING Bank, remains optimistic. “We continue to look into opportunities in the market. China Investment Corporation have built up a significant portfolio and we believe they will continue to do what they do,” he says.
ING Real Estate Finance works with big institutional investors, with 14 deals worth €2.5 billion accounting for a 14 percent market share of the European commercial real estate market in 2014.
China’s outbound investment increased from $15.5 billion in 2014 to $26.7 billion last year, according to a report from Real Capital Analytics, partly driven by the economic recovery in Europe.
With markets in London and North America almost saturated, European deals offer higher yield possibilities. Philippines-based investor Andrew Chan bought the 56-storey Torre Espacio (Space Tower) in Madrid’s central business district last year, while Chinese property developer Dalian Wanda Group acquired Edificio España, a Madrid landmark, in 2014.
The depreciation of the yuan is also forcing domestic capital to seek opportunities in overseas markets earlier rather than later.
“As the renminbi becomes a more market-driven currency, it will devalue,” says Frank Khoo, global head of Asia at AXA IM – Real Assets. “This will drive the long-term capital to continue to invest abroad. Chinese investors are thinking that they’d better get out now because the depreciation will make it more expensive to get out later.”
The slowdown in the Chinese economy is also encouraging institutional investors to diversify through global portfolios.
Many will remain prudent and seek low-risk, low-yield real estate assets that serve to balance the risks they face domestically, while those willing to take on moderate risk for higher returns foreign-denominated income may become more important as expansion into new markets counters weakening growth at home.
Even a short-term pause in outbound investment may not be as painful as some fear. Chinese capital overseas accounts for only 1-3 percent of the total investment in Europe.
No reason for panic, then.