In an amendment to the most recent legislation from The National Development and Reform Commission of the People’s Republic of China (NDRC), which came into force on 1 March and set out new rules governing outbound investment, effectively stemming the flow of Chinese capital into UK real estate, the NDRC has inserted a clause which has offered Chinese investors a loophole to operate in the UK without fear of recrimination from Beijing.
The NDRC, a macroeconomic management agency under the Chinese State Council, which has broad administrative and planning control over the Chinese economy, has ruled that Chinese investors can redeploy capital in the UK as long as the money is recycled from their existing UK property holdings or raised by non-Chinese banks.
The NDRC’s new directive provides exemption for “projects that do not involve assets or interests in the territory or provide financing or guarantee in the territory …For enterprises that do not use government investment to build projects, the examination and approval system will no longer be implemented.”
The rules relax further for investment in infrastructure and development, including business parks, logistics and tech parks, for which Chinese State approval will no longer be required, regardless of whether or not the money is taken out of China.
The surreptitious clause is significant for three reasons:
Firstly, it will encourage Chinese investors to become traders of property, rather than long term holders as the option to refinance existing assets and free up equity to redeploy on other property deals without incurring Beijing’s wrath becomes a compelling option.
Secondly, the move will be a game changer for UK-based lenders which have struggled to win financing mandates from Chinese investors which, more often than not, have opted to use cheaper local debt with domestic relationship banks in China.
Thirdly, the new rules are likely to encourage Chinese investors to diversify their overseas real estate holdings and increase their allocation to logistics, infrastructure and business parks given State approval is no longer needed for these asset classes.
China Overseas Land & Investment is one mainland Chinese investor that is expected to move quickly to take advantage of the relaxed regulations. COLI, a subsidiary of China State Construction Engineering Company, has amassed a four-strong portfolio of prime London properties since its entry to the market in 2012. Having bought Finsbury Circus House, it then acquired the Centrium Building in Midtown for £170m through its subsidiary China Overseas Holdings and, in 2014, bought Carmelite Riverside for £160m, reflecting a 4.5% yield. COLI then acquired the Helicon in the City of London for £140m in 2016.
Alongside its own equity, COLI used Chinese sovereign debt to secure the deal. Under the latest amendment to NDRC’s directive, COLI can repay the Chinese State and use UK-based lenders to refinance its portfolio which could free up hundreds of millions of pounds for reinvestment in UK property.
CoStar News has learned that that some Chinese firms have already received terms from lenders including HSBC and LBBW for refinancings at a 50% LTV.
In an attempt to prevent the unbridled exodus of capital, on 1 March, the NDRC ruled that all foreign investment deals by Chinese firms, including those conducted by their overseas affiliates, must be reported through an online, government-run platform. Any deal valued at over US$300m now requires specific approval from Beijing, a move that has prompted many Chinese investors to rethink their overseas investment strategies.
Since then, Chinese investors have been looking at more creative ways of getting their money out of the country. One source told CoStar News that trying to track where Chinese money will emerge from next was “like playing a bizarre game of Whac-A-Mole”, with evidence emerging that some investors are now re-routing their equity though other jurisdictions – namely Singapore – in an attempt to bypass the overseas restrictions.
Chinese investment into central London real estate has fallen to its lowest level in two and a half years, according to research from Cushman & Wakefield. Buyers from Hong Kong and China bought £482m of London commercial buildings in the first three months of 2018, a level last seen in 2015.
China began targeting “irrational” deals – often involving high-profile hotels, cinemas and sports clubs – after outbound investment in 2016 rose to an all-time high of US$170bn, causing the value of the yuan to slump and leading to massive capital outflows.
Despite being actively encouraged by Beijing a few years ago to increase their exposure to overseas investments, some of China’s biggest overseas spenders have provoked the Chinese Cabinet’s ire by extracting too much cash from the country and redeploying it in prime real estate, much of which has been directed at the UK.
Several of China’s top private sector deal makers, including HNA Group, Wanda and Anbang, came under scrutiny after President Xi Jinping described rampant outbound investment as a “national security matter”.
Last summer, Dalian Wanda walked away from its £470m acquisition of a stake in the 10-acre Nine Elms Square site in London by flipping it to Hong Kong investors R&F Properties and CC Land, having had the deal thwarted by China’s decision makers. The news was yet another setback for Dalian Wanda as Beijing tightened its controls on overseas investment. R&F is this week expected to announce the completion of the deal to the Hong Kong Stock Exchange.
At the time, China’s cabinet said it planned to maintain a blacklist of domestic firms that violated overseas investment rules and Wanda, a property-to-entertainment giant run by one of China’s richest men, Wang Jianlin, has been one of the companies most affected.
In March last year, Wanda’s proposed $1bn acquisition of US TV production company Dick Clark Productions collapsed under the heightened pressure from Beijing on outbound deals.
Last month, The People’s Republic of China completed its purchase of the iconic Royal Mint Court site in London for £255m and plans to convert it into its new UK embassy. A joint venture between client funds of real estate investment advisory company Delancey and the LRC Group completed the sale to the People’s Republic of China following an unsolicited offer to buy it.