Developers discover room for growth overseas

As more Chinese look for ways to invest abroad, the country's real estate companies are following the money

Amid continued talk of a bursting domestic real estate bubble, Chinese property developers' overseas expansion has picked up steam this year.

Just during the first quarter this year, leading developers, including China Vanke Co Ltd and Greenland Group Co Ltd, announced plans to invest more than 50 billion yuan ($8.17 billion) overseas.

Shanghai-based Greenland Group has so far been the most aggressive, having announced three large foreign investments this year totaling more than 40 billion yuan.

The company will enter three to five new markets this year, including Canada, France and Singapore, Chairman Zhang Yuliang said.

Greenland just raised its overseas sales target to 20 billion yuan in 2014, from 13 billion yuan originally. Overseas sales reached 3 billion yuan in 2013.

"We plan to boost our overseas sales to 30 billion yuan by 2015," Zhang added.

The aggressive expansion plan overseas, according to Zhang, is an extension of the strategy followed in the domestic market, where the developer has been striving to meet demand from China's middle class and its newly rich buyers.

Almost 25 percent of Asia's ultra-high-net-worth individuals in Asia ($30 million or more in net assets, excluding a primary residence) are considering purchasing another home in the next 12 months, according to a report from Knight Frank and Bank of China International Ltd.

Residents of China express the highest level of interest, at 31 percent, compared with the global average of 22 percent, the report said.

When expanding overseas, adapting to different regulatory and legal environments is a key task, and a global management team also matters, said Zhang.

As for the product, Zhang said the choice depends on profitability, local policy requirements and market demand. Most of Greenland's overseas projects are complexes including residential, retail and hotel facilities.

Cross-border real estate developments are a growing phenomenon in Asia, according to Nicholas Holt, Knight Frank's head of Asia-Pacific research.

"The rising global mobility of people and capital has been steering prime residential markets, which is evident in the Asian-led globalization of prime residential development activity," said Holt.

In 2013, more than 76 percent of total inbound capital into the development markets of the United Kingdom, the United States and Australia originated from China, Singapore, Malaysia and India, according to Knight Frank.

"Brand building, diversification, growth and selling back to domestic buyers have been key drivers," said Holt from Knight Frank.

He said London, New York, Hong Kong, Singapore, Paris and Sydney will continue to be targeted by developers.

"Investors from China will increasingly recognize homegrown brands when they buy luxury developments in London, New York, Sydney and Vancouver," he added.

As to what guides an investor in buying overseas property, education remains a key driver in terms of prime residential developments. That may eventually be true as well of commercial property acquisitions, he said.

According to Knight Frank's research, about 50 percent of ultra-high-net-worth individuals are likely to send their children overseas for higher education. The US, UK and Australia are the top three destinations for those families.

Meanwhile, more middle-class households are making overseas home purchases for investment purposes, as they react to continually rising prices and tightening measures in the domestic market.

Louis Bai, chief executive officer of the Beijing branch of Barratt Homes Plc (a UK-based developer), said members of China's emerging middle class, not millionaires, have been the major buyers of the company's projects in London this year.

"Most of our individual buyers' annual household incomes hover around 500,000 yuan. About 60 percent of them are pure financial investors, while 40 percent are thinking about emigration and children's education," Bai said.

Diversifying their investment portfolio is a key motivation in buying overseas property, he added.

As competition in the core market has intensified and "hot" investment opportunities have diminished, investors are now moving into second-tier markets, according to research by LaSalle Investment Management, a subsidiary of Jones Lang LaSalle Inc.

"For instance, investors are actively seeking opportunities in London, Munich and Paris, but they also have an eye on Manchester, Bristol, Berlin, Frankfurt and Lyon," said Paul Guest, head of Asian research for LaSalle Investment Management.

Michelle Zhang, head of China residential business for Knight Frank, noted that Chinese investors, especially individuals, have shown strong interest in Manchester instead of London because of higher investment returns.

"They are mainly entrepreneurs, and their investment is purely for financial purposes. Theoretically, they could get an investment return of around 60 percent if they can get bank loans," said Zhang.

According to Xie Zhigang, chairman of Beijing Vereal Investment Holding Group, the profitability of developing projects overseas could be even higher than for domestic projects.

The company is mainly looking at investment opportunities in the US, mostly in second-tier cities.

Chinese property developers' strong interest in Malaysia - not a traditionally hot destination for Chinese investors - is a typical case of expansion into second-tier markets.

Following Country Garden Holdings Co Ltd's success in Malaysia last year, Greenland said this month that it had reached two deals (residential and hotel) in Malaysia, with an investment of $3.3 billion.

In February, Agile Property Holdings Ltd spent 430 million yuan to buy a site in Kuala Lumpur, making its debut in Malaysia.

Statistics from international real estate service provider Savills Plc show that Chinese institutional and individual investors invested $1.9 billion in Malaysia last year, higher than their investment in Hong Kong ($867 million), Singapore ($1.8 billion) and Australia ($1 billion).

Chinese investors have little knowledge of overseas developers. Therefore, they prefer to buy projects developed by prominent Chinese developers, said Zhang.

But Ding Zuyu, executive president of E-House (China) Holdings Ltd, said that Chinese developers' overseas expansion is just getting started, and they need time to gain experience.

"Because of the huge growth potential at home, it's unlikely that going abroad will become a mainstream strategy for Chinese developers," Ding added.