China’s proposed changes for the rules governing overseas investment are likely to fuel appetite for UK assets from Hong Kong-based investors and could have a significant impact on the property market.
China has readied proposals to block state-owned enterprises from purchasing property worth more than $1bn in a single overseas transaction.
Permission may also be required for transferring funds up to $5m, where it has previously been $50m.
China is attempting to restrain capital outflow, which is placing pressure on the renminbi and depleting foreign exchange reserves, to keep money in the Chinese economy.
Chris McCormick, European investment director, of GAW Capital Partners adds that after the US election, president-elect Donald Trump’s pledge to fund more infrastructure and implement tax cuts could strengthen interest rates in the US – a potential weakness for the Chinese economy.
James Shepherd, managing director of research at Cushman & Wakefield, China, says: “The central government can control capital outflows by restricting the intending investor’s ability to transfer funds overseas.
“To obtain approval for such transfers, the investor must go through the formal approval process. The more substantial the investment, the more scrutiny is likely to be applied.
“If a Chinese company has the intention to acquire projects or direct investment overseas, they need to get approval from different government departments such as the Ministry of Commerce, National Development and Reform Commission and State Administration of Foreign Exchange.
“The government therefore has a high level of control over how much capital it allows local companies to invest overseas.”
The changes are likely to cause a slowdown in interest from Chinese investors.
It could also mean “savvy investors” could move their money to neighbouring Hong Kong where restrictions would not apply, according to McCormick.
He adds that getting money out of China this year has become harder due to restrictions already in place.
“Obviously by reducing the transfer limits it makes a massive difference; it is not a large amount of money. The average size we were doing was £200m as a single asset deal with Chinese institutions – it would be a lot harder to shift anything out.”
“It would clearly present a barrier to capital exiting China, as this is likely to overwhelm the system, so even if the majority of requests were approved, there could be a significant delay,” adds Zachary Gauge, European real estate analyst at UBS Global Asset Management.
“This would mean investors missing out on target opportunities unless they already have the cash in a non-RMB currency.”
Jun Wei, managing partner at Hogan Lovells’ Beijing office, agrees. The implications could be “huge”, as the regulation could also block parts of projects funded by multiple transactions. She adds: “It is still possible that certain important investment projects, in particular involving large SOEs, can be done with support from the relevant authorities.”
Shepherd says it seems China’s government is committed to allowing Chinese companies to go global and diversify their holdings, meaning at present it would be unlikely that the UK will see a “massive and immediate impact” from these recent sanctions alone.
He adds: “For private buyers of lower value properties a challenge will arise if there are any further restrictions on transference of personal funds overseas. In this scenario it is possible that appetite for UK property investment may remain, but that the deal size would reduce.”
According to Savills, Chinese investment into UK offices this year, until the end of November, accounts for almost £1bn.
But Chinese investors do not make up a major component of the London investment market, says Gauge.
“At the moment at least, there is plenty of alternative foreign capital still considering the market with the significant currency discount on offer.
“What would be more of a concern for the UK is if the Chinese investors had to start re-capitalising themselves in RMB, selling off foreign currency assets. However, as far as I am aware there is no suggestion this will happen.”
As Chinese officials have not commented officially on plans to lower the $50m threshold, it remains unclear how quickly changes might be implemented – if at all. But increased scrutiny on overseas investments can be expected, while Chinese economic concerns persist.