The Chinese economy enjoyed remarkable CAGR growth of 9.8% between 1978 and 2012, a figure 6 percentage points higher than the average global growth rate during the same period. China's GDP stood at USD8.2 trillion in 2012, making it the world's second largest economy after the United States.

This strong economic growth has driven an increase in the size of the real estate market and the volume of investable assets for institutional investors. Such conditions have promoted direct investment in the real estate sector and the development of other real estate investment channels.

China's rapid urbanization and its government-led large-scale investment plan launched in 2008 have resulted in an upsurge in real estate investment and development. The large increase in the price of land and expanding demand for property consumption and investment has led to soaring property prices. As a result, the government has launched a series of measures to curb domestic real estate speculation, especially in the residential sector.

Whilst tighter credit conditions, strict regulations and pressure from short term oversupply have increased the investment risk in the domestic real estate market, sentiment towards outbound real estate investment has risen steadily encouraged by the gradual easing of global credit conditions, RMB appreciation, rising demand from wealthy Chinese - particularly High-Net-Worth Individuals (HNWIs) - looking for immigration and wealth preservation, and the increasing volume of investable capital in China.

Investing in real estate assets overseas has therefore emerged as a preferred strategy among Chinese individuals and institutional investors. At the same time, a number of domestic real estate enterprises have begun to enter foreign markets seeking broader investment channels and other strategic alternatives to the Chinese market.

This report was compiled via research into Chinese individuals, enterprises (mainly real estate development enterprises) and institutional investors with the aims of:

• Ascertaining and measuring the extent of Chinese capital investment in overseas real estate markets;
• Analyzing the motivations behind these groups' decisions to invest in overseas real estate markets and their investment considerations;
• Providing suggestions and advice on risks, opportunities and challenges that Chinese outbound investors are likely to face in overseas real estate markets.

Executive Summary

• In recent years, Chinese individual investors, property developers and institutional investors have increased investment in overseas real estate markets. This trend has been driven, in our view, by several factors including limited investment channels in China, abundant liquidity, RMB appreciation and the relatively lower valuation of overseas assets in the years following the 2008 financial crisis.
• Individual investors from China have been particularly active in overseas real estate markets in recent years, extending their primary objectives from immigration and the education of their children to wealth preservation and creation. By contrast, the involvement of Chinese real estate enterprises in overseas real estate markets is still in its preliminary stage, with most looking to broaden their financing channels, to gain knowledge, experience and know-how from their overseas counterparts. Well-capitalized Chinese Sovereign Wealth Funds (SWFs) have initiated capital allocation to real estate investment in their attempt to generate both capital gains and long-term stable rental income from undervalued core property assets overseas.
• Domestic insurance institutions possess abundant and long-term capital with relatively lower return expectation and have been permitted to invest overseas as well as conduct direct real estate investments since late 2012. We therefore expect Chinese insurance companies to emerge as a major new buying force in overseas real estate markets in the near term.
• Yet there are still a number of risks related to overseas investment allocation of Chinese capital. These include unfamiliarity with overseas markets, lack of experience in overseas property investment and asset management, fluctuating exchange rates and possible policy changes. Other challenges include how to time the closure of deals in the current competitive market, how to determine investment horizons, how to optimize transaction structures and identify appropriate financing arrangements.

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