Commercial Investment Real Estate

NOV-DEC 2017

Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.

Issue link: http://cire.epubxp.com/i/897832

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your_photo ong ago, the old Silk Road tied China to Asian coun- tries linking it to Europe. Today, China is underwriting billions of dollars for infrastructure investment within 68 Asian and Eastern European countries along an expanded old Silk Road and Belt, which includes land and sea routes. Launched in 2013 through the Belt and Road Initiative, China is investing $150 billion annually in the roads, bridges, railways, airports, and gas pipelines of these nations. Supported by the internationalization of the renminbi, the Belt and Road Initiative means more than investment, capital spending, and goodwill in international countries. China's outbound activities are accelerating its structural transformation from a government-led economy to a mar- ket-driven economy. The Belt and Road Initiative also creates new channels to absorb surplus capacity for specific Chinese industries, provides high-quality investment routes for private enter- prises, and promotes market-oriented capital sourcing for international investments. Changing Cultural Paradigms For Chinese investors, the Belt and Road Initiative sig- nals several trends. Chinese investors have become more diversified. In the past, state-owned enterprises drove Chinese outbound investments. Today, private companies are increasingly seeking their own international investment opportunities. In 2016, outbound investments by Chinese private enti- ties accounted for 87 percent of the total Chinese interna- tional investment. Since 2012, Chinese insurance compa- nies have been allowed to invest up to 15 percent of their assets in overseas investments. Between 2015 and 2016, Chinese insurance com- panies made more than 50 percent of all investments from China. Operating through the Qualified Domes- tic Institutional Investor program, or blind pool funds, private equity companies raise capital for investments by selling shares of international financial products to domestic Chinese investors. During the last few years, Chinese high net worth indi- viduals have been among the most active in the world. Pursuant to the 2017 China Private Wealth Report issued by Bain & Company and China Merchants Bank, there are 1.6 million HNWIs in China. Their collective assets in 2016 exceed $24 trillion — six times higher than the 2006 level. The percentage of Chinese HNWIs investing internationally increased to 56 percent in 2017, up from 19 percent in 2011. The motivations and risk tolerance of Chinese inves- tors are centered on maximizing value. In the recent past, Chinese investors focused more on long-term capital pres- ervation than on cash flow. This is no longer true. More often, Chinese investors seek to optimize return on investment by focusing on the higher-end and value- added aspects of commercial real estate. More Chinese investors conduct development activities to enhance the property's overall value, including new construction and extensive capital improvements to existing structures. They are weighing the risks and returns of a potential investment in the same way as their global counterparts and are assessing more factors, such as macro-economic concerns. Private equity funds and insurance companies are making investment decisions based on the different risks and returns desired by their partners or clients. Coming soon: U.S.-style REITs. Historically, Chi- nese investors have not invested significantly in U.S. Real Estate Investment Trusts or other securitized real estate vehicles. The internationally recognized REIT format is not common in China, due to the complexity of the legal framework and tax issues. November | December 2017 31

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