Today’s global property market is sitting on the cusp of an unprecedented flood of capital now banking up in China in search of a new home offshore. And Australia, once again, is near the top of China’s wish list.
The impact of buying power of such magnitude is hard to fathom, simply because the world has never seen such a great wall of capital from a single country coming to the market all at once.
We are talking here about Chinese institutional capital, a far cry from the sometimes dubious sources of money that have been channelled from China into off-the-plan apartments and suburban homes in Australia and elsewhere.
This capital is disciplined. It seeks investment that will deliver stable income streams to meet future liabilities. Its investment criteria are no different to that of global and Australian institutional investors.
The objective is portfolio diversification to create broader sources of income.
The biggest pool of available capital belongs to China’s insurance companies. Since 2014, they have been able to invest up to 30 per cent of their total investible funds in infrastructure or real estate assets.
The top 10 insurance companies alone have a collective pool of some RMB 3.05 trillion ($667 billion) for investment in these two sectors, according to a study by global property firm Jones Lang LaSalle.
Darren Xia, Jones Lang LaSalle’s National Director International Capital Group, China, says 15 per cent of the total amount is permitted to go offshore to any of 45 markets.
But in reality, the Chinese institutions have targeted three regions -- the UK, the US and Australia -- as their preferred destinations. They are looking for deep, transparent markets in stable, developed economies.
Drilling further down, it would be more accurate to say they target gateway cities, rather than countries per se. Sydney and Melbourne have consistently showed up among their favourite gateway cities in successive global investment intention surveys.
They are also looking for landmark buildings that will allow them, if you like, to make a statement.
China’s Anbang Insurance is an example. Anbang paid $2.6bn ($US1.95bn) for one of New York’s best known landmark hotels, the Waldorf Astoria. Anbang is holding some RBM25 billion in investible funds and total asset of RMB125 billion.
China’s second-largest insurer, Ping An, bought a landmark building and a piece of history when it acquired the Lloyds of London Building for $441m (£210m) in 2013.
Xia points out that Lloyds of London is the only insurance exchange in the world still to book insurance transactions manually. The business has gone online everywhere else in the world. Lloyds embodies the history of the insurance industry.
China Life, China’s largest insurance company (with total annual premium income of US$52.9bn) stepped out last year to pick up a prime office tower at 10 Upper Bank Street in London’s Canary Wharf for $1.7bn (£705m).
In the first half of this year, Chinese institutions invested $7.8bn globally, and they are on track to spend up to $20bn before the end of 2015. If they reach that number, Chinese institutions will have doubled their spending in just two years.
To put it in proper perspective, Chinese investment still accounts for just a small fraction of total global transactions in commercial real estate. These amounted to $US730bn in 2014.
China was the fifth largest global real estate investor, behind the US, Canada, Germany, and the Middle East.
But when the outflow of Chinese capital quickens, it will play a significant role in pushing global commercial real estate transactions towards the magical US$1 trillion mark by 2020, based on JLL forecast.
It is also fair to say that Chinese institutions are still learning the ropes when it comes to overseas investment.
They were still embarking on fact-finding trips overseas as recently as two years ago. Back in November 2013, Peter Mitchell, who was then running the Asia Pacific Real Estate Association (APREA) out of Singapore, brought six insurance companies on a fact-finding trip to Australia.
What most impressed Mitchell was the diligence of these groups in their research. He recalls they did extensive homework about Australia before they embarked on the trip, and is aware that they have continued to monitor the Australian market for investment opportunities.
One of the six companies on the APREA trip, Sunshine Insurance, purchased the five-star Sheraton on the Park in central Sydney for $463m a year later.
Last year, China’s institutional investors put $US17bn into offshore real estate – up from $US11bn in 2013. Sydney received $US2.2bn, with London getting the lion’s share.
If they want true diversification, Xia says Chinese insurers are going to look to the UK and the United States before they look to Australia, because Australia is regarded as part of Asia and its economy is too closely linked to China’s.
However, it is undeniable that Australia is attractive today because of the 20-plus per cent devaluation of the dollar against the yuan. Australia’ interest rates are also at the lowest they have even been.
And because Sydney and Melbourne asset prices lag behind those in London and New York, Australian real estate still offers better value.
So far, only five of China’s largest insurance companies have ventured overseas, with another six indicating they are prepared to go offshore, according to a research note from international agency Knight Frank.
Big names include PICC (People’s Insurance Company of China), which has premium income of $US44.4bn, China Pacific ($US27.3bn), New China Life ($US19.6bn) China Taiping ($US 3.9 billion) and Taikang Life ($US 10.1bn).
Some Chinese institutions will likely outsource their investment to foreign asset advisors and investment banks, asking them to scout for assets. Korean institutions outsource to foreign groups in the same way.
China Life, with an investment portfolio of $ US315bn, has hired five foreign managers on three-year contracts to implement its multi-asset class strategies.
The depth of China’s capital market is even deeper than the insurance money, with capital accumulating in managed investment funds, says Mitchell, who now consults with Emerge Capital, an international real estate advisory and investment firm working with Chinese and Asian investors.
One of the largest Chinese fund managers has a client base of 40,000 high net worth individuals, he says. It manages assets totalling some $US90bn ($122bn).
Sydney had its first real taste of the might of Chinese capital when China’s sovereign wealth fund, China Investment Corporation, trumped competitors with a $2.45bn bid to clinch Investa Property Trust last week.
Many described the price agreed in Australia’s largest transaction of direct real estate as ‘jaw-dropping’ or ‘eye-popping’.
This was, nevertheless, a droplet against what is potentially likely to come out of China. Wait till the dam breaks.