CHINA-US INBOUND INVESTMENT CAPITAL WATCH

Transcription

1 Issue CHINA-US INBOUND INVESTMENT CAPITAL WATCH A Cushman & Wakefield Publication

2 2 Table of Contents CONTENTS 04 Highlights 05 Chinese Investment Volumes Return to Earth 09 New York City Metro Investment Volumes Down 54% 13 Regulatory Environment 15 Top Ten Transactions 2017 China-US Inbound Investment Capital Watch

3 Cushman & Wakefield 3

4 4 Highlights 2017 HIGHLIGHTS Chinese investment in U.S. commercial real estate (CRE) slowed in 2017 following the imposition of capital controls. Megadeals and hotel acquisition volume experienced the greatest declines. In August 2017, the Chinese government formalized capital controls under which investments in real estate and hospitality assets are restricted, but not prohibited. The rules were clarified and streamlined in December 2017 with new measures becoming effective as of March 1, Chinese investment continues to be concentrated in five U.S. markets New York, San Francisco, Los Angeles, Chicago and Seattle. New York and San Francisco together accounted for two-thirds of every Chinese investment dollar bound for the U.S. In contrast to , non-institutional players dominated acquisition activity in 2017 with insurers, in particular, becoming less active. Demand for office and industrial properties remained relatively supported in 2017 in contrast to hotel, development sites and multifamily. Looking past the exceptional years of , acquisition volumes continue to trend upwards across property types. While Chinese investment in U.S. CRE declined, global outbound investment set a new record with the UK a prime beneficiary OUTLOOK Restrictions will continue to weigh on overall transaction activity, but U.S. economic growth and the liquidity, safety and diversification benefits of its CRE markets will continue to attract Chinese capital. Investment activity will favor deals most likely to receive state approval, including logistics entities and properties, R&D facilities, as well as student and senior housing China-US Inbound Investment Capital Watch

5 Chinese Investment Volumes Return to Earth 5 CHINESE INVESTMENT VOLUMES RETURN TO EARTH After hitting a high in 2016, Chinese investment in the United States declined significantly in The decline was not limited to real estate. According to the Rhodium Group, overall Foreign Direct Investment (FDI) flows from China into the U.S. fell 35% in 2017 to $29 billion (B). The decline was not a reflection of any diminished enthusiasm among Chinese investors for U.S. assets. Instead, a combination of new capital controls imposed by the Chinese government, greater regulatory scrutiny of deals by the Committee on Foreign Investment in the United States (CFIUS) and increasing attractiveness of opportunities in other countries led to diminished capital flows into the U.S. in These factors would have weighed on flows regardless of capital controls and one extrapolation is that the effect of controls on dealmaking is less than the 2017 figures first suggest. Outbound investment in real estate and hospitality assets attracted particular attention under the new rules and accordingly experienced relatively greater declines than did overall FDI. Cushman & Wakefield estimates that Chinese investors deployed $7.3B into commercial real estate acquisitions during 2017 a 55% decrease from As a result, China fell behind both Canada and Singapore in the ranking of largest sources of foreign capital in U.S. commercial real estate transactions. Much as the explosion in deal activity in 2015 and 2016 was driven by a collection of extremely high-value transactions, and the drop-off in megadeal activity accounts for the fall-off in 2017 volumes. Volumes for deals over $1B were down 75% year-over-year (YoY) in In contrast, volumes for deals under $250 million (M) declined only 12%. Accordingly, deal volumes fell significantly more than did the number of transactions down 17% YoY. Despite the deceleration, inbound investment remains elevated by historical standards. Nor have Chinese investors absented themselves from the megadeals market completely; the top 10 largest transactions in the U.S. in 2017 included two involving Chinese investors (Taikang Asset Management Co. and HNA Group). China Inbound Investment Volumes Down 55% in 2017 Deals over $1 Billion down 75% compared to only 27% for deals under $1 Billion China/HK Investments in U.S. CRE: 2011 Present Dollars in billions, number of deals Deals over $5 million. Where there were multiple buyers, deal volume was distributed evenly (e.g. if there were two buyers, then each was given 50% deal credit) Cushman & Wakefield

6 6 Chinese Investment Volumes Return to Earth SEATTLE 1% SAN FRANCISCO 20% CHICAGO 5% NEW YORK 46% LOS ANGELES 6% IN 2017, MARKET SHARE REMAINED SIMILAR TO PRIOR YEARS, DESPITE PULLBACK IN OVERALL VOLUMES Over three-quarters of capital continued to be deployed into five markets, with New York City and San Francisco together accounting for two-thirds of every Chinese dollar. The decrease in volumes was proportional across the top markets so that shares were essentially stable in 2017 compared to 2016: New York City (46%), San Francisco Bay Area (20%), Los Angeles (6%), Chicago (5%) and Seattle (1%).The remaining 22% of capital went to acquire properties in 57 additional markets. Among those, Washington, DC, Houston, Dallas, and San Antonio saw the greatest acquisition activity. Volumes increased YoY in each of the three Texas markets. China/HK Investments in U.S. CRE by Location: 2011 Present Dollars in billions Deals over $5 million. Where there were multiple buyers, deal volume was distributed evenly (e.g. if there were two buyers, then each was given 50% deal credit) 2017 China-US Inbound Investment Capital Watch

7 Chinese Investment Volumes Return to Earth 7 CHINESE INVESTOR COMPOSITIONS SHIFTED MARKEDLY IN 2017 AS NON-INSTITUTIONAL CAPITAL CAME TO DOMINATE CROSS-BORDER FLOWS. The period saw the emergence of insurance companies (notably Anbang) and investment companies as sources of capital for many of the largest transactions. Along with sovereign wealth funds, these investors were targeted by and particularly susceptible to political pressure to reduce speculative real estate investments. In contrast, investment by Chinese developers/owners/operators rose to $4B in 2017, up from $2.6B in China/HK Investments in U.S. CRE by Investor: 2011 Present Percent of total (%). Deals over $5 million. Where there were multiple buyers, deal volume was distributed evenly (e.g. if there were two buyers, then each was given 50% deal credit). Cushman & Wakefield

8 8 Chinese Investment Volumes Return to Earth HOTEL ACQUISITION VOLUMES DECLINED PRECIPITOUSLY IN 2017 DOWN 84% YOY AND ACCOUNTING FOR FULLY 71% OF THE OVERALL DECLINE IN CHINESE INVESTMENT. Development site and apartment acquisitions also declined significantly. In contrast, suburban office volumes more than doubled up 136% YoY and retail volumes increased 29% YoY, in line with its multi-year trend. Industrial volumes were flat for the year. CBD office volumes declined 35%, but they also became the dominant property type by volume with a 42% share. Office overall received 50% of all Chinese investment capital during The trends in Chinese investment activity were distorted by a small number of industrial transactions in 2015 and CBD office and hotel transactions in Looking past those, demand for office assets continues to trend upward. The same is true for hotels. The recently announced sale of a $650M hotel portfolio by Barings to a Hong Kong investor demonstrates how capital controls have not extended to offshore capital. Meanwhile, industrial volumes remain elevated compared to pre-2015 levels; we expect them to increase further. The small allocation to and distinct fall-off in apartment properties/volumes are two of the most notable divergences between Chinese and U.S. domestic investor activity. The multifamily market is more widely dispersed across metro areas and is more concentrated in suburban markets. As Chinese investors become more familiar with a wider range of U.S. markets, expect to see multifamily allocations increase. China/HK Investments in U.S. CRE by Property Type: 2011 Present Dollars in billions Deals over $5 million. Where there were multiple buyers, deal volume was distributed evenly (e.g. if there were two buyers, then each was given 50% deal credit) 2017 China-US Inbound Investment Capital Watch

9 New Chinese York City investment Metro Investment Volumes Return Volumes to Down Earth 9 NEW YORK CITY METRO INVEST- MENT VOLUMES DOWN 54 % New York City metro investment volume from all investors declined 32% in 2017, while investment from China and Hong Kong was down 54%. New York City has been the largest beneficiary of Chinese investment in U.S. commercial real estate for many years. In 2017, two of the top ten largest transactions were based in Manhattan, compared to five of the top ten in This was likely due to the imposition of capital export restrictions during the course of the year, which resulted in the cancellation of at least two $1B+ transactions. The decline in acquisitions was broad-based across property types in the New York City metro. In dollar terms, hotel accounted for the largest share of the decline as investments, falling 80% YoY. Development sites, apartments and industrial property acquisitions all experienced declines of 80% or greater as well. In contrast, retail acquisitions increased 12% YoY, although they only represented 7% of Chinese investment in the New York City metro. More significantly, Chinese investment in office properties declined only 31% YoY slightly less than the overall decline in the metro. China/HK Investment in NYC Metro by Property Type: 2011 Present Dollars in billions Deals over $5 million. Where there were multiple buyers, deal volume was distributed evenly (e.g. if there were two buyers, then each was given 50% deal credit) Cushman & Wakefield

10 10 San Francisco Bay Area Investment Volumes Declined SAN FRANCISCO BAY AREA INVEST- MENT VOLUMES DECLINED 52 % San Francisco Bay Area investment volumes from all investors declined 17% in Chinese acquisitions declined substantially more down 52% YoY. The sharpest declines were in hotel (down 69%) and industrial (down 79%) segments, with office activity falling marginally less (down 56%). On the positive side, development deal volume increased 10%. Hotel activity continued to be dominated by larger deals. Chinese investors were involved in the acquisition of the Intercontinental-Mark Hopkins in San Francisco and the Marriott City Center in Oakland, both among the 10 largest Chinese investments of 2017* (*page 15). Overall, however, there was a shift towards smaller deals. While the investment volume shrunk by half, the number of transactions actually increased 11% YoY. Looking forward, Chinese interest is expected to pick up in R&D facilities, incubator space, senior living and student housing. China/HK Investment in SF Metro by Property Type: 2011 Present Dollars in billions Deals over $5 million. Where there were multiple buyers, deal volume was distributed evenly (e.g. if there were two buyers, then each was given 50% deal credit) 2017 China-US Inbound Investment Capital Watch

11 Los Angeles Investment is the Lowest Since LOS ANGELES INVESTMENT IS THE LOWEST SINCE 2012 Los Angeles metro volumes were down just 1% across all investors in Acquisitions by Chinese investors, however, declined 67% YoY on the back of a 90% decline in hotel volumes. Meanwhile, office acquisitions rose to their highest annual level on record, except for the outlier year of 2014 despite CBD office transactions in the overall market declining 42% YoY. Industrial volumes were higher than in any year except 2015, while apartment volumes posted a new record. While the directionality in each case is impressive, the overall volumes remain relatively small. In 2014, 2015 and 2016, Chinese investment in the Los Angeles metro was driven by discrete deals in office/retail, industrial and hotel property sectors, respectively. These types of deals were absent in 2017, and so last year s activity is a better indicator of the more or less permanent flow of capital from China into the Los Angeles market. That flow is increasingly well-balanced across property types, is likely to grow in the future, and will likely again be punctuated by large deals as opportunities arise. China/HK Investment in LA Metro by Property Type: 2011 Present Dollars in millions Deals over $5 million. Where there were multiple buyers, deal volume was distributed evenly (e.g. if there were two buyers, then each was given 50% deal credit) Cushman & Wakefield

12 12 Chicago and Seattle CHICAGO AND SEATTLE Across all investors, Chicago and Seattle deal volumes in 2017 declined 20% and 23%, respectively, from Acquisitions by Chinese investors fell 62% in Chicago to $375M and 81% in Seattle to $78M. The leading cause of the decline was the absence of any hotel deals in either metro following nearly a billion dollars in acquisitions in Chicago in Office acquisitions increased 58% as rising deal volume in Chicago offset a decline in Seattle. Industrial investment declined 46% YoY, with the vast majority of what remained located in Seattle. As Chinese investors become more focused on industrial properties throughout the U.S., this will translate to greater activity in the Chicago and Seattle markets. China/HK Investment in Chicago/Seattle by Property Type: 2011 Present Dollars in millions Deals over $5 million. Where there were multiple buyers, deal volume was distributed evenly (e.g. if there were two buyers, then each was given 50% deal credit) 2017 China-US Inbound Investment Capital Watch

13 Regulatory Environment 13 REGULATORY ENVIRONMENT Since the last quarter of 2016, China has signaled plans to curb Chinese firms investment in foreign assets, reflecting concerns over speculative investments, the belief that many transactions were motivated primarily by the desire to circumvent existing capital controls and the broader goal of directing capital towards the state s strategic objectives, namely the Belt & Road initiative. On August 18, 2017, China s State Council released new guidelines regulating China s outbound investments. On December 26, 2017, the National Development and Reform Commission (NDRC) issued the Administrative Measures for Enterprise Outbound Investment ( Regulation No. 11 ).The new measures clarify the approval process for outbound transactions under the August framework and were effective as of March 1, The Intent: To reduce Chinese businesses overseas investment risk To promote healthy growth of overseas investment To enhance cooperation with overseas technology companies, in order to meet the needs of national economic and social development in China To manage foreign exchange reserves and stabilize the value of the Chinese currency. To deepen cooperation with countries involved in the Belt and Road Initiative The Details: August framework established three categories of overseas investments: supported, restricted and prohibited. Applied only to investments using domestic funds (whether direct or through offshore entity). Regulation No. 11 expanded August framework to include outbound investments by domestic (mainland) investors through controlled overseas enterprises using offshore funds (e.g. reinvestment of proceeds from sale of an offshore asset). Investments that can lead to export of China s technology and equipment, upgrade the nation s research and manufacturing ability, and make up the shortage of energy and other natural resources are supported. Investments in real estate, hotels and entertainment are restricted. The establishment of equity-investment funds and any investment platforms that aren t linked to a specific project are restricted. If the total investment amount from Chinese parties is less than $300M and the project is classified as neither restricted or prohibited, then pre-transaction verification, record-filing and reporting are not required. Deals over $300 million require record-filing with NDRC but not verification (approval). Restricted projects, including real estate investments, of any amount must go through the NDRC verification process and receive approval before deal close. Regulation No. 11 improved the transparency and reduced uncertainty of the outbound investment approvals process, introducing an online platform and a predictable timeline. Cushman & Wakefield

14 14 China Global Outbound Commercial RE Investment CHINA GLOBAL OUTBOUND COMMERCIAL REAL ESTATE INVESTMENT 2017 was another massive year for China outbound commercial real estate investment. The transaction volume reached a new record $50.7B USD, up 19.9% from A weakened pound enticed Chinese to invest in the UK. Chinese investors acquired commercial real estate in the UK with total deal volume of $15.4B USD, surpassing the 2016 level ($4.8B USD) by a wide margin. LKK Health Products Group bought London s Walkie Talkie building for 1.28B ($1.68B USD). Another mega deal in London was China CC Land Holding s 1.15B ($1.51 billion USD) acquisition of the Leadenhall Building, known locally as the Cheesegrater China-US Inbound Investment Capital Watch

15 Top 10 Transactions 15 Top 10 U.S. Commercial Real Estate Transactions of 2017 Property Name Region Investor Type Price (US$million) Size (SF/Units) Date Dupont Fabros Various Digital Realty Datacenter N/A 21 Sep-17 Taikang/Northstar JV Healthcare Regency Centers Portfolio Various Taikang AMC Healthcare 5, Jan-17 Various Regency Centers Retail 5, Mar-17 Greystar Monogram Various GIC, Ivanhoe Cambridge, Greystar, APG Group Apartment 4, Sep-17 Milestone REIT Various Starwood Capital Apartment 3, Apr-17 Duke Realty MOB Portfolio Various HTA (REIT) Medical Office 2, Jun Park Avenue Manhattan HNA Group Office 2,210 1,723,993 Mar-17 Care Capital Properties Various Sabra Health Care REIT Healthcare 2, Aug-17 NorthStar Realty Finance MHC Various Brookfield AM Manufactured Housing 2, Mar-17 Lone Star US Apartment Portfolio Various Harbor Group Int'l Apartment 1, Nov-17 Grey = China/HK investor. Top 10 China/Hong Kong Inbound Transactions of 2017 Property Name Region Inbound Investor Type Price (US$million) Size (SF/Units) Date Taikang/Northstar JV Healthcare Various Taikang AMC Healthcare 5, Jan Park Avenue Manhattan HNA Group Office 2,210 1,723,993 Mar-17 ElmTree US Industrial/Office Various China Life Industrial/Office May-17 LBA Western Industrial Various SAFE Industrial Mar West Madison Building The Standard Highline New York City Chicago HNA Group Office ,559 Feb-17 Manhattan Gaw Capital Hotel Oct-17 Welltower Senior Housing Various Cindat Capital Management, Union Life Insurance Senior Housing Feb-17 Intercontinental Mark Hopkins Oakland Marriott City Center San Francisco General Nice Hotel Feb-17 East Bay Gaw Capital Hotel May-17 Lansdowne Resort DC VA burbs Ci Zhonghua Hotel Mar-17 Cushman & Wakefield

16 2018 OUTLOOK Tighter government controls and approval procedures may frustrate the deployment of capital overseas in Only qualified investors will be able to invest abroad. Due diligence will be enhanced in order to reduce the investment risk, as well as to generate more balanced asset allocations. The logistics sector will receive more attention and should translate to greater logistics portfolios acquisitions activity as well as development of new facilities. This may include acquisitions of businesses in which the core business is not real estate development, but whose balance sheets hold a significant portfolio of owned logistics properties. Meanwhile, R&D facilities, incubator space, senior housing and student housing will receive additional capital allocation. Although Chinese investor activity has been dampened due to government policies on currency export, Cushman & Wakefield believes that the anticipated accelerated growth in the U.S. economy will continue to provide Chinese investors with compelling investment opportunities in Any reduction in demand form Chinese capital is likely to be backfilled by other foreign capital sources as the U.S. remains the top destination for global capital. David Bitner Vice President Americas Head of Capital Markets Research david.bitner@cushwake.com Revathi Greenwood Americas Head of Research revathi.greenwood@cushwake.com Xinyi McKinny 高心怡 Senior Managing Director China Direct Investment xinyi.mckinny@cushwake.com Lic. # Janice Stanton Executive Managing Director Global Capital Markets janice.stanton@cushwake.com James Shepherd, MRICS 林荣杰 Managing Director Research, Greater China james.shepherd@cushwake.com Copyright 2018 Cushman & Wakefield. All rights reserved. The information contained within this report is gathered from multiple sources considered to be reliable. The information may contain errors or omissions and is presented without any warranty or representations as to its accuracy. cushmanwakefield.com