Will Headwinds In China Keep Investors From Pouring Billions Into U.S. Real Estate?
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China is one of the largest foreign investors in U.S. commercial real estate, having poured about $12.5B into U.S. property markets in 2016. But headwinds in the country — from the depreciation of its currency to the government’s recent crackdown on capital leaving the country — have some industry professionals questioning China’s future position as a global power buyer.
Though the Chinese renminbi dropped 13% compared to the U.S. dollar from 2013 to 2016, resulting in more aggressive U.S. acquisitions, Colliers International foresees the depreciation of the RMB slowing this year, turning capital flows back toward Asian markets.
“There are signs that the focus of Chinese overseas property investment is shifting,” Colliers Executive Director of Asian Research Andrew Haskins said. “Evidence so far this year supports the contention in our report that Chinese investment [will] shift gradually towards Asia from this year.”
In its recent report, “Fact or Fantasy: 2017 — The Year In Which Asian Property Capital Flows Reverse,” Colliers estimates Asian countries will slow their spending in foreign property markets, and available data already backs up that claim.
Chinese investment in U.S. property markets dropped 17% year-over-year to $4.7B in the first half of 2017, according to Real Capital Analytics. This decline was the result of more robust activity in property markets around the world. Asian money flowing into European real estate increased 15%, and investment in Asian property markets jumped more than 100% to $7.8B.
Biggest Buyers Under The Microscope
Chinese regulators are tightening the screws on the country's largest investment companies, honing in on the financial activity of four firms — Dalian Wanda, Fosun, HNA and Anbang. HNA and Anbang have slowed their foreign investment activity as a result of increased scrutiny, temporarily tabling some mergers and acquisitions. Chinese regulators want to determine how much debt these companies have used to fund massive acquisition sprees for fear they are overleveraged and pose a threat to the financial system.
Some industry professionals believe the government's move to curtail capital outflows will delay deals and even keep some from closing.
“Chinese companies looking to invest in foreign real estate are required to submit requests for approval to the government, but the government is not required to respond to these requests, and in some cases they’re leaving them on the table unanswered,” Ten-X Commercial Real Estate Associate Director Conlyn Chan said.
Why The Crackdown?
Several factors have contributed to the Chinese government’s increased scrutiny of capital outflows, according to Chan. One, the government is being strategic in an effort to prevent the further depreciation of its currency. In 2016 alone the yuan fell 6.6% against the U.S. dollar, CNBC reports, its largest dive since 1994. China has been devaluing its currency for the past two years to stave off aftershocks from the global financial crisis that led to drops in Chinese employment and production. By weakening its currency, China made exports cheaper, strengthening its position in international trade markets.
Two, Chan said regulators are rethinking their approach as they prepare for the 19th National Congress of the Communist Party of China. This vote involves 2,200 party delegates who meet every five years to elect a Central Committee and approve their agenda for the following five years. The next vote is scheduled for October or November.
“Especially with the country’s sovereign debt recently being downgraded by Moody’s, the Chinese government is very averse to allowing the RMB (the Chinese currency) to depreciate in advance of the Congress, so they have been particularly wary of capital outflows,” Chan said.
Third, Chan said concerns regarding the foreign reserve are exacerbating the government crackdown. Within the last three years, more than $1 trillion in Chinese capital has left the country. Should this volume of outflow persist, it could put the country’s economy at risk.
Haskins said the crackdown may also be the government’s attempt to protect its big spenders from entering overpriced markets and making large purchases that are ultimately a mistake.
"The trophy acquisitions which have been pursued recently by certain Chinese large groups resemble the rash of acquisitions in the U.S. made by Japanese companies in the late 1980s, when Mitsubishi Estate purchased the Rockefeller Center in New York and the electronics producers Sony and Matsushita purchased Hollywood film studios MCA,” he said. “Many of these acquisitions proved highly overpriced, and resulted in large write-downs for the acquiring companies.”
Deals To Proceed Via Back Channels?
Even with these challenges and increased regulations at play, experts said it is possible Chinese capital outflows will persist at the rate they have, just via back channels.
“The high net worth individuals in China have always found a way. They have their ability to move funds, whether it’s from inside the country or outside the country, despite what the government puts in front of them,” One & Only Holdings partner Edward Mermelstein said.
Even taking into account the long length of the cycle and inflated property prices in the U.S., which have turned some foreign buyers away from the country’s gateway markets in search of better risk-adjusted returns, Mermelstein said most of his Chinese clients do not see much of an alternative to America’s real estate market.
“We’re likely going to see a reduction of investment from China, which is substantially due to the economic slowdown in China,” Mermelstein said. “In the meantime, as their economy stabilizes or improves, that will bode well for the U.S. because we anticipate investment will at some point start increasing. That is primarily due to the relationship that has been built between the two countries. Economically at this point we are extremely tied-in. It will continue to be a growing relationship.”
Reverse In Flow To Asian Markets
Colliers noted growing opportunities for Asian investors to shift their spending to markets in China, Hong Kong, Singapore and India. Increased inflows of cash in the country will likely offset rising costs, Colliers reports, resulting in decent, albeit on average flat, returns. Still, it does not predict Chinese investors will abandon U.S. deals.
“We expect the pace of Chinese investment in the U.S. to moderate for the reasons explained, but do not anticipate a sharp fall. Carefully considered investment in U.S. property can offer Chinese enterprises both reasonable returns and diversification of risk. The same applies to Chinese investment in property markets in Asia, Europe or elsewhere in the world,” Haskin said.