How The Chinese Government Thinks About Global Real Estate, From A Man Who Actually Knows

Last month, the real estate sector in the U.S. and Europe had a close eye on Beijing and the Chinese Communist Party congress. Besides analyzing the attitude of President Xi Jinping, the market looked for signs the party would relax regulatory scrutiny of overseas real estate deals.

Anyone expecting news from the congress that regulation would be scaled back did not understand how the system worked, according to Collin Lau, a man with a better insight than most into the workings of the Chinese state and its strategy toward global real estate.

Lau was global head of real estate at China Investment Corp., the $810B Chinese sovereign wealth fund, from 2009 to 2012, and oversaw its move from primarily investing in funds to directly undertaking huge deals to buy companies and portfolios.

He now runs Bei Capital Partners, a Hong Kong-based private equity firm. He started the firm when a Canadian pension fund asked him to set up a business to invest its money in Asia. It now also manages money for Asian institutions.

Lau told Bisnow how the regulation currently stymieing Chinese outbound investment would evolve, gave an insight into the strategy of Chinese state-run funds like CIC, how real estate fits into China’s Belt and Road initiative, and how Western investors would be able to access China and Asia in the future.

Chinese investment in global real estate is not huge — it stood at $30B in 2016 according to JLL, or 2% of total volumes — but before the extra regulation, it was growing fast. In global gateway cities, Chinese firms were frequently the top bidder for trophy assets, pushing up prices.

JLL predicts 2017 should match 2016’s investment volume but those figures are somewhat skewed by the $14B undertaken by CIC for Logicor, Blackstone’s European logistics business. Common or garden deals are likely to be down, and it has caused some high-profile investors to withdraw from deals.

“The party meeting is finished, but then it takes some time to reshuffle and change the officials in the next couple of levels down," Lau said. "It will be next summer before those people are in place and understand their roles and what the government wants, so I think the current situation will remain for another year.”

He said the regulations were having an effect by encouraging self-censorship as much as prohibiting deals.

“The regulations mean that you have to provide detailed information about risks and strategy," he said. "If you went for it, you might get approval, but I think people will want to keep a low profile for the next 10-12 months.”

Beyond the short-term effects on outbound capital, Lau said the desire for investment abroad from companies in China, and Asia more broadly, remained strong.

“I think Asian capital will have an increasing influence on global real estate. There will be some near-term restrictions, but in the long term, I would not be surprised if Asian investors made up more than half of global real estate investment,” he said. Asia accounted for 43% of global investment in 2016, according to Cushman & Wakefield.

“At the moment, the allocation to real estate of Chinese institutional investors that are looking to invest abroad is de minimis, and they want to increase it," Lau said. "And their asset base generally is increasing, as Asian populations generally save more than Western populations, where consumer spending is higher.”

Along with controlling the investment of private companies, the Chinese state is a major investor itself via CIC, which undertook the largest deal in European property history when it bought Logicor earlier this year.

Lau said at this stage in the cycle, CIC would be heavily focused on risk management but would continue to look for large platform and portfolio deals.

“You had downturns in 1987, 1998, 2008 and now we are in 2018,” he said. “At this point in the cycle, the No. 1 thing is you don’t want to make a big mistake, so my former colleagues will be heavily focused on risk management. They will be looking for deals that can be defended and perform through multiple cycles, something where the fundamentals are very positive. A lot of the time that will be big platforms or portfolios with good partners.”

In terms of what a body like CIC is looking for in its partners in markets like the U.S. and Europe, Lau is straightforward: cut out the hype.

“They look at track record and reporting process but also, don’t sit there and tell me how much money you can make — be candid about risk," he said. "And don't expect to just come to Asia Pacific once a year, you have to have a good presence in the region or travel there often.”

Lau said the Logicor deal was part of a wider push by the Chinese state and its companies to dominate the global e-commerce sector.

“That deal was about more than just a piece of concrete,” he said. “I think you could call it a real estate infrastructure deal and an investment in the global supply chain. I think in China, more than other places, there is a view that in the long-term global trade, the consumer supply chain and traditional wholesale and distribution methods will be changed by e-commerce.”

In this sense, the deal fits well alongside the Belt and Road initiative Xi's government is pushing, which will look to invest more than $4 trillion in Eurasian and African infrastructure over an unspecified time frame.

In terms of the effect on real estate of this initiative, Lau said: “It is about increasing the flow of people and cargo from China all the way across Southeast Asia to Europe and Africa, and you have to look at the types of real estate that will benefit from that.”

In terms of money flowing into China and Asia from the West, Lau said opportunities abound, but investors need to recalibrate their expectations.

“I don’t think people should consider investing in gateway cities in Asia as an emerging markets strategy, as they have very similar characteristics to gateway cities anywhere," he said. “Also, they always feel that capital values are high compared to those in the west and need to understand the historic reasons for that, and that it doesn’t mean these assets won’t grow in value. You need a skilled team on the ground that understands the market.”

In terms of the opportunity in China, Lau said it again comes back to the state. He said Chinese state companies control around $19 trillion of assets, and much of this will be privatized as it looks to improve efficiency. Property sales will be a big part of this.

In a centrally controlled economy like China, the government has a level of control over capital flows that Western investors simply cannot imagine. The long-term prognosis looks rosy for greater outbound investment from China, but expect the government to turn on and off the tap as it sees fit.