The breadth and depth of capital sources in China make for a complex investment picture. There are myriad groups that have different investment requirements and experience in the real estate sector. Very often, consortiums pool resources with different partners who bring capital in addition to a range of skills and experience.
As a result, many of these consortiums have an abundance of real estate knowledge and have already made initial investments in global gateway markets. They are also comfortable with taking on investment risk in non-gateway markets.
One noteworthy group is the Chinese developers who are actively diversifying away from mainland China Tier 1 cities and are looking to apply their extensive development experience globally. Key drivers behind the diverse destinations of Chinese cross-border capital include:
- New groups pooling capital.
- Diverse capital sources resulting in diverse requirements.
- Developers diversifying away from Tier 1 Chinese cities.
RCA data highlights just how these cross-border investors have moved beyond gateway markets in 2015 and through 2016 to date. In 2011 global gateway markets received 79% of cross-border Chinese capital.
But, by 2015, gateway markets received only 46% of cross-border investments from Chinese investors. Year to date through October 2016, there has been a slight uptick with gateway markets accounting for 50% of cross-border volume.
Maturity and familiarity are driving broader investment mandates
The diverse pool of Chinese investors has a wide range of requirements around returns, holding periods, asset types, etc. Many have made investments overseas, often initially in gateway markets.
Anecdotally, many Chinese investors consider smaller, Tier 2 markets, such as Portland, Seattle, Miami and Chicago, to offer better value with more attractive yields. Asset class diversification is also evident: office and residential condos have been prevalent to date, but Chinese investors are increasingly looking at senior living, student housing and multifamily.
Investment activity in 2016 has mirrored the trend seen in 2015 of a more even split between gateway and non-gateway markets. While relative pricing and investment prospects will continue to influence the direction of capital in the short term, increasing maturity and familiarity with overseas investing is allowing many important sources of capital to broaden their investment mandates to the benefit of non-gateway markets.