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Chinese Investors Change Focus In Wake Of New Government Regulations

Beijing skyline

With China’s government clamping down on outbound investment, Chinese investment in U.S. commercial real estate assets is down significantly so far this year. Instead of directly investing in real estate, many Chinese investors are turning toward tech and biotech and investing in incubators, according to Xinyi McKinny, Cushman & Wakefield senior managing director of China direct investment for the San Francisco Bay Area and Los Angeles.

R&D facilities and incubator spaces will receive additional capital allocation as these types of investments are supported by the government. Investments that lead to the export of China's technology and equipment, improve the country's research and manufacturing and improve energy and resources are highly encouraged by the government. Commercial real estate investments, on the other hand, will be restricted.

Chinese investment into the U.S. already has declined significantly and will not likely reach the same levels as 2016. During the first half of 2017, Chinese investment in the U.S. totaled $4.17B, which is 26% of the $15.96B in investment during the first half of 2016, McKinny said. Total Chinese investment globally totaled $15.82B during the first half of 2017 compared to $23.4B during the first half of 2016.

While the U.S. remains a top destination, the U.K. and Hong Kong are becoming increasingly popular since investors think they can get better returns in these countries, McKinny said. Investments increased in the U.K. to $4.01B during the first half of 2017 compared to $1.4B in the first half of 2016. Hong Kong received a boost in investments from China, with funds increasing to $5.4B during the first half of 2017 compared to $3.3B during the first half of 2016.

Cushman & Wakefield Senior Managing Director, China Direct Investment Xinyi McKinny

Restrictions To Reduce Risk

China instituted these regulations to reduce the overseas investment risk. With the new regulations, investment in real estate, hotels and entertainment is restricted, as are equity investment funds and investment platforms not connected to a specific project. EB-5 financing also has been hit pretty hard by the shift in investment.

“It’s hard to find EB-5 financing right now, especially from Chinese investors,” McKinny said.

Insurance companies were big investors last year, but cannot move as much money into real estate as they did in 2016. Hotel followed by office were the top industry classes for Chinese investment in 2016, but there will be much less hotel investment this year.

Something on the magnitude of Anbang Insurance Group’s $2B purchase of New York's Waldorf Astoria Hotel, one of the biggest deals to close in 2015, will not likely be repeated this year, McKinny said. Anbang also is under pressure from the Chinese government to sell many of its assets, including this one.

“There will still be some activity and Chinese companies are actively looking, but are very conservative and careful because they don’t have as big of a budget to work with,” McKinny said.

Chinese developers also will remain active, especially when it comes to residential projects in stable markets. Their focuses will shift to development and asset management and building track records.