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<span style="line-height: 1.3em;"> </span><span style="line-height: 1.3em;">I read with interest this week that the office block at Sydney's 175 Liverpool was sold off to a Chinese property group.</span>
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<div>As good a time as any, then, to have a quick look at some Chinese investment trends.</div>
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<div>Doug Ferguson of KPMG and Professor Hans Hendrischke of the University of Sydney have teamed up with Knight Frank to produce an excellent and enlightening summary report on this very subject, entitled <a href="https://demystifyingchina.com.au/reports/demystifying-chinese-investment-2015.pdf" target="_blank">Demystifying China</a>.</div>
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<div>It's well worth a read. </div>
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<div>Below are just a few of their key findings.</div>
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<div><strong><span style="text-decoration: underline;">Trend 1 - Commercial real estate investment quadruples</span></strong></div>
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<div>In 2014, Chinese overseas investment in Australia was largely focused on commercial real estate at 46% of the total ($4.4 billion), with mining now accounting for just 11% $992 million)</div>
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<div>Chinese investment in commercial real estate nearly <em>quadrupled</em> in only one year to $4.37 billion.</div>
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<div><a href="/images/2015/06/22/China1.jpg" target="_blank">Click to enlarge</a></div>
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<div><span>A few of the larger investments in 2014 included the Hoyts Group, the Port of Newcastle, the Sheraton on the Park and the flagship Gold Field House at Sydney's 1 Albert.</span></div>
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<div>These trends are only set to continue as the threshold for outbound investment was raised tenfold from US$100 million to US$1 billion in October.</div>
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<div>Incredibly, the report notes that the total assets of China's insurance industry doubled in the past 5 years to RMB 9.6 trillion (US$ 1.6 trillion).</div>
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<div>Investment is now rotating away from mining and resources and into real estate.</div>
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<div>This stunning graphic puts into context just how serious Chinese investment is in the "gateway cities" of Sydney and Melbourne.</div>
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<div>Not that these figures <em>exclude</em> residential property. </div>
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<div><a href="/images/2015/06/22/CHina3.jpg" target="_blank">Click to enlarge</a></div>
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<div>The report found that Brisbane and the Gold Coast are beginning to capture more Chinese residential developer interest, in particular around Brisbane's Newstead and Fortitude Valley (I live there, and yes that is definitely the case).</div>
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<div>Here is a list of some of the key properties bought by Chinese investors in the 15 months to March 2015.</div>
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<div><a href="/images/2015/06/22/China4.jpg" target="_blank">Click to enlarge</a></div>
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<span>The trend is only set to continue, if not accelerate.</span><br><br><strong><span style="text-decoration: underline;">Trend 2 - Currency play</span></strong><br><br><div>Purchasing power for Chinese capital against the Australian dollar has increased massively over the past decade, which only encourages further investment.</div>
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<div><a href="/images/2015/06/22/China5.jpg" target="_blank">Click to enlarge</a></div>
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<strong><span style="text-decoration: underline;">Trend 3 - A New South Wales focus</span></strong><br><br><span>It is interesting to note that a massive 72 per cent of Chinese investment hits New South Wales.</span>
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<div><a href="/images/2015/06/22/China6.jpg" target="_blank"><span>Click to enlarge</span></a></div>
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<div><span>Australia is encouraging further Chinese investment with the Significant Investor Visa (SIV, A$ 5 million) now being refined with a Premium Investor Visa (PIV, $15 million) offering a more expeditious route to Australian permanent residency within 12 months for ultra-high net worth individuals.</span></div>
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<span><span><em>PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank" rel="nofollow">AllenWargent</a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank" rel="nofollow">blogger</a>.</em><br></span></span>
<p><em>His latest book is <a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank" rel="nofollow">Four Green Houses and a Red Hotel</a>.</em></p>
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Chinese investment rotates to real estate: Pete Wargent

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<p><span>What started as Chinese sovereign funds making exploratory investments in Australia has now proliferated into investment sprees by Chinese developers, banks, ultra high net worth individuals (UHNWI’s) and institutional investors such as insurance companies.</span></p>
<p><span>The attractiveness of mature gateway markets in the UK, US and Australia is pulling capital out of China, providing quality products and higher yield returns with diversification benefits and assisting institutions and developers build their brand internationally. </span></p>
<p><span>The first wave of Chinese capital outflow saw sovereign wealth funds, banks and private funds investing in core, trophy assets with examples including CIC and Bright Ruby Group acquiring core office assets in the Sydney CBD. Large developers followed, looking to diversify with an overseas presence.</span></p>
<p><span>The 10th Demystifying Chinese Investment report was by KPMG and The University of Sydney, who given the unprecedented increase in commercial real estate investment partnered with Knight Frank, to provide a more detailed account of Chinese commercial real estate investment activity in Australia.</span></p>
<p><span>"The catalyst for our report series is the historic lack of detailed factual information about the real nature and distribution of China’s outbound direct investment (ODI) in Australia," report authors Doug Ferguson and Hans Hendrischke said.</span></p>
<p><span>"Our reports seek to set the record straight and debunk the myths associated with Chinese investment in this country," </span></p>
<p><span>It noted, somewhat dichotomously, the Federal Government has proposed changes to the foreign investment framework or private residences in Australia, announced as part of an options paper released in February 2015.</span></p>
<p><span>"This may impact Chinese commercial investment flows.</span></p>
<p><span>"However, even if implemented in their entirety, it is unlikely to deter the large scale development and investment into commercial and residential markets."</span></p>
<p><span>Here are <em>Property Observer's</em> 17 key takeouts of<a href="https://demystifyingchina.com.au/reports/demystifying-chinese-investment-2015.pdf" target="_blank"><span> the 8000 word report</span></a>.</span></p>
<p><span>1) The gateway cities of Australia, namely Sydney and Melbourne, have been the most active markets for Chinese investors. With their relative geographic proximity, relatively higher yields, market stability and liquidity, total Chinese real estate investment volume in these two cities outstripped both London and New York in 2014. </span></p>
<p><span>2) But China’s outward investment into real estate has seen Chinese high net worth investors and developers now looking to new destinations offering discounts on prime property such as Miami in the US; and in Australia, Brisbane, Gold Coast, Adelaide and regional suburbs of NSW and Victoria will start to gain more traction. </span></p>
<p><span>3) For the first time, nearly half of Chinese investment was concentrated in commercial real estate transactions, up from 14% in 2013.</span></p>
<p><span>4) For the first time, Chinese private sector investment in Australia exceeded state owned enterprise investment in number of deals (85% of total) as well as in total value (66%, AUD 6.23 billion) in 2014. Fifty-one private deals were recorded in 2014, compared to 25 in 2013.</span></p>
<p><span>5) NSW attracted 72% of investment.</span></p>
<p><span>6) Australia maintained its position as the second largest recipient country of aggregated global Chinese direct investment between 2007 and 2014, behind the United States in first position.</span></p>
<p><span>7) According to the Australian Bureau of Statistics, China now ranks as Australia's fifth largest investor with 4% of investment stock, behind the United States (24%), the United Kingdom (13$), Japan (10%) and the Netherlands (6%), equal to Singapore (4%) and ahead of Canada (3%).</span></p>
<p><span>8) Chinese direct investment in Australia in 2014 was mainly focused on commercial real estate, infrastructure and for the first time, a material investment in the tourism and leisure sectors.</span></p>
<p><span>9) 2014 saw a dramatic increase in commercial real estate investment, accounting for 46 percent of the total 2014 value – up from 14 percent in 2013. Chinese investment volume in commercial real estate has nearly quadrupled in one year to A$4.37 billion, a surge fuelled by a combination of push and pull factors, with a number of key domestic economic and policy variables contributing. </span></p>
<p><span>10) Another major push comes from some significant easing of overseas investment policies. For example, in late 2013 the outward investment approval threshold was raised from USD 100 million to USD 1 billion and in October 2014, the Ministry of Commerce removed prior approval for most foreign investment. The total assets of China’s insurance industry doubled over the past 5 years to RMB 9.6 trillion (USD 1.6 trillion) as at October 2014. By 2020, authorities estimate that the Chinese insurance industry will accumulate a further RMB 20 trillion worth of premiums, tripling the current pool size.</span></p>
<p><span>11) There are a number of pull factors at play fuelling investment in overseas markets:</span></p>
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<li><span>As these investors and developers already have extensive domestic exposure, offshore investments help them diversify risk into markets that offer better returns and lower funding costs. Funding costs in Shanghai and Beijing are very high, notwithstanding recent cuts, often at above 8 percent. In contrast, funding costs can be as low as 4 percent in Australia and an easing cycle is underway. </span></li>
<li><span>Deep, liquid and transparent markets with scale – clarity of rules and regulations. </span></li>
<li><span>The quality of life, weather, clean air and world class education institutions all act as a magnet to Chinese developers and migrants alike. </span></li>
<li><span>Overseas acquisitions help Chinese institutions build their brands internationally. </span></li>
<li><span>Owner occupiers (eg. big banks) use investments to help manage their future occupation costs. Banks such as CCB, Bank of China, Agricultural Bank of China and Commercial Bank of China have all been active in the commercial market globally over the past year. <br>  </span></li>
<li><span>12) For many wealthy Chinese, the risk of buying property in unfamiliar overseas markets such as Australia can be offset by buying projects offered by Chinese developers, providing a sense of both familiarity and pride. However, our recent conversations with several pioneering Chinese developers revealed that they are increasingly realising the need not just to cater for Chinese buyers, but to tailor project design elements and marketing strategies to the broader local markets. </span></li>
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<li><span>They are no longer distinguishing buyers by nationality or relying primarily on demand from Chinese buyers. Robust local sales conditions have become one of their most commonly stated criteria for project screening. They aim to expand and leverage their brand identity overseas and to take advantage of this demand. Chinese developers, however, have the added advantage of being able to attract a significant pool of Chinese buyers, who often purchase off-plan, which helps to de-risk their development projects. Greenland has invested heavily into Australian development projects, tapping predominately into cities such as Sydney and Melbourne. Dalian Wanda Group, one of China’s largest mixed-use developers, is developing major hotel and residential projects in Sydney and the Gold Coast.</span></li>
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<p><span>13) Since the end of 2007 and the onset of the GFC, the Renminbi (RMB) has appreciated considerably against a basket of major currencies, including 37 percent against the British Pound, 38 percent against the Euro, 15 percent against the US dollar and 26 percent against the Australian dollar. This has largely strengthened the purchasing power of Chinese investors, as overseas investment has become relatively cheaper. Many Chinese investors see this as a good opportunity to acquire foreign assets. </span></p>
<p><span>In the face of a cooling Chinese economy, RMB appreciation is expected to slow down in the coming years. Currency fluctuation is a double-edged sword for Chinese investors. Since Greenland’s acquisition of their Melbourne site, the Australian dollar has depreciated roughly 18 percent against the Renminbi. On the flip side, this devaluation now favours any Chinese investors who buy into this and any other residential schemes.</span></p>
<p><span>14) Currently, the third wave of equity investors and insurance firms are seeking core, value-add and yield-driven opportunities. Only four of the top 10 Chinese insurance companies have made offshore investments so far, although the remaining six are considering overseas expansion. Sunshine Insurance Group’s purchase of the Sheraton on the Park Hotel in Sydney for a record AUD 463 million in November 2014.</span></p>
<p><span>15) Chinese developers, however, have been more aggressive, with eight of the top 10 players having already made offshore investments, seven of which have been active in Australia, and other developers are contemplating such a move. Greenland Group, one of Shanghai’s largest state- owned enterprises, has purchased numerous development sites in Sydney’s CBD and other metropolitan markets in Sydney and Melbourne. Other developers currently actively developing product include Country Garden, Chiwayland, Bridgehill, Aqualand, Golden Age, JQZ, R&amp;F Properties, Golden Horse and Dalian Wanda (Wanda One). </span></p>
<p><span>After heavy investment in prime office buildings and subsequent yield compression in gateway cities, Chinese investors have begun to look increasingly at opportunities in other key cities and other property sectors and importantly in suburban locations in metropolitan Sydney, Brisbane and Melbourne, not just within the CBD and fringe markets.  </span></p>
<p><span>Whereas investors traditionally targeted the core office and residential development sector, they are now also targeting a more diversified group of real estate assets, from hotels and leisure to industrial to student accommodation. Brisbane and the Gold Coast have begun to capture more residential development interest from Chinese investors and developers. </span><span style="line-height: 1.3em;"> </span></p>
<p><span>There has been increasing activity in non-core areas of Brisbane, such as Newstead and Fortitude Valley, and this is expected to broaden to more metropolitan sites and to the Gold Coast, where Wanda has co-invested in an AUD 1 billion beachfront site. These markets are underpriced relative to Sydney and Melbourne, and we expect Chinese developers to continue to seek entry to these markets. </span></p>
<p><span style="line-height: 1.3em;">Adelaide and more satellite or regional suburbs of NSW and Victoria will start to gain traction/interest from Chinese and we should see some stronger price growth occur also. In the commercial sector, retail and hotels will start to garner more interest following relatively subdued activity over the past few years relative to office and residential development sites.</span></p>
<p><span style="line-height: 1.3em;">16) A new group of entities is quickly emerging as a fourth wave of capital outflow. This group constitutes not only big-name companies, but also UHNWIs, small- to mid- cap SOEs, and smaller, private developers. UHNWIs are exploring Australian investment opportunities mainly for secured income, capital appreciation, risk diversification, personal interest and to link with the strong education sector. Their investment strategies are far ranging, and they are open to different asset classes, with interests ranging from smaller shopping centres, such as the Campsie Centre, to offices such as 299 Elizabeth Street in the Sydney CBD, residential units and lifestyle properties.</span></p>
<p><span style="line-height: 1.3em;">17) Given the distinctive policy-driven nature of the Chinese market, however, Australia should equally be aware of the risk of policy reversals over time.</span></p>
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17 facts about Chinese investment in Australia: KPMG/University of Sydney/Knight Frank

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<p><span>The next wave of Chinese capital flowing into Australia property will target new destinations like Brisbane, Gold Coast, Adelaide, Perth and the suburbs of Sydney and Melbourne, according to Knight Frank.</span></p>
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<p>But the impetus will not come from traditional property developers, rather its insurance companies.</p>
<p class="Normal"><span style="line-height: 1.3em;">According to Knight Frank’s latest report, </span><span class="Hyperlink__Char" style="line-height: 1.3em;"><span class="Hyperlink__Char">Chinese Outward Real Estate Investment Globally and Into Australia</span></span><span class="Normal__Char" style="line-height: 1.3em;">,</span><span class="Normal__Char" style="line-height: 1.3em;"> </span><span style="line-height: 1.3em;">the total value of Chinese outward real estate investment globally skyrocketed from US$0.6 billion in 2009 to US$16.9 billion in 2014 across the world.</span></p>
<p class="Normal"><span style="line-height: 1.3em;">Already over US$7.8 billion has transacted in the first four months of 2015 (data excludes residential dwellings). </span></p>
<p class="Normal"><span class="Normal__Char" style="line-height: 1.3em;">Knight Frank’s Dominic Ong, senior director of Asian markets, capital markets</span><span style="line-height: 1.3em;">, said so far the majority of the Chinese outward investment has been focused in gateway cities of Australia, the US and the UK.</span></p>
<p class="Normal"><span style="line-height: 1.3em;">“What first started as sovereign funds making exploratory investments has proliferated into buying sprees by Chinese developers, banks, Ultra High Net Worth Individuals (UHNWIs) and institutional investors, such as insurance companies. </span></p>
<p class="Normal"><span style="line-height: 1.3em;">"By 2020, authorities estimate that the Chinese insurance industry will accumulate a further RMB20 trillion worth of premiums, tripling the current pool size.</span></p>
<p class="Normal"><span style="line-height: 1.3em;">“This current wave of equity investors and insurance firms are seeking core, value-add and yield-driven opportunities," Dominic Ong said.</span></p>
<p class="Normal"><span style="line-height: 1.3em;"> Among the big-cap players, only four of the top 10 Chinese insurance companies have made offshore investments so far, although the remaining six are considering overseas expansion. </span></p>
<p class="Normal"><span style="line-height: 1.3em;">Sunshine Insurance Group is the only one to invest in Australia, purchasing the Sheraton on the Park Hotel in Sydney for a record AU$463 million.</span><span style="line-height: 1.3em;"> </span></p>
<p class="Normal">“For Chinese investors in the Australian market, the gateway cities – namely Sydney and Melbourne – have been the most active market for Chinese investors.</p>
<p class="Normal">"The next wave of Chinese investors are diversifying more and broadening to areas such as Brisbane, Adelaide, Gold Coast, Perth and metropolitan suburbs of NSW and Victoria, which will all start to gain more traction.</p>
<p class="Normal"><span style="line-height: 1.3em;">“These investors will also diversify by broadening their sector allocation from core office and residential developments into hotels and leisure, student accommodation, industrial assets and mixed-use developments,” said </span><span class="Normal__Char" style="line-height: 1.3em;">Mr Ong</span><span style="line-height: 1.3em;">.</span></p>
<p class="Normal"><span style="line-height: 1.3em;">Click to enlarge</span></p>
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