George Soros says China is due a hard landing. A credit bubble about to burst, he insists, just as it did in the West in 2008.
Soros is famously bearish about China and its multi-trillion yuan problems. But is he right? And is Q1 2016’s £1.175bn of Chinese investment in London real estate at risk if he is?
With Chinese economic growth slowing to 6.7% in the first quarter, the yuan devalued and the main Chinese stock markets roller-coasting dangerously, concerns about capital flows into London seem reasonable. Taiwanese life insurance giant Fubon’s decision to pull out of the £500m purchase of Hines’ Cannon Place, EC4, seemed to confirm the worst.
CBRE says: don’t panic. Like many in the London investment scene, the firm is guessing that domestic troubles at home will encourage Chinese investors to buy in Europe. The good times will just keep on rolling.
Richard Zhang, head of CBRE’s China business team in London, says: “Chinese investment capital flows into the London commercial property market increased by 159% year-on-year in the first quarter of this year, rising from £453m in 2015 to £1.175bn in 2016.
“We are seeing an increasingly diverse group of Chinese investors, comprising insurance companies, developers, institutional investors and private investors allocating more capital to real estate, particularly in London.
“It is no longer just the large lot size, prime London assets that are attracting investor intention. What we are increasingly seeing is Chinese developers assembling overseas specialist development teams to identify and secure opportunities as well as partnering in joint ventures.”
The list of Chinese buys that are agreed, in prospect, or rumoured, seems likely to take the 2016 total even higher than CBRE predicts. Resolution’s £300m purchase of the 566,000 sq ft Thomas More Square, E1, campus from Land Securities is understood to have been funded by Chinese investment group Fosun, while HNA is said to be paying £170m for 200,000 sq ft at 17 Columbus Courtyard, E14. The deal follows HNA’s £235m purchase of 30 South Colonnade, E14.
Brookfield/China Life splashed out £350m on Aldgate Tower, E1, while China Overseas Land’s interest in the Helicon building, Finsbury Pavement, EC2, and Poly’s £145m purchase of 5 Fleet Place, EC4, as well as a super-hush-hush £350m deal nobody will talk about, all add to the long roll-call of transactions in progress. The list goes on.
Rasheed Hassan, director in Savills’ cross-border investment team, shares the sense that all is well – better than well. He agrees that sluggish domestic Chinese growth rates and returns will push even more capital overseas.
“The only question is how they export the money. That may be an issue, but much of it is already outside mainland controls in Hong Kong. Much else is already committed. And we have no idea how much blind money is in reality from China in the big US investors’ funds. It certainly isn’t all US money,” he says.
Hassan rejects the idea that a panicked Beijing could order repatriation of capital and large-scale disinvestment. “It isn’t impossible, but it’s hard to believe, and complicated to do,” he says.
“There are things to be concerned about in China, but I think they mean more outward capital flows, and more diversification. London and Manhattan are the two top targets,” he says.
Eric Pang, head of JLL’s China desk, is fresh back from Beijing, Shanghai and the off-shore centres, and says London’s reputation as a safe haven still scores strongly with China’s many first-time investors and new entrants.
“The year 2016 will set a record for investment in London because capital is being driven out by the most serious slowdown in China since the reforms began. China is seeing a real economic correction, but with growth down, and interest rates low, capital is looking for better returns elsewhere,” he says.
However Pang, like Zhang, sees the UK’s 23 June European referendum as the key factor in deciding how much more money comes to London, and when.
“Investment volumes from China are already down by 50%, and if the UK votes to remain, a wall of capital will jump into the market. If it votes to leave, there will be a longer pause,” he says.
James Beckham, director at Cushman & Wakefield, points to another downside risk. He suggests some Chinese buyers may turn into sellers, a trend apparent among many other groups of Asia-Pacific investors. “We will see some selling under the radar. We’re envisaging some big sells, and volumes may be affected by pressure to prevent outflows of capital,” he says. “It’s a pan-Asian phenomenon.”
But he stresses that London’s appeal is still strong. He says: “Compared with the alternatives such as the eurozone, which still looks chaotic, London is stable with low supply, low vacancy rates, and sound property fundamentals.”