Blog - Commercial
CHINESE INVESTORS SHIFT FOCUS FROM RESIDENTIAL TO COMMERCIAL
Increased stamp duty, tax and application fees, and a crackdown by Chinese regulators on how individuals can transfer their money abroad have seen Chinese investors turn away from the Australian residential market.
A study by Morgan Stanley even forecasted that Chinese investment in overseas residential property markets would drop by 84% in 2018, and by another 15% in 2019.
The commercial real estate industry also took a hit in 2017 as a result of regulatory changes. Last year Chinese investment in Australian commercial property plummeted to $1.83 billion (compared to $7.1 billion in 2016) as the market worked to understand the implications of the new laws.
However, Chinese interest in the commercial property sector appears to be back on the rise…
Why is Chinese investment in commercial real estate making a comeback?
To date, China’s effort to regulate outbound investment in real estate has focused mainly on large Chinese conglomerates – such as Anbang, Dalian Wanda, HNA, Fosun, and Zhejiang Rossoneri Investment – in a bid both to stem capital outflows and rein in risk. This is because, in China, the banks control the financial system, and bank loans, rather than bond markets or sharemarkets, are the primary source of funding.
In recent years, these larger groups have spent more than US$1.6 trillion buying up Australian property and businesses. So, if one of these projects fails, it risks destabilising the entire Chinese banking system and, in turn, their whole economy.
“One of the main reasons for the new government regulations is to change how multi-billion dollar overseas investments are funded,” said TGC Sales and Leasing Agent, William Shen.
“Chinese investment in commercial property certainly slowed in 2017 as the market tried to wrap its head around the new regulations and their practical implications. However, smaller investor groups and high net worth individuals are coming to realise that the new rules relate more to the big players, and that’s given them the green light to start buying again.”
Interest unlikely to wane in the long run
New regulations are also unlikely to dampen strong Chinese demand for Australian commercial property in the long run. For Asian investors, Australia remains a safe haven and preferred destination for investment, with good capital gains, rising values, low office vacancy rates and prospects of dual citizenship.
Though Australian yields sit at historic lows (around 6%), they still attract investors looking for an alternative to the disappointing bond market. Multiple global reports continue to place Sydney and Melbourne amongst the world’s most sought-after investment destinations, which appeals to Asian buyers.
Other countries to pick up some of the slack
Recent reports also show that any cooled interest from Chinese investors is being restored by investors from other countries – such as Singapore, Hong Kong, the US and Germany – who also view Sydney and Melbourne as strong global performers.
AXA Investment Managers supports this idea, recently naming Australia as the “the first port of call” for investors in the Asia-Pacific region. Here, Sydney and Melbourne, in particular, are described as “liquid markets, with respected rule of law and long-term growth in office employment.”
Chinese buyers still prop up Sydney’s commercial property market
Offshore investors now account for approximately 40% of commercial sales, and Chinese buyers still comprise around 12% of this total. And, despite the Chinese Government’s crackdown on multi-billion dollar Chinese overseas deals, Carrie Law, CEO and board director of Juwai.com maintains that “over the past two and a half years, there has been a steady increase in commercial property investments by Chinese high net worth individuals and investment partnerships.”
“For them, buying Australian commercial real estate is like purchasing a bond that pays a near-guaranteed return year after year,” Law said.
Chinese investors turn to the hotel sector
Last year, many overseas buyers also turned to the Australian hotel sector. In NSW alone, over 26% of hotels were purchased by foreign investors in the fourth quarter of 2017. New data shows that a lot of this interest stemmed from Chinese buyers who, in 2017, purchased 13 Australian hotels worth a total of $1.12 billion.
These figures are predicted to rise this year with a recent ANZ/Property Council Survey forecasting that foreign investor demand for hotels and offices will grow even further, to 21.9% and 19.2% respectively.
Can supply meet demand?
While there’s no denying that hotels are hot ticket items for Chinese investors, it’s important to keep in mind that they are also in relatively short supply.
“Australian hotel owners are currently enjoying the best trading conditions they’ve seen in a while,” said Shen. “But there’s not much stock available at the moment, and many owners are unwilling to sell for fear of being unable to reinvest in the sector”.
“There are a few developments in the pipeline; actually, hotel development is rising at its fastest pace in years. But this is unlikely to be enough to meet the demand from foreign investors,” said Shen.
Looking to invest in commercial property?
High levels of transparency, a comparatively stable government and financial institutions, strict planning controls, high capital gains, and lower deposit requirements will continue to win over Asian buyers.
“Property prices may plateau in the short-term, but prices will continue to soar in the long-term, particularly for commercial strata and freehold commercial properties,” said Shen.
“There are many Asian people looking to migrate to Australia. And, since population growth creates an underlying demand for property, I am confident that Australia will remain a sanctuary for Chinese investors well into the future.”