Given the surge in Chinese purchases of Australian property since the turn of the decade, ongoing volatility in the Middle Kingdom’s bourses is bound to have a profound effect upon our own real estate markets.
Many have viewed recent plunges in Chinese share prices as a sign of underlying economic fragility which could lead to a thinning of the country's outbound foreign investment. According to Michael Hanschen, International Investment Manager, Point Polaris, China’s turbulent bourses could actually serve as a spur for the country’s individual investors to purchase more property in overseas markets like Australia.
“I think the impact of China’s stockmarket crash will be pretty great - more people will see that instability as a reason to take cash out of China,” said Hanschen, an old China hand who was a resident of the country throughout the noughties.
“As far as individuals go, the mum and pop investors were hit hard by the recent crash, and instability in the Chinese stock market will cause a lot of these investors to buy overseas markets, whether that’s in Europe, Canada, America or Australia.
“They will follow the traditional allotment – the majority will go to America, then Canada and the UK, and then Australia - I think there’s going to be more and more of that.”
Hanschen notes that the extent to which China’s stock market volatility will drive investment by Chinese home buyers in Australia’s property market will depend upon regulatory factors on both sides.
“Chinese investors can still transfer capital abroad with relative ease – they’re allowed to take 50 thousand dollars out per year per person, which is enough to cover the deposit on an apartment in the Melbourne CBD or the city fringe area,” said Hanschen.
“But right now the scrutiny is very much on individuals trying to take that money out, because China doesn’t want that capital leaving, and I think things could tighten up.”
When it comes to Chinese developers hoping to make inroads in the Australian market, Hanschen believes that Australian Prudential Regulatory Authority’s (APRA) recent clampdown on lending could have a more significant impact upon their decision-making.
“We’ve got several clients of ours that have developed a million or so of square metres in China - so one fourth of the Sydney CBD, yet they can’t get finance for construction here because they don’t have local development experience or track records,” he said.
“The developers can’t get finance here because they’re not known to the banks - they’ve got plenty of capital and financial backing but because they don’t have that track record they can’t get that project off the ground.
"Some have even had to invite a director from the outside in order to demonstrate to the bank that they have that know how to run a local development.”
Hanschen believes these changes to lending regulations will have a significant impact upon Australia’s reputation amongst Chinese real estate development community.
“Word gets out, and now people are talking within Chinese community about trouble getting finance, so that deters a whole section of would-be developers from coming here,” he said.
“As far as developers go, and those bringing in five to eighty million dollars, that kind of range, it might taper off or become a little more hesitant.”
While Beijing may adopt short-term measures to stopper capital flight in the wake of share price volatility, Hanschen sees China persisting with its capital account liberalisation program over the long-term, enabling more large-scale institutional investors to pursue commercial property investment overseas.
“From what I know [capital account liberalisation] is still on track, expanding gradually and allowing larger institutional investors in particular, such as Ping’an and the insurance companies, to invest more abroad.
“They’re going to buy existing assets like office towers, retail, shopping centres and the like, as long term plays rather than the short-term development and sell trend that’s been happening in the past.”
Institutional investors from China will likely be looking to Australian property as the safe haven component of a portfolio diversification strategy, given that returns on these investments will be modest compared to those on offer back home.
“They’re going to look at a lot of stuff and do lot of tire kicking when they realize that the returns are half what they are in China, that’s a big deterrent for these companies to come down.
“But the pluses are that they’re not subject to China’s potential vulnerabilities, so it’s a diversification play for most of them.”