Colliers Asia Pacific 2015 Sep Market Insights: The Chinese Currency Shock

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The Chinese Currency Shock
What does the rapid devaluation of the yuan mean for real estate?
The unexpected devaluation of the Chinese yuan, or renminbi
(RMB), has sent shock waves through asset markets around the
world not only because of the significant and rapid degree of
downward adjustment, losing 4.6% within a period of just three
days, from August 11 to 13, but also because of the underlying
implications for ongoing economic reform in China. Individual
analysts suggest the recent RMB devaluation is a clear sign of a
policy shift away from stimulating internal consumption back to
One week on from our recent comments on August 14 regarding
the potential impact on the Chinese real-estate market, it looks
like the yuan has now steadied. However, the picture might be
different if one is to take a medium- to long-term view. The
following is a short note highlighting some of the region-wide
factors that are worth considering when assessing the potential
impact of the depreciation of the RMB on outbound real estate
flows out of China, and the future impact on the market for
occupiers.
Figure 1: Chinese yuan (RMB) per 1 U.S. dollar
pushing export growth as a means to prevent the economy from
any further significant slowdown.
Looking at the chart of the yuan vs. the U.S. dollar, the recent
depreciation might point to the beginning of a cycle with a potential
further downside of about 20% if the Chinese currency is to go all
the way back to the level seen in 2005. So, the question is: what
does it mean to real estate?
Market Insights
Asia
September 2015
RMB per 1 USD
Source: PBOC
Between now and 2005
6.137 Jan-15
8.277
6.389
Aug-15
22%

2. Market Insights | The Chinese Currency Shock | September 2015 | Colliers International2
Expectations are key
After the recent devaluation, the market is indicating that there will
be no sharp plunge in the RMB over the near term but that there
will be further downward adjustments. The only uncertainty is the
timing. What’s more, we cannot rule out the possibility of a knock-
on reaction from other Asian countries if the RMB is drifts further
downwards. If that comes to pass, China will possibly react by
actively devaluing the RMB by a substantial amount again, thus
putting Asia in a “currency war.” While possible, we believe this
scenario is unlikely as of now.
Likely deferral of U.S. interest rate hike
Assuming the scenario of a gradual depreciation in the RMB,
Asian countries with a strong reliance on exports might adjust
their currencies downward gradually as well. As a result, major
economies buying imports from Asia will see lower import prices.
In the case of the United States, the straight-forward conclusion
of cheaper imports is that the current mild inflation in the country
will be checked or even taper off. Simply put, there is no strong
reason in the United States to support a rate rise soon. Rather
than the expectation of a rate hike in the coming months of 2015,
the more likely scenario right now is a deferral of the upcoming
cycle of rising interest rates into 2016. This is good news for real-
estate buyers since the cost of borrowing is going to stay low for
an extended period of time.
Diversified sources of capital provide
flexibility
The premium now required when converting RMB into foreign
currencies following the yuan devaluation is one of the key
factors holding back Chinese investors from buying overseas. For
instance, U.S. real-estate prices look considerably more expensive
if one has to convert RMB into U.S. dollars. However, a number of
Chinese companies are listed in Hong Kong or on the U.S. stock
exchanges and will be largely immune from the impact of the
devaluation. In other words, they have built up a wider capital base
by selling dollar-dominated financial instruments that leave them
with a sufficient volume of U.S. dollars for further use. Arguably,
outbound investment flows from China will see no significant
setback and may even accelerate in the coming quarters.
Outbound real-estate flows still strong
In relative terms, the recent RMB depreciation has made overseas
real estate more expensive for Chinese purchasers. In the United
States, real-estate prices have in fact gone up quite a bit in the
past couples of years, and the investment yields for quality assets
have compressed. For example, the spread of U.S. office yields
over 10-year treasury bonds actually contracted by more than 100
basis points in the past three years. Naturally, newcomers from
China might be more cautious now if they think they have missed
the boat. However, for most mainland buyers who want to diversify
their portfolios with purchases in overseas markets, the key
consideration is the availability of investment-grade assets for sale.
Currency fluctuations are just one of the many other factors in their
decision-making process.
Since it is likely that the RMB will fall against the world’s major
currencies, it is our view that the pace of outbound real-estate
flows will gather further momentum in the next few quarters.
Buying interest will remain strong from high-net-worth individuals.
There is also a steady supply of insurance companies and other
institutional investors in China that want to derive the benefits of
portfolio diversification and currency hedging as well.
According to statistics provided by Real Capital Analytics, total
outbound real-estate investment transactions made by Chinese
buyers surged 46% year-on-year during the first half of 2015.
Looking at the breakdown, the amount of money invested in the
United States during the period increased far more rapidly, by
122%. There might be a short-term volume slowdown in gateway
U.S. cities, but the shortfall will likely be covered by transactions in
second-tier cities in the United States. Those secondary locations
now offer better return prospects and are beginning to attract
buying interest from China.
The growth of investment flows into Australia was even stronger,
at 149% during the first half of 2015, thanks to the availability
of opportunities promising better returns. There are signs that
buyers from China are moving up their risk curves by taking on
development projects including alternative investments in the hotel
sector.
35,000
30,000
45,000
40,000
25,000
20,000
15,000
10,000
5,000
0
2008 2009 2010 2011 2012 2013 2014 2015 1H
Figure 2: China Outbound Real Estate Capital Flows
Real Estate Investmemts (US$ million)
Source: Real Capital Analytics
Americas EMEA ANZ

3. 4 North American Research & Forecast Report | Q4 2014 | Office Market Outlook | Colliers International
Copyright © 2015 Colliers International.
The information contained herein has been obtained from sources deemed reliable. While
every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No
responsibility is assumed for any inaccuracies. Readers are encouraged to consult their
professional advisors prior to acting on any of the material contained in this report.
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Real-estate occupier market not so
rosy
The outlook is not quite so positive for the real-estate market
for occupiers in China. The reason is that the RMB devaluation
reflects the economic outlook stemming from weakening external
demand. Despite the concern of an economic slowdown, office
rents in the first-tier China cities such as Beijing, Shanghai and
Guangzhou are staying firm as those cities continue to perform
well. From an occupier’s perspective, rising rental costs are going
to weigh on the already-fragile market sentiment. Although local
Chinese banks are actively expanding, large multinational banks
are expected to continue with their cost-reduction strategies.
When it comes to other business sectors, manufacturing
companies in China will have to pay higher prices for imported
goods such as crude oil and other commodities, thus cutting
into their margins. On the front of private consumption, demand
for imports will dampen as those good prove more expensive.
Companies in this region that have China as their key market
will feel the negative impact since the slowdown in private
consumption will gradually be reflected in their top-line growth.
In general, the challenge in the occupier market in China is that
there is a divergence between the upward cycle in commercial
rents and the consolidation in aggregate demand. As such, it is
our view that most prudent real-estate occupiers should remain
cautious in committing to real-estate expansion plans, at least over
the next six to 12 months.
Figure 3: Asia office rental clock (by key cities)
Source: Colliers
Bengaluru
Shanghai
Hong Kong
Beijing
Guangzhou
Chengdu
Singapore
Tokyo
Office
Rental
Value
FOR MORE INFORMATION
Terence Tang
Managing Director
Capital Markets & Investment Services
+65 6531 8565
terence.tang@colliers.com
Sam Harvey-Jones
Managing Director
Occupier Services
+852 2822 0509
sam.harvey-jones@colliers.com
Simon Lo
Executive Director
Research and Advisory
+852 2822 0511
simon.lo@colliers.com