Think A Biden Administration Will Bring Chinese CRE Investors Running Back? Think Again
In the early to mid-2010s, China-based investors flooded the coffers of U.S. commercial real estate. Multiple forces aligned to make the country the No. 1 foreign investor in the U.S. — American real estate was hot, and the countries were fairly friendly as globalization ruled daily political discourse with minimal pushback.
A lot has changed since then. Investment from China has plummeted, and the political relationship between the U.S. and China is different. Don't expect a new administration to change all of that. The coronavirus pandemic and its economic aftermath have placed more public scrutiny on China, which could continue to affect CRE investment flow between the two countries.
"The flow of funds out of China are determined domestically and, at least at the moment, any administration will have very little influence and ability to shift this dynamic of less investment into the U.S.," JLL Senior Managing Director of Capital Markets Dan Cashdan said in a statement to Bisnow.
President Donald Trump came into office on an "America First" platform that created distance and tension with China. The president urged U.S. businesses to move operations, especially manufacturing, out of China. He implemented and increased tariffs. After failed negotiations between the countries, in May 2019, the Trump administration increased tariffs on $200B worth of imports from 10% to 25%, Bisnow reported at the time. Many of the products, which included finished goods like floor and wall panels, directly impacted the cost of real estate development activities. The trade war also was seen as causing some Chinese investors to pause, Cushman & Wakefield said in 2019.
During Trump's tenure, Chinese investment into U.S. commercial real estate plummeted from loftier heights reached earlier in the decade. Investment figures in 2013 hovered at $2B and grew each year until reaching a peak of $16B in Chinese capital investments into U.S. CRE in 2016, data from JLL shows. The majority of those CRE investments four years ago, or roughly $8B worth, were tied directly to the now-suffering retail sector, according to JLL.
For the past four years, capital flowing into U.S. CRE has fallen every year until reaching less than $2B in both 2019 and 2020. Though the correlation with the U.S. presidential election looks like it could provide an explanation, experts say that isn't the cause of the dip.
"The U.S. generally welcomes foreign investment into our real estate markets," Cashdan said. "Over the past 10 years, investment specifically from China picked up dramatically and then, unfortunately, dropped significantly. The primary throttle on capital flows out of China is largely determined domestically [by China]."
Economic analysts interviewed by Bisnow, all of whom steered away from discussing specific predictions about Chinese policy changes from the Trump to the Biden administration, noted that China itself reversed the amount of investments it allowed to flow into the U.S. commercial real estate market four years ago in an attempt to minimize financial risk and shore up its currency.
"With the policy changes in China from several years ago, outbound investments have gone down," Tenant Risk Assessment CEO Bradley Tisdahl said. "It was in 2017 when we started to see things decrease as the Chinese government was exercising its authority and encouraging investors that had commercial real estate investments in the U.S. to sort of repatriate them back to China."
Still, the U.S. government did have a role in the past five years to make U.S. real estate-friendly China refocus its efforts.
U.S. accommodation toward China in regard to trade and other policies transitioned, not only with a new philosophy in the White House, but also with ongoing scrutiny of the Southeast Asian country that stems from long-standing objections to trade imbalances, the stealing of U.S. trade secrets as reported by the FBI, human rights concerns, its treatment of Hong Kong and general skepticism that hit a crescendo this year when international officials criticized China after the coronavirus outbreak for its failure to better inform and prepare the rest of the globe for the disease's virulent aftermath.
There is some sentiment that a Biden administration and Democrat-controlled Congress would loosen things up between China and the U.S.
In a Harvard Business Review survey of 67 international institutions, 80% of respondents believed Biden would partially or completely remove Trump’s import tariffs on China. Sixty-one percent predicted President-elect Joe Biden would remove tech restrictions on Chinese companies like Huawei.
On the real estate side, Democrats are generally seen as more immigrant-friendly and favorable toward programs used by Chinese investors to place money into the U.S. The EB-5 program, in particular, was strongly supported by top Democrats and is slated for more likely reforms in the future, Dallas attorney and EB-5 expert Shae Armstrong said.
"The biggest advocate of EB-5 probably in both the House and the Senate is [Senate Minority Leader] Chuck Schumer," Armstrong said. "As being one of those advocates of EB-5, if he became the majority leader, you would have the No. 1 advocate of EB-5 having one of the most powerful positions in Washington."
The Democrats took control of the Senate when two Georgia runoff elections last week flipped two seats from Republican to Democratic control.
But while Biden has given little information about his planned specific policies, the overall tone coming out of Washington, D.C., suggests the U.S. will not quickly revert back to a friendly Chinese trade policy or attempt to stoke Chinese capital outflow to America.
Biden's appointed top trade representative, Katherine Tai, speaking this week in her first speech in the role, indicated the administration's top priority is to focus on American workers and jobs during trade talks and not just on the benefits stemming from the cheap importation of goods, The Wall Street Journal reported. Tai's statement shows a Biden administration that appears reluctant to quickly undo Trump's policies or enact a more friendly trade policy.
The sentiments left by the outgoing administration and a refocus on the quality of life of the American worker also could make a quick retrenchment to the relationship of the early 2010s difficult for the new administration.
With only days left in the Trump administration, U.S. Secretary of State Mike Pompeo released his official remarks last week for a media event in which he reversed course on America's long-standing accommodation of China's view of Taiwan as part of the one-China policy initiative, creating what many news outlets reported as a strategic play that will make it more difficult for the Biden administration to undo policies without looking too acquiescent when it comes to Chinese foreign interests over American interests.
Pompeo in a speech at the Georgia Institute of Technology further warned attendees the Chinese Communist Party poses an ongoing threat to American institutions.
"There’s no one to hold accountable for this. That’s not the important part. Because for a long time, Republicans, Democrats, leaders all across academia, institutions, commercial space thought that by trading and engaging with China that the Chinese Communist Party would reform itself, it would loosen up, it would embrace economic and political freedom, and it would present less risk to freedom around the world," Pompeo said. "But instead, that’s not what we got."
Biden has indicated he intends to continue pressuring China and trying to mitigate its global influence.
While CRE analysts generally did not answer specific questions or speculate on how political policies or how a changing U.S. administration will impact the inflow of capital from Hong Kong and China overall, they agreed uncertainty reigns supreme from both a policy and economic standpoint going forward, particularly given the political discussions making news.
"I don't expect any change in 2021," BEI Capital founder Collin Lau said. "I think it's largely concerns over the pandemic, and second, the travel restrictions that are affecting real estate."
And over the long term, Lau said, Chinese investors will wait to see what the new administration does and what general American sentiment to China is going forward before making investment decisions.
"I would say the impact is marginal because the real concern is there is a spread of pretty hostile messages from the current administration," Lau said. "I think people want to wait and see. Actions are louder than words, so I think the investors are concerned about how the people voting for the current administration will see an investment from the overseas Chinese."
And it's not just political ramifications creating uncertainty. Economic questions also loom large for Chinese investors. Lau said one of the key ones is how will American CRE assets recover from the pandemic; and is today's low-interest-rate environment masking risk in U.S. real estate markets?
Over the short-term, China could very well remain a less active player in U.S. CRE, but the country is likely to want back into the market at some point.
"Long term, the U.S. market is too big an economy and a very important diversifier for any country, including China, to ignore," Cashdan said. "We should expect Chinese investment to gradually increase, but the pace will definitely be impacted by whether the new administration will continue with the current hard-line towards China or be willing to take a more conciliatory view of bilateral relations."