Chinese Investment May Be Down In U.S. Real Estate, But Investors Still Love These Cities
Despite Chinese investment in U.S. real estate declining 55% after the advent of strict government regulations on outbound investment, Chinese capital markets remain keen on five core markets. New York, San Francisco, Los Angeles, Seattle and Chicago will continue to benefit from Chinese investment even though the overall amount in each city will be much less, according to a report from Cushman & Wakefield.
New York, San Francisco and Los Angeles made up 72% of deal volume from Chinese investors in 2017, according to Cushman & Wakefield Senior Managing Director, China Direct Investment Xinyi McKinny. Chinese investors have historical ties to these cities and many prefer to invest large amounts of money in cities with which they are familiar, she said.
“Over the years they will start to look at other cities,” she said. “Culturally, they are not familiar and … not comfortable with secondary and tertiary markets.”
Cities such as Washington, D.C., Houston, Dallas and San Antonio are starting to pique the interest of investors, according to the report. McKinny said investors are starting to consider Austin and Denver, but Chinese investors will remain committed to the markets they know well.
While there may be few opportunities to make purchases in multiple markets, some Chinese investors like HNA Group and Dalian Wanda have been under pressure by the Chinese government to sell their real estate.
HNA Group said in February it plans to shed up to $4B in properties in New York, including the recently purchased 245 Park Ave. HNA also is in talks to sell off its stake in Park Hotels & Resorts, a spinoff of Hilton. Gaw Capital Partners, a Hong Kong investor that does not fall under the same restrictions, has been actively buying up properties in New York and San Francisco, including ones sold by HNA Group.
Check out how each of the top cities for Chinese investment performed below.
New York
Total Chinese Investment: $3.4B
Preferred Asset Class: Office ($2.5B)
While total investment volume declined 32% in New York for all investors, Chinese and Hong Kong investment in New York declined 54% in 2017 to $3.4B compared to $7.4B in 2016 and $5.1B in 2015. Acquisitions in New York hotels declined 80% year over year, the biggest decline of any asset class in the Big Apple.
New York City has been the largest recipient of Chinese investment over the last few years and still remains its largest recipient despite the dropoff in investment dollars overall. Megadeals from Chinese investors may be a thing of the past, especially after the imposition of capital export restrictions during the course of the year resulted in the cancellation of at least two transactions over $1B.
Deals over $250M will still occur, but less frequently. While 15 deals were over $100M in 2016, only three deals were over $100M in 2017, including HNA Group’s $2.2B acquisition of 245 Park Ave., Gaw Capital’s purchase of Standard Highline NYC for $340M and China State Engineering’s acquisition of a development site at 537 Greenwich St. for $102M.
“While New York City may witness some isolated Chinese dispositions in 2018 for political reasons, we believe that appetite will be quickly backfilled by other international players as New York remains a top destination for global capital,” Cushman & Wakefield Executive Managing Director of Capital Markets Janice Stanton said in a statement.
San Francisco
Total Chinese Investment: $1.4B
Preferred Asset Class: Development Sites ($500M)
All investment volume in the San Francisco Bay Area declined 17% year over year, but was down 52% among Chinese acquisitions. In 2016, Chinese investors bought $3B in assets, but only $1.4B in 2017. Outside of 2016, Chinese investment in the Bay Area is actually trending upward and 2017 totals were up by 40% compared to 2015 and up 75% compared to 2014.
In 2017, hotels posted the sharpest declines in Chinese acquisitions — down 69% — along with industrial, which was down 79%. Cushman & Wakefield expects interest to rise for R&D, incubator space, and senior and student housing.
Even though investment volume decreased, the number of transactions increased 11% year over year and the brokerage expects more smaller deals.
Several hotel and office purchases marked 2017 in the Bay Area, including Gaw Capital’s purchase of the Oakland Marriott City Center for $143M from Apollo Group and General Nice’s $206M purchase of the InterContinental Mark Hopkins from Woodridge Capital. Genzen Group spent $250M for a development site at 3050 Democracy Way in Santa Clara from LeCo.
Gaw Capital also purchased 555 Montgomery St. in San Francisco for $121M from East West Bank. This Hong Kong investor remains keen on San Francisco and is said to be in talks to buy HNA Group’s 123 Mission, which HNA bought for $255M in 2016, Bloomberg reports.
Los Angeles
Total Chinese Investment: $446M
Preferred Asset Class: Office ($134M)
While all investment in Los Angeles was down 1% in 2017, Chinese investment declined by 67% year over year in large part due to a 90% decline in hotel investments. In 2016, Chinese investors put nearly $1.2B toward hotel assets, an amount which declined dramatically to $115M in 2017. Office acquisitions rose to one of its highest levels in Los Angeles to $134M.
Discreet deals in office/retail, industrial and hotel properties helped make 2014, 2015 and 2016 banner years for Chinese investment in Los Angeles, but these types of deals were not present in 2017.
During 2017, Elite International Investment and Future Land purchased The Alhambra from AIG for $117M. Han’s Holdings Group bought The DoubleTree by Hilton Los Angeles from UBS for $115M, which was the one and only hotel investment deal made last year.
Cushman & Wakefield expects 2017 to be a better indicator of future Chinese investment flow, which was more balanced across property types and will likely grow in the future. Los Angeles will experience a shift in the type of Chinese investors in the city.
“Over the past 12 months we have experienced a significant transition of the type of capital we are interacting with from China for investments in Los Angeles,” Cushman & Wakefield Executive Vice Chairman, Capital Markets Marc Renard said in a statement. “Previously the capital was primarily the large state-controlled conglomerates, today, it is for the most part very high-net worth individuals.”
Chicago
Total Chinese Investment: $375M
Preferred Asset Class: Office ($372M)
Chinese investment in Chicago fell 63% year over year compared to $1B in 2016, and there was only one noteworthy transaction in 2017. HNA Group acquired 181 West Madison for $335M, making up the majority of the deal volume for 2017. The investor sold the building in February for $360M. While Chicago piqued the interest of many large investors, such as Anbang, Cindat, HNA and China Life, in the last three years, European and Canadian buyers tend to dominate the Chicago market, according to Stanton.
Chinese investors only invested in two asset classes in Chicago. Outside of office, capital markets invested $4M in industrial properties, and Cushman & Wakefield expects additional investment in this asset class.
Seattle
Total Chinese Investment: $78M
Preferred Asset Class: Industrial ($53M)
Total Seattle investment was down 23% overall not just because of the capital regulations, but also due to a lack of large-scale investments sold in 2017, according to Cushman & Wakefield Senior Director Gordon Ahalt.
Chinese investment declined sharply by 81%. Chinese investors tend to look for large institutional assets that are stabilized or have some value-add component and there were only five sales made by all investors over $200M in Seattle last year. Another reason for the drop was the lack of any hotel sales in Seattle.
Cushman & Wakefield anticipates greater activity in industrial in Seattle, especially as the new regulations create an impetus to grow industrial portfolios. Industrial made up well over half of Chinese investment in 2017 in Seattle.
“The Chinese are still showing strong interest in our market,” Ahalt said in a statement. “Because of the global demand on Seattle commercial real estate, it is very competitive when a large quality property comes to market.”
