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A man looks at the Pudong financial district of Shanghai November 20, 2013.Carlos Barria/Reuters

As Chinese commercial real estate investors sent a wave of capital to North America's property markets this year, some Canadian investors were heading in the opposite direction.

From warehouses to shopping malls, Canadian institutions such as large pension funds struck partnerships and took stakes in properties poised to benefit from China's continued, albeit slowing, economic growth cycle.

At the same time, institutional investors and developers from China are setting new foreign-investment records by sending money abroad in droves. Even with Beijing's attempts to rein in foreign spending, these investors sought to diversify away from their home market where property prices have climbed quickly and desirable properties are scarcer.

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For large investors taking flight in either direction, it's becoming increasingly difficult to find properties that offer attractive returns. The volume of capital from around the world seeking alternative assets has climbed amid low interest rates, equity-market volatility and the desire to diversify growing investment portfolios. But even with these challenges, research firms expect the Chinese will continue to be aggressive buyers in the coming year.

Over the past decade, making money as a Chinese real estate developer was fairly easy, particularly in the residential space. "The demand is strong, it almost builds itself," said Jimmy Phua, who heads Asian real estate investments for the Canada Pension Plan Investment Board from the Hong Kong office. "But as the market matures and competition increases, then it becomes a bit harder, and the space becomes tighter. In order for the developers to grow, they have to branch overseas like everyone else. … Most of them have the vision to go beyond China, just like the Canadian market is too small for us."

CPPIB made several significant investments in Chinese commercial real estate alongside partners this year. In October, it bought a 49-per-cent stake in the Chongqing West Paradise Walk shopping centre for $193-million.

In November it picked up a stake in another mall and also struck an agreement to invest $375-million (U.S.) in an investment partnership that will target properties in gateway cities. Others funds have also been circling Chinese property, with the Caisse de dépôt et placement du Québec's real estate arm Ivanhoé Cambridge joining a partnership to invest $400-million in modern logistics properties located in cities such as Shanghai.

The draw for these funds is the promise of population and economic growth that North America and Europe just aren't offering investors. China is already the world's second-largest economy after the United States. "Based on CPPIB's projections, we think by somewhere around 2040 China will become the largest, representing 20 per cent of the global economy, while the U.S. will by then be about 18 per cent," Mr. Phua said, adding that this makes the country one of the CPPIB real estate team's most important markets globally. But the current investment portfolio allocation of 40 per cent to the United States and 4 per cent in China look dramatically out of step with that projection, which is something the fund expects to change in the coming years.

From a real estate perspective, many cities in China are in their early stages of development and now is the time to lay the groundwork and cozy up to local partners to position the CPPIB for growth in the coming years, Mr. Phua suggests. The government has been working to boost incomes in rural areas and improve health care, among other social services. These reforms and others in the financial sector would support the environment for commercial property expansion in the coming years.

But choosing the right investments is a challenge that's only getting more difficult as more money circles the market from competing investors in China and abroad.

China was the most active investment market in the Asia-Pacific region in the third quarter of the year, surging ahead of Japan and Australia, figures from real estate data firm Real Capital Analytics show. For the full year, only Japan outranks China. And Mr. Phua and other investors are having to think more creatively to find good deals, valuing local partners who can source potential investments and manage the properties once they are purchased.

"There's a lot of liquidity in the market … and that has driven asset prices much higher. And also more people are getting into the real estate sector, driving competition to a more intense level," Mr. Phua said. The trick is to be more careful than ever about what you buy. "Instead of a machine-gun approach, you take a sharpshooter's approach. We look for opportunities that play to our competitive advantage – being long term, investing at scale and having certainty in capital."

Chinese investors seeking properties in Canada and the United States, such as the sale of Vancouver's largest office complex, the Bentall Centre, to Beijing-based Anbang Insurance, are taking a different tack. They are often willing to pay more for assets, indicating they may settle for lower returns, in order to win auctions for well-known properties that require large cheques.

That's resulted in foreign investors being major buyers of Canadian commercial property in 2016, while private Canadian investors, REITs, pension funds and other institutions did more selling than buying in the first three quarters of the year, according to CBRE Group Inc., a U.S. commercial real estate company. CBRE has been tracking Chinese investment in Canadian commercial real estate.

By the third quarter of the year, the most recent figures available, overall investment volume in Canada's commercial property market reached $27.4-billion (Canadian), according to CBRE. Based on that robust market activity, CBRE expects the full year will exceed $35-billion, which would set an investment record.

So far, nearly three-quarters of the investments have come from Chinese investors and about 24 per cent from the U.S. and Europe. CBRE said that in most other years that pie would have been inverted, and added that the Chinese would likely continue to be significant investors in the months to come.

In U.S. commercial property deals, the trend is much the same, with Chinese investors set to top Canadians as the largest foreign investors this year.

What unites these institutional investors – many of whom are pension funds and large insurance companies – is the global challenge to deal with shifting demographics, Mr. Phua said.

"I think many people are starting to realize that there's an aging population at their doorstep, and they have to deal with pensions and they need a higher return to sustain the aging population," he said. "It has caused the landscape to be more and more competitive."

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