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China’s government has tamed dragon investors and harnessed them to ride for the state

  • United Kingdom
  • Real estate

02-10-2019

As originally published in React News

Beijing is determined all outgoing investment will align with China’s strategic goals

Stockholm - home of ABBA and fermented herring. A fish so pongy, the Swedes open their tins of it outside, in buckets of water. If the sun shines (and it only manages four hours a day in winter), Stockholm becomes luminously beautiful. Its deep blue Baltic harbours are fringed with elegant mansion blocks. This is Venice for blond people.

It’s also the venue of Business Arena, Scandinavia’s premier property conference, where I spoke last week on China and global real estate. I was also interviewed by Swedish Radio on Brexit, but you’ve surely had a Brexit bellyful – so let’s pass over that in silence. At the conference we discussed some of the profound shifts in the source and destination of real estate capital, particularly Chinese and US money.

Chinese outbound investment, the tiger teeth of the global real estate market since 2008, is now slowing rapidly. In H1 this year Chinese companies “only” invested $12.3 billion in the EU and North America, an 18%drop year on year and the lowest figure since 2014. Capital controls are only part of this story. The Chinese government is now determined all outgoing investment will align with China’s strategic goals. They have tamed their dragon investors and harnessed them to ride for the state.

Xi Jinping wants China to leap from a low-value manufacturing to a high-tech and added-value economy. Xi dreams of a China making world-leading A.I. robots, not plastic toys. When the Chinese government speaks, Chinese companies are well-advised to listen. And big Chinese property buyers have diversified away from real estate. For example, Evergrande, China’s biggest real estate developer has bought 51% of NEVS (the Swedish electric vehicle specialists) for $930 million.

China is also investing heavily in the EU south of the olive line, in Eastern Europe and the Balkans. These investments are creating the terminus for China’s New Eurasian Land Bridge. This is a transport and infrastructure corridor of vertiginous ambition, stretching from Western China to Eastern Europe. These vast injections of money also give China the leverage to influence EU policy and decision making. The EU has responded by calling China a “systemic rival” and heightening scrutiny of Chinese investment. Mainland Chinese money may not be back in real estate for a while, unless Brexit mispricing becomes an overwhelming temptation.

China and the US have a profoundly symbiotic, as well as competitive, relationship. They are the mega-frenemies of the global economy. That is why their trade war is so dangerous. The US real estate market is enjoying a late-cycle, Trump-tax-cut driven boost. But, even with a trade war in full populist swing, Chinese offices, logistics and hotels were a key target of US outboard investment in 2018.

China is not only America’s bank manager (holding over $1 trillion of US treasuries), it is also one of America’s biggest potential growth markets. Hopefully, these commercial realities will curb the coming century of systemic rivalry between these two hyper-powers.

The talk over dill prawns and Swedish “weak beer” (think flat, warm Lucozade) was of US funds building up giant barrels of “dry powder” cash to take advantage of distressed Chinese assets and companies (distress ironically caused in part by the trade war itself) and to pursue post-Brexit UK currency and pricing plays.

Brexit (you can’t keep this dog out of the kitchen) is adversely affecting investment flows into EMEA. Volumes dropped 20% in Q2 2019. This was almost entirely down to a Brexit-related fall in UK focussed investment, and the ongoing structural decline of retail.

Paris has become Europe’s darling city and a more stable proxy for London. You’ll remember the 2017 MIPIM Cannes posters, “Had enough of the Fog, try the Frogs?” During H1this year, South Korean Funds have heard the Gallic song and diversified away from Brexit-belaboured Britain, pumping $2.5 billion into the City of Light. They also invested heavily in Poland and the Czech Republic.

In the teeth of trade tensions and political threats, everyone is chasing operational assets with a strong demographic backbone: senior living (by 2030 25% Europe will be over 65), hotels and build to rent. BTR is rapidly becoming a major European-wide asset class, with investors increasing their BTR weighting by 14.1% in 2018.

Sweden itself is strong and stable (it’s more than a slogan there), with a giant manufacturing and natural resources sector. For investors, it acts like a northern extension of the safe-haven German market and a useful diversifier from less stable EU markets.

Swedish politics is strange, but somehow works. The vagaries of eternal coalition and compromise mean the socialists have just been obliged to introduce a tax-cutting, free market budget. It’s like John McDonnell delivering a Thatcherite finance bill. Returning on the ever-punctual Arlanda Airport Express, I was sure we could learn a lot from Sweden.