China Market Volatility Expected to Stimulate Outbound Real Estate Investment and Diversification in the Short Term

March 17, 2016

Hong Kong - As a result of the ongoing devaluation of the yuan, domestic asset devaluation, and market volatility, global law firm Paul Hastings expects that Chinese investors will increasingly look to accelerate and diversify their overseas real estate investments in 2016. Simultaneously, Chinese outbound investors will face short-term pressure from authorities seeking to prevent excessive cash flowing out of the PRC.

Paul Hastings expects that Chinese real estate investors will diversify their investments in the coming months in several ways. Firstly, there will be a growing interest in second and third-tier cities in the U.S. and Europe, particularly for small to mid-sized investors. Secondly, more Chinese companies will consider increasingly innovative and complex investments in and beyond ‘traditional’ real estate assets.

Vivian Lam, Corporate partner at Paul Hastings said, “Chinese investors are quickly learning and adapting their approach when investing overseas. When talking to SOE clients and other businesses, many expect that the environment will be challenging for them this year. As such, they’re interested in exploring diversification.”

As Chinese companies mature and become more familiar with the overseas investment climate, they have increasingly looked to invest in projects that deliver more long-term, stable yields. Paul Hastings Real Estate partners David Blumenfeld and Paul Guan, who advised Ping An Insurance and China Life on their respective significant U.S. investments last year, expect this trend to continue and hasten in the year ahead, but do not believe this will mark the end of ‘megadeals’.

David Blumenfeld said, “While Anbang has shown this week that ‘megadeals’ are still an attractive and viable option for some investors, we expect that many will also actively look into new, less glamorous sub-sectors, including medical and senior care facilities across the U.S. and elsewhere. These investments are about stable returns, together with knowledge gathering that can eventually be used in China to capitalize on the PRC’s own demographic shifts”.

Paul Guan added, “Chinese investors are becoming more sophisticated and understand that they need to broaden their horizons. This could entail considering Seattle instead of New York City, or transitioning from prime-location office buildings to ‘last-mile’ logistics centers.”

Total Chinese outbound capital reached record levels in 2015, supported by capital liberalization initiatives such as the Qualified Domestic Institutional Investor (QDII) scheme.

Until late last year, thanks to simplified approval processes employed by free-trade zones in Shanghai and a few other cities, Chinese companies were able to secure approval for outbound transactions within a few weeks. However, things have changed notably in the last three months.

Paul Guan commented, “Since December with the depreciation of the RMB, it would appear some local authorities have unofficially slowed down the approval process, and banks have been exercising more scrutiny than before when examining their clients’ applications for converting RMB into foreign currency for outbound investments. This has impacted the ability for deals to happen in the short-term.”

While it is unclear which direction the Chinese economy is heading, Paul Hastings expects that as long as the market remains volatile, authorities may continue to guide investors towards slowing down or pull-back on overseas investments in the short-term.

David Blumenfeld added, “This slowing of approvals may last for a few more months but we don’t expect it to be the new normal. The long-term trend is one of greater convertibility and the increased ability for investors to take their money offshore.”

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