A real estate tale of two cities

Updated: 2012-12-28 14:26

By Li Xiang (China Daily)

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 A real estate tale of two cities

The Notre Dame cathedral by the Seine river in Paris. Big Chinese investors tend to focus on top-tier properties in the best locations. Bertrand Guay / AFP

A real estate tale of two cities

Paris looks to steal a march on London as the key target for chinese property investors

Paris is now competing head to head with London to attract deep-pocketed Chinese investors to its property market.

After China Investment Corp, the country's $410-billion (313 billion euros) sovereign wealth fund, bought Deutsche Bank's headquarters in London for a reported $403 million, the French capital stepped up its efforts to lure Chinese investors interested in the European commercial real estate market.

"We have one competitor in Europe, which is London," said Benoit du Passage, chairman and CEO of the real estate company Jones Lang LaSalle France and Southern Europe in an interview. "The market of Paris is twice the size of London in terms of the office stock. And being large means that the market is very liquid."

The greater Paris region is ranked the world's second largest commercial property market after New York in terms of office space available. The French capital is also a heavyweight in general economic terms, accounting for 4 percent of European GDP and 29 percent of French GDP.

High liquidity and the relatively low investment risk will make Paris an increasingly attractive destination for Chinese investors, Du Passage says.

"We set up a China desk in 2011 because we believe that more Chinese investment will come. We haven't seen that many Chinese investors, but they are starting to show interest."

This year a large State-owned institutional investor from China bought a property portfolio owned by the French real estate investment trust Eurosic for 508 million euros ($659 million), making it the largest deal in the Paris property market space this year.

"Chinese investors are becoming much more open minded and have started to look for investment opportunities beyond the traditional destinations such as London and New York," says Alexandra Li, head of Asia Business Development at JLL France.

"It is not that Paris was unattractive to Asian investors; the problem is that the information available to them was too limited."

Chinese investors drawn to Paris see the city as a gateway between Europe and Africa, where they have extensive business, Li says. "France's historical and geological link with Africa is part of the reason why Chinese companies would like to invest in hotels and commercial property and to set up their headquarters here."

From no presence last year, China has grown into the second-biggest foreign investor in the Paris commercial property market. In the first three quarters of this year the value of Chinese investment accounted for nearly 15 percent of the total foreign property investment made in Paris, after Qatar's 30 percent, a report by JLL France says.

JLL France is in talks with major institutional investors of China and the country's sovereign wealth funds that have expressed interest in the high-end property market in Paris, Li says.

In London, CIC's purchase of Deutsche Bank's headquarters is a sign that China's sovereign wealth fund is expanding its presence in Britain.

The purchase took place as the nature of Chinese overseas investment changes. In recent years there has been a shift from financial assets such as bonds to assets such as infrastructure and real estate, said Mark Williams, London-based chief Asia economist of the macroeconomic research company Capital Economics.

The fund bought the building in 2003 and then leased it to Deutsche Bank. It is the head office of the bank's global investment banking operations.

The purchase means CIC has a presence in the property market in the City of London and at Canary Wharf, the capital's two financial centers.

CIC made its first investment in the British property market in 2009 when it became a shareholder in Songbird Estates, which owns Canary Wharf, in the wake of the financial crisis. The area is home to the global headquarters of banks such as HSBC and Credit Suisse, and 90,000 people work there.

The sovereign wealth fund is also involved in infrastructure projects in Britain. In January it bought an 8.86 percent stake in Thames Water, the country's largest water and sewerage company.

Britain is more open to Chinese investment than other developed economies such as the United States, Williams said. The British government has maintained that China can be helpful when the economy in Britain is faring badly.

"I expect a wave of Chinese investment in the UK in the coming years in sectors like real estate," Williams says.

London's property market has been attractive to global investors because of its position as one of the world's main financial centers, and the fact that most global financial companies have a presence there. The head offices of many European banks are in London.

A report by JLL says investment in central London reached $11.76 billion at the end of the first half of this year, up 24 percent year-on-year. This was driven mainly by overseas investment, which amounted to $8.2 billion.

"Despite continued economic uncertainty in the eurozone, we will continue to see investor demand driven by overseas capital, notably private Asian and sovereign wealth funds," the company says.

In the first half of this year Asian investors accounted for 16 percent of transactions, the report says.

In Paris, big Chinese investors tend to focus on top-tier properties in the best locations and with high liquidity. More investment opportunities may emerge in the future as European institutional investors have liquidity problems and are under liquidity pressure to sell their properties for cash, industry analysts says.

The investment yield from the prime property market in Paris is now about 4.75 percent, slightly higher than that of London. Industry experts say investment yields are likely to remain flat, making Paris a defensive type of investment.

"Paris is not the market where you can find distressed assets or a cheap bargain," Du Passage said. "But it is a highly transparent and institutionalized market, which makes it an ideal market for beginners."

Du Passage dismisses the impact of the recent downgrading of France's credit rating on the attractiveness of the French property market, saying his company did not see any change in foreign investors' desire to do business in Paris.

Moody's Investors Service stripped France of its triple-A rating last month on concerns of its excessive public debt of 90 percent of GDP, its sustained loss of competitiveness, and the diminishing ability of the country to resist future eurozone shocks.

France's image as a foreign investment destination has also been bruised by remarks last month by the Industrial Recovery Minister, Arnaud Montebourg, who accused the global steel company ArcelorMittal of deceit, says it should leave the country, and threatened it with temporary nationalization.

Du Passage acknowledges that France's reputation as an attractive investment destination is suffering and that reforms are needed to improve the country's productivity and competitiveness.

"France is no exception in Europe. Reform will be painful, but it will take place as we have no choice."


(China Daily 12/28/2012 page19)