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Real Estate

Already one of the world's largest, China's real estate market continues to benefit, in our view, from three broad secular trends - urbanization, rising levels of consumption and increasing investments in infrastructure - that could offer attractive opportunities to offshore investors. We analyze the market in this section.

What are the options?

Through our experience in investing in Chinese real estate, we find that investment strategies depend on factors such as macroeconomic trends, capital market cycles, regulatory developments and operational considerations. Here we focus on four broad sectors.

Key real estate sectors and their considerations
 Key real estate sectors and their considerations

Other sectors

There are other niche options such as nursing homes, student housing, data centers and car park spaces etc. These are more operationally intensive, where we often see the best margins coming not from owning, but running them.

Beyond properties, debt financing is another option. This involves offering bridge financing options to developers who need short-term funds. This channel is exposed to dynamics that go beyond the real estate sector and into finance and pricing in the market.

Why consider?

China is the largest real estate market in Asia Pacific

It is also the second-largest globally after the US, with an investable stock valued at US$3.8 trillion, or 44% of the regional total. As China continues to widen its doors, making it a more inviting destination for investment globally, we believe it will make the market a greater target for other Asian-based investors who are encountering increasing difficulty in finding attractively-priced opportunities in major regional cities.

Beijing and Shanghai are among the most liquid markets globally

China’s Tier-1 cities have seen strong improvements in market liquidity, with Shanghai being the fifth most active investment market globally (since 2015)^. Better liquidity conditions have made the market more attractive to investors which in turn drives the growth and maturity of the market.

Diversification benefits

Property-level total returns in China offer some of the lowest cross-regional correlations of any country in Asia Pacific. As shown below, adding Chinese real estate to a pan-Asian portfolio potentially has the dual benefit of not only lowering risk through improved diversification but enhancing returns as well.

 

^Based on the total direct commercial real estate investment transactions in 4Q15-3Q18, excluding land, development and residential transactions. Source: JLL, 2018.

Figure-2
Note: The efficient frontier is based on a hypothetical portfolio comprising of Australia, Japan, Hong Kong, Singapore, South Korea, New Zealand and China (each weighting less than 30%). Calculation is based on the longest available total return data from MSCI: Australia (1985-2017), Japan (2002-2017), Korea/Hong Kong (2006-2017), China/Singapore (2007-2017), New Zealand (1994-2017). Source: Invesco Real Estate based on data from MSCI, as of November 2018. There is no guarantee that these hypothetical results will be achieved in the future.

Key takeaway

China’s Tier-1 cities (Beijing, Shanghai, Shenzhen, and Guangzhou) have offered reasonably high return, with low income volatility.

Ways to access

The legal framework for foreign investors to access Chinese real estate markets has been evolving over the years. While the long-term trend is to gradually relax the regulatory restrictions on foreign investors’ investment in China, the actual practice of, and each local government’s requirements and attitudes with respect to foreign participation in real estate transactions vary, and may also change from time to time.

Here we summarize the five main options for foreign investors considering accessing Chinese real estate:

Wholly foreign-owned enterprise (WFOE)

Description

A direct investment channel where a foreign investor establishes or acquires a WFOE to invest in real estate project companies.

Advantages

Foreign investor gains full control over the management and major financial decisions of the WFOE.

Who qualifies?

No specific qualification criteria on foreign investors; subject to the filing procedures with relevant authorities.

Foreign exchange

Based on SAFE regulations, foreign-invested enterprises can convert their registered capital in foreign currency to RMB.

Authorities

Ministry of Commerce (MOFCOM), National Development and Reform Commission (NDRC), State Administration of Foreign Exchange (SAFE), State Administration of Industry and Commerce (SAIC), or their local counterparts.

Restrictions

Subject to the guidelines on market access for foreign investments as updated from time to time (negative industry list etc.).

Joint venture (JV)

Description

A direct investment channel where an investor establishes or acquires a JV in China to invest in real estate companies. The JV can be either a Sino-Foreign Equity Joint Venture (EJV) or a Sino-Foreign Cooperative Joint Venture (CJV).

Advantages

Enables investors to work with local partners who have contacts with local business communities, specific geographic or industry knowledge, and government relations.

Who qualifies?

No specific qualification criteria on foreign investors; subject to the filing procedures with relevant authorities.

Foreign exchange

Based on SAFE regulations, foreign-invested enterprises can convert their registered capital in foreign currency to RMB.

Authorities

MOFCOM, NDRC, SAFE, SAIC, or their local counterparts.

Restrictions

Subject to the guidelines on market access for foreign investments as updated from time to time (negative industry list etc.).

Foreign invested partnership (FIP)

Description

A direct investment channel where a foreign investor sets up an FIP in China to make real estate investments.

Advantages

FIP may be established by registering with SAIC and does not require prior approval from MOFCOM.

Who qualifies?

No specific qualification criteria on foreign investors; subject to the filing procedures with relevant authorities.

Foreign exchange

Based on SAFE regulations, foreign-invested enterprises can convert their registered capital in foreign currency to RMB.

Authorities

MOFCOM, NDRC, SAFE, SAIC or their local counterparts.

Restrictions

Subject to the guidelines on market access for foreign investments as updated from time to time (negative industry list etc.).

Foreign-invested investment holding company (FHC)

Description

Established by a foreign investor in the form of a wholly-owned enterprise or a Sino-foreign joint venture to engage in direct investments in China. This is an onshore investment platform.

Advantages

Relatively broader permissible business scope; greater certainty on foreign exchange settlement.

Who qualifies?

The requirements for establishing an FHC are relatively high. The foreign investor in the FHC should: (i) have total assets of more than US$400 million, with at least one established foreign-invested enterprise (FIE) in China with actual paid-in registered capital exceeding US$10 million; or (ii) has established ten or more FIEs in China with actual total paid-in registered capital exceeding US$30 million.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

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