The Australian commercial property market could benefit from China’s expected decision to relax its capital controls.
“Foreign exchange (forex) reserves in China increased for the fourth consecutive month in May,” CoreLogic commercial property research analyst Eliza Owen (pictured) said. “It is the longest growth period in Chinese forex in almost three years. If the trend continues, Chinese financial regulators may ease capital controls currently inhibiting foreign direct investment,” she told AB+F.
From mid-2016, controls were placed on capital outflows for Chinese banks and businesses involved in direct foreign investment. Chinese citizens were also limited to exporting US$50,000 per year. As a result, foreign investment from China fell by 30 per cent.
“As the value of capital inflows to China surpasses outflows, regulators have since eased controls on commercial Chinese banks processing cross-border payments. Over the last two months the People’s Banks of China repealed the lending controls of China’s commercial banks,” Owen said, adding that “the tide could now be turning” in China’s forex resources which could leave Australia ”awash with new investment”.
A commercial focus
CoreLogic expects the new investment to target Australia’s commercial property market, particularly given the Federal Government’s recent initiatives to stave off foreign investment in Australia’s residential market.
“In relation to foreign investment in the housing market, the May budget was strong on rhetoric and regulation,” she said. The big policy initiative, according to Owen, was that new residential property sold to foreign buyers would be capped at 50 per cent.
The controls were expected to address Australia’s housing affordability problem and voter concerns about foreign buyers but, according to Owen, the government is “welcoming” of capital inflows into other parts of the market.
“Overseas capital is an important source of funds and we should expect to see foreign investment pick up in areas such as mining and agriculture," she said.
However, Owen's remit is commercial property and she highlighted that capital outflows from China should dominate foreign investment in commercial real estate particularly in Sydney’s central business district.
“Sydney is a blue-chip market with an economy that offers scale. It’s an attractive designation for foreign buyers," she said.
According to data from Cityscope, a business owned by CoreLogic, Chinese investment in Sydney fell about 31 per cent in the year to May. However, Owen expects this investment to pick up and more deals such as the $700 million purchase of a site in Darling Harbour by a Chinese consortium to continue.
Furthermore, Owen highlighted that new home price growth in China for the year to May was 10.4 per cent, the lowest levels since August 2016. She said that these factors may encourage both institutional and individual investors “from our major trading partner” to prop up investment in commercial assets.
“Despite the decline in the value of transactions, the replenishment of Chinese forex reserves can, in the short term, be seen as positive for Sydney commercial real estate.”