Real Estate

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

That whoosh you just heard? It's Chinese money pulling back from property in London to New York.

Capital centers globally should brace for tumbling real-estate prices as Beijing manages to do what Brexit and higher interest rates haven't. Reflecting tighter regulations, China overseas direct property investment could drop 84 percent to $1.7 billion this year and about another 15 percent to $1.4 billion in 2018, according to Morgan Stanley.

Beijing Blues
The yuan, which weakened after Beijing's surprise August 2015 devaluation, is strengthening once again as capital controls bite
Source: Bloomberg, Morgan Stanley
Note: Beijing began to probe acquisitions and funding by major conglomerates including Anbang, Fosun, Dalian Wanda and HNA in July.

Mainland money began piling into offshore commercial property in 2013. Land prices were expensive at home, and investors wanted to find a hedge against a weakening yuan.

Another draw was the prospect of higher returns in cities such as Sydney where yield spreads -- the difference between rental yields and what government bonds pay -- are higher. A slumping pound post June 2016's Brexit vote helped, too. While some marquee transactions are still being inked -- think the purchase earlier this year of London's "Cheesegrater" tower by Chongqing-based, Hong Kong-listed CC Land Holdings Ltd. -- their numbers are dwindling.

Towering
The biggest Chinese commercial real estate acquisition in the first half was CIC's purchase of Logicor
Sources: CBRE Research, Real Capital Analytics

A strengthening yuan, along with China's One Belt One Road initiative that needs funding, will see many property deals dry up. Over the past few months, Beijing has made it tougher to get money out, clamped down on more fanciful transactions such as the buying of football clubs and luxury hotels, and is now going after some of the country's most prolific acquirers. Dalian Wanda Group Co., Anbang Insurance Group Co., HNA Group Co. and Fosun International Ltd. have all included real estate in their global buying binges.

Buying Bricks
Mainland firms including China Life, Anbang and HNA have been among the most aggressive acquirers, snapping up almost $17 billion of commercial real estate in the U.S. over the past 24 months
Source: Real Capital Analytics, Morgan Stanley Research

Against that backdrop, and with increasing foreign-government scrutiny thrown into the mix, it's hard to see how Chinese offshore real estate acquisitions can continue at such a pace. Domestic developers are already finding it harder to tap international debt markets, and have been resorting to short-term securities instead.

This matters because Chinese capital accounted for one-quarter of commercial property transactions in central London last year, up from 1 percent a decade ago. China is now the second-largest foreign investor in the U.S. after Canada, and is responsible for between 12 and 25 percent of all office transactions by value in Australia over the last two to three years. In Hong Kong, Chinese firms have bought about 80 percent of the residential land sold so far in 2017, and have spent around $6.5 billion on office space from 2012 through 2016.

One sliver of good news -- some Chinese companies have capital already stashed offshore with which they can keep buying, plus there are other interested Asian parties around. London's "Walkie Talkie" tower was sold last month to Hong Kong's LKK Health Products Group Ltd. And Sunac China Holdings Ltd., now the most indebted developer after buying assets from Dalian Wanda Group Co., last week issued $1 billion of dollar bonds.

Whether that's enough to offset the amount of money going the other way, however, is questionable. Investors would be wise to stand well back.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net