Foreign investors shy from buying

Luster of real estate fades as overseas capital seeks better bargains. It's a frustrating time for overseas investors in Chinese real estate, especially those looking to turn a quick profit.

One potential investor, a managing director in Hong Kong for a leading US fund, looked into many real estate projects in China last year but did not sign any deals.

Instead, he sold a number of big projects ahead of pre-set investment deadlines.

He requested anonymity because of company policy against speaking to the media. But he was clear about his exasperation at not being able to achieve his objectives.

"Despite the ongoing correction in China's property market, investment opportunities are not as competitive as the EU and US," he said.

All investment decisions for his global real estate fund are made by its New York office.

"We have to compete with other teams in the EU and US where there are more bargains because of the recession," he said.

"Our investment in China, in fact, is more on the long-term perspective and for risk diversification in our global investment portfolio."

Significant outflow

His case is quite representative. John Wong, director of investment services at Colliers International (Beijing), a real estate consultancy, said that overall, more international real estate capital was withdrawn from China than came in last year.

In Beijing, for instance, approximately 10 en bloc sales transactions were concluded and disclosed in 2011 but there was little foreign participation. Domestic investors - State-owned enterprises, financial institutions and private developers - continued to denominate the market, while overseas investors' involvement became more constrained, according to a recent report by Colliers International.

China's real estate sector and stocks are the major fields that have been favored by international hot money, the funds flowing from one country to another to earn a short-term profit. Those funds are leaving China.

A key indicator for analysts is the amount of foreign exchange bought by Chinese banks, and the amounts declined in November for the second consecutive month. (The release of December figures is expected later this month.)

The percentage of change does not sound like much, but it is significant when the purchases in a month total hundreds of trillion yuan.

After a strong September, the value of purchases fell in October for the first time in four years - down 0.09 percent, 24.9 billion yuan. In November, purchases dropped 0.11 percent, the largest monthly decline since December 2007.

Less appetitie for risk

The reasons for the capital outflow, analysts said, include global investors' lessened appetite for risky assets amid the global economic recession, growing worries over a hard landing by China's economy and the yuan's recent depreciation.

Ding Zhijie, dean of the School of Banking and Finance at the University of International Finance and Economics, said the yuan's decline demonstrates the shortage of dollar liquidity.

"Since the worsening European debt crisis sent global financial markets into turmoil by the end of September, it's an obvious trend that global capital has been flowing into dollar-dominated assets," Ding said. The US dollar has been in great demand in the market, he said.

According to the State Administration of Foreign Exchange, the annual inflow of hot money to China during the past decade averaged nearly $25 million. Total accumulated inflow 2003-10 hit $300 billion, betting on appreciation of the yuan.

Most of this capital sought haven for speculative profits in the property market, the stock market and the underground banking system.

"Lower growth in Europe in the course of fiscal austerity and the banks' needs to increase capital coverage would affect East Asia," Bert Hofman, the World Bank's chief economist for East Asia and the Pacific, said in November. He said that less credit from European banks could mean reduced capital flows to the Asia-Pacific region.

Lu Zhengwei, chief economist with Industrial Bank, said investors' worries about an economic hard landing and the risks of local government debt also contributed to the outflow of hot money.

The country's economic growth slowed last year, from 9.7 percent in the first quarter to 9.5 percent in the second and 9.1 in the third. Most economists have estimated China's economy will grow 8 to 8.5 percent this year, dragged down by falling exports and investment.