Chinese Investment Nosedives In Bay Area, While Dropping By Half In SoCal

The flow of mainland Chinese capital in amounts of $2.5M or larger into commercial real estate dropped by more than 50% in SoCal markets, and vanished almost entirely in San Francisco, in 2019.

A Real Capital Analytics report based on independent reports of properties and portfolios of $2.5M and greater found that investment dollars in the Los Angeles Metropolitan area have dropped by 57% in the third quarter of 2019 compared to a year prior.

In the Inland Empire, where Chinese investors had long sought to capture a share of the region’s booming industrial market, investments were down 50%. 

San Francisco has experienced a similar story, but at much more dire levels. The Golden State’s other economic hub, and neighboring San Mateo County, saw Chinese investments of that size in CRE fall to almost nothing in 2019. That's a sharp drop from a peak of $1.8B invested in both counties just three years earlier, according to RCA’s report. 

Nationwide, Chinese investments in CRE have nosedived by 76%, according to RCA. 

“The retreat by Chinese investors can be summarized with the phrase: ‘It’s not you, it’s me,’” the report states. 

RCA Senior Vice President Jim Costello, who authored the report, told Bisnow that Chinese investment has been pulling back in every city. But Costello cautioned that the U.S.-China trade war is not the reason for the decline in investments from China. Instead, Costello said capital controls instituted by the Chinese government trying to protect its currency is the biggest factor.

Cushman & Wakefield Vice President David Bitner, who works out of the company’s San Francisco offices as its Americas head of capital markets research, said currency strength concerns and a slowing national economy led China’s government to implement restrictions on capital outflows, which aren’t U.S.-specific.

“On the one hand, [China’s slowing economy] makes outbound investment more attractive,” Bitner said. “And on the other, it means less wealth is being created in China that can then be allocated to real estate investment, either foreign or domestic."

It also “doesn’t take a massive leap of the imagination” to think China’s capital controls have been applied more rigorously to U.S. assets in light of the two countries’ ongoing trade disputes, Bitner said.

Despite the decline, Costello said investors from China are still the 11th-largest group of cross-border investors in the U.S. commercial real estate market. Mainland China’s pullback has a minimal impact on market pricing. 

“The RCA Capital Liquidity Scores show that even as Chinese investors withdrew from the U.S., market liquidity remained high,” according to the report.

The new data come as a number of high-profile Chinese investments in Los Angeles have sold or stalled in the past year. According to RCA, Chinese investments have dropped from $265.5M in 2018 to $113.3M year-over-year. 

California, particularly in the Los Angeles and San Francisco markets, has been a popular investment destination for the Chinese. From 2012 to 2017, Chinese investors poured more than $5B in investments into commercial real estate, according to Cushman & Wakefield. 

"When the Chinese were coming over here in a big way, they targeted markets where there was a large Chinese American community and the potential to hire staff," Costello said.

But the once booming market in recent years waned as government restrictions put a chokehold on capital outflows.

In the fourth quarter of last year, Chinese megadeveloper Dalian Wanda sold an 8-acre development site in Beverly Hills to an entity controlled by a JV of Cain International and Alagem Capital Group.

Wanda had acquired the site at 9900 Wilshire Blvd., across the street from a Waldorf Astoria hotel, in 2014 for $420M. The China-based group had plans to build a $1.2B mixed-use residential, hotel and retail megaproject called One Beverly Hills on the site.

According to commercial real estate data site Reonomy, Wanda sold the land four years later to BH Luxury Residences for $445M, without building anything.

The new owners said they planned to "stick with the outline" of Wanda's original plan. 

Earlier this year, Oceanwide Holdings stopped construction on its Oceanwide Plaza project in the heart of Downtown Los Angeles. On a recent visit, a couple of construction cranes towered over unfinished skeletal building structures. Oceanwide had plans to build a Park Hyatt hotel, a residential tower with retail and restaurants.

RCA's report shows that type of moonshot optimism to be hamstrung by regulations, at least for now.

"The typical cross-border investor in the past had come here with the notion of buying something just for the prospective of the yield being a little better than the bond,” Costello said. “They tended to buy safe, stable-yielding assets. The Chinese investors came here swinging for the fences trying to become developers. They were taking on risks that other folks would not."

In San Francisco, once a focal point of Chinese capital, the country’s investors have also been cowed by the city’s arduous permitting process, which has stopped several projects in their tracks, according to the San Francisco Chronicle.

One such project is Oceanwide Center, which is now part of China-based Oceanwide Holdings’ massive U.S. portfolio, which is reportedly for sale.

In S.F., the sudden vanishing of large-scale investment from China shouldn’t distract from the city’s increase in cross-border flows, or from California and the U.S. as a whole, still being a hot real estate market, Bitner said.

"The organic, true, underlying demand is much higher than is suggested by the statistics that we see,” he said.

The outlook also remains rosy further north. While investments from China are down in Los Angeles, Canadian companies are picking up the slack. Canada made up almost half, or about $1.4B of the $3.2B cross-border investment, that flowed into Los Angeles commercial real estate in 2019, according to RCA.

Filling that gap some are Middle Eastern investors, who contributed about $333M into Los Angeles commercial real estate, and European cross-border investors, who plunked down $1.3B in the San Francisco market in the past year, RCA reported.