Chinese Investment In U.S. Real Estate Dropped By Half In 2017

With China's government clamping down on outbound investments, Chinese investment in U.S. real estate has declined as feared. With regulations in full swing as of March 1, megadeals will remain a thing of the past. Chinese investment in U.S. commercial real estate took a nosedive in 2017, dropping 55% compared to volume in 2015 and 2016, according to a report from Cushman & Wakefield.

Chinese investors spent $7.3B on U.S. real estate in 2017 compared to $16.2B in 2016. Increased government scrutiny and regulations on outbound investment in China have partially led to a decline in volume and the number of megadeals of $1B or more.

The volume of deals over $1B declined by 75% in 2017 while deals under $250M fell 12%, according to the report. With the decline in Chinese investment, Canada and Singapore regained their top spots as foreign investors in U.S. real estate.

China's new government regulations restrict large deals as well as deploying capital in real estate, hotels and entertainment. Deals that can lead to improvement of Chinese technology and equipment, upgrade the country's research and manufacturing, and improve the energy shortage are encouraged. Investment activity in 2018 will favor logistics, R&D and student and senior housing, according to the report.

Hotel acquisitions declined 84% year-over-year to $1B in 2017 compared to roughly $7B in 2016, but interest is still strong among investors. A Hong Kong investor, which is not under the same government scrutiny, recently bought a $650M hotel portfolio from Barings.  

Office still drew a lot of investors and made up half of the Chinese investment capital in 2017. Investment in central business district office assets declined by 35% to about $3B while suburban office volume more than doubled, increasing 136% year-over-year to just under $1B.

Apartment and development site acquisitions were down about 60% each, but Cushman & Wakefield expects acquisitions of multifamily assets, which tend to be more concentrated in suburban markets, to increase as Chinese investors become more familiar with additional U.S. markets.

The composition of capital markets shifted in 2017. While 2015 and 2016 were marked by large deals from insurance companies, these investors have been under pressure to reduce their real estate risks. Chinese developers, owners and operators picked up some of the slack, increasing their investments to $4B compared to $2.6B in 2016.

Small deals under $250M may gain more traction this year as these deals are not under as much scrutiny as larger deals, according to Cushman & Wakefield Senior Managing Director, China Direct Investment, Xinyi McKinny. Supply of available deals is minimal, prices are high and there are plenty of investors looking for the right deal, she said.

“Right now, there is not enough yield to make people do transactions,” she said. “A lot of people want to buy, especially core funds, but they can’t find a number that makes sense.”

Instead, many are turning to the U.K. where the pound has weakened and yields are higher. Investments in U.K. real estate jumped to $15.4B in 2017 compared to $4.8B in 2016. LKK Health Products Group bought London’s Walkie Talkie building for about $1.7B, while China CC Land Holdings bought the Leadenhall Building for about $1.5B.  

Chinese Investors Aren’t Leaving The U.S. 

While the year-over-year results may be alarming to some, McKinny said the current level of investment is much more healthy and sustainable. If you take out 2015 and 2016, investment is 66% higher than 2014, according to the report.

“It is better balanced compared to before with those megadeals and those outlier deals,” McKinny said. “We definitely won’t see too many megadeals this year.”

While total volume is down, Chinese capital markets are not going away any time soon, McKinny said. China has strong economic growth and wealthy investors need to put their capital gains somewhere, she said.

“Commercial real estate seems like a safe place to preserve their wealth,” she said. “They don’t want to put all their eggs in one basket, especially in China. Real estate is not as stable as in the U.S.”

These investors prefer U.S. real estate where the political environment is more stable, McKinny said.

Chinese investors are likely to remain in their favorite gateway cities, which have been New York, San Francisco, Los Angeles, Chicago and Seattle. Nearly three-quarters of all Chinese investment in the U.S. was made in New York, San Francisco and Los Angeles in 2017, McKinny said.

While Canadian and Singaporean investors are more adept in secondary and tertiary U.S. markets, Chinese investors are more familiar and comfortable investing in these core gateway markets, McKinny said. Chinese investment did start to increase in cities such as Washington, D.C., Houston, Dallas and San Antonio, but Chinese capital markets will keep to its five core markets, according to McKinny.