A global real estate boom fueled by China’s ambitious Belt and Road Initiative has slowed to a crawl, as Beijing seeks to rein in rogue building projects across the developing world.
So far this year, less than $1bn has been invested into overseas commercial property projects by Chinese developers in designated BRI countries. That puts this year’s total on track to be far below last year’s figure of about $14bn, and marks another sharp drop from the peak of $23.6bn in 2016, according to data compiled by Washington-based consulting firm RWR Advisory.
When China announced its $1tn plan to build bridges, roads and ports in emerging markets starting in 2013, it also unleashed a wave of investments into hotels, office buildings and casinos from Mongolia to Montenegro — an unintended consequence of the plan.
For Chinese real estate developers the Belt and Road Initiative looked like an official green light to invest in projects in the roughly 150 participating countries.
But Beijing is hitting the brakes on overseas construction and some companies that invested abroad under the banner of the BRI are now ditching the affiliation.
“It does appear, including in commercial real estate development projects in BRI countries, that a noticeable slowdown, or an effort to discipline, occurred,” said Andrew Davenport, RWR’s chief operating officer. “There was a degree of concern about capital flight and, perhaps, in general, a sense that the exuberance and blank-cheque approach to BRI by state-owned enterprises and policy banks was reeling a little bit out of control.”
Capital flight has been a key concern among Chinese policymakers. Overseas investments that require companies to sell renminbi and buy dollars are carefully vetted to make sure the investments are in line with government policy and not just a means of moving money out of the country.
BRI gave a number of smaller companies a new justification for forays overseas. In 2015 and 2016, a flurry of Chinese developers labelled their overseas investments as Belt and Road deals. Some investors even added “Silk Road” to their company names as a means of showing support for the programme.
Zhongqi Overseas Group, a government-owned company, said in 2016 that its sprawling casino on the Cambodian coast was part of BRI. It has since removed all references to Belt and Road from its website as government regulation has increased.
One Hong Kong-listed Chinese beverage company, originally called JLF Investments, changed its name to New Silkroad Culturaltainment in 2015 before buying a casino in South Korea and pursuing several other overseas property deals.
“When they first proposed BRI, the government was very vague on what it included,” said Christopher Lee, chief corporate ratings officer for greater China at S&P Global Ratings. “But China is becoming a lot smarter about this and giving more direction. They need these investments to make sense, especially for banks.”
The level of debt developing countries owe to Chinese banks for BRI projects has raised concerns in country’s such as Pakistan, Sri Lanka and the Maldives. Asian Infrastructure Investment Bank president Jin Liqun said last week at a conference in China that Beijing would control the debt risks of these projects.
Some of the biggest private investors in BRI real estate have been forced to begin selling assets.
HNA, once one of China’s largest overseas commercial real estate investors, often labelled its buyouts as part of BRI. In 2018, it came under government pressure to sell many of those assets, such as an office tower in Sydney. CEFC, another company that advertised its affiliation with BRI, has also been forced to sell some of its commercial real estate to government groups in BRI countries, such as the Czech Republic.
Sam Xie, head of research at CBRE China, a consultancy, said that Chinese real estate investors have become net sellers on the global market, although investments in BRI countries have held up better than in some developed markets.
“Chinese outbound investment into global real estate has clearly moderated as regulations have tightened,” he said.