How Chinese Stock Turmoil Affects US Commercial Real Estate

It’s been one of the biggest stories in US business and real estate coverage: the enormous influx of Chinese capital.

Since a 2012 regulation on foreign investments—and a subsequent historic acquisition near the Brooklyn waterfront by Chinese real estate developer Xinyuan—money from China has been flowing freely, with these foreign investors setting their sights on everything from storied hotels to trophy commercial assets.

With the $1.9B Waldorf Astoria acquisition late last year, Chinese insurance group Anbang became the biggest foreign buyer of US housing.

According to global commercial real estate data and analytics firm Real Capital Analytics, Chinese spending on global real estate shot up from $1.5B between March 2011 and March 2013 to $10.4B between March 2013 and March 2015.

With the free spending in full force, experts have predicted that Chinese investors could spend more than $50B over the next few years.

"Over the next several years, we'll see—potentially—over $50B injected into the market from China," Cushman & Wakefield chairman of New York investment sales Bob Knakal told TheStreet. 

"There's going to be an uptick. I think it's just beginning," JDS Development’s Michael Stern added.

But those projections came months ago. 

More recently, a dramatic stock market plunge led to speculation that the crash could trickle down to the US real estate market. In just three weeks, stocks listed on mainland China’s most prominent exchange tumbled 30% from near-historic highs, wiping out nearly $3T in market cap.

Similarly, The ChiNext Index—China’s NASDAQ—lost 42% of its value over 21 days, prompting bad nostalgia trips to the tumult that followed once-mighty Japan's 1980s investment spree in New York.

“The problem is that the turmoil in the Chinese stock market is going to take some time to show up in anything we do,” RCA senior vice president Jim Costello tells Bisnow. “Theoretically, there will be both positive and negative impacts from the turmoil.”

Considering the state of the stock market, the safe, low-yield approach makes sense for Chinese buyers in the market for prime assets. “The prospect of healthier yield in the US market may entice some capital movements,” Costello says.

By the looks of it, the crash doesn’t appear to have discouraged institutional investments abroad. In fact, it could speed up the shopping spree.

In addition to the record $10B-plus spent on American commercial real estate, Chinese buyers pumped $28.6B into the entire real estate sector, more than doubling Canada’s investments, according to the National Association of Realtors.

Despite the crash, Chinese real estate developer Xinyuan, one of the first Chinese firms to gain footing in the US, said it plans to continue shopping for assets.

“In addition to our Williamsburg project, we’re seeking opportunity to find additional projects in New York,” Xinyuan investor relations manager Nathan Lai told Bisnow.

“Changes in the Chinese equity markets are affecting different people in a variety of ways,” Colliers International president of capital markets and investment services Brian Ward tells Bisnow. “On the larger, institutional side, there will be little or no change. Institutional investors are keeping their real estate diversification strategies in full play, with intense focus on the US and Western Europe, mostly the UK.”

While institutional investors appear unfazed, private investors could be in trouble.

In China, with the uncertainty surrounding equity markets—“it’s incredibly manipulated,” Jake Phipps told Bisnow—the majority of local wealth has been put into real estate, creating a dangerous bubble.

In Shanghai, home prices surged 638% between 2000 and 2014.

Another stunning stat: Chinese households have 74.7% of their assets in real estate versus just 27.9% in the US.

There's also the matter of brain drain. According to a report in e-newsletter Economy & Markets, 33% of wealthy Chinese with over $16M in assets have already left the country, and 64% of China’s millionaires expressed plans to follow suit.

A Barclays survey of 2,000 individuals with over $1.5M in assets supported this: 47% of about 50 Chinese respondents expressed a desire to move abroad in the next five years.

“You can already see it now,” said real estate lawyer Earl Antonio Wilson, who advises on EB-5 visas and specializes in Chinatown. “There are new players arriving on the scene and the current economic conditions in China definitely play a major role in that.”

Wilson, who employs Chinese staff, said he had received a growing number of inquiries on both real estate and EB-5 visas. “My phone is ringing non-stop,” he said.

In the past year, Chinese investors accounted for more than 90% of EB-5 visas.

In the first six months of 2015 alone, China invested about $5B in US CRE, about $1B more than in all of 2014, Ward said.

In other words, the Chinese free fall simply causes “more flight to safety, which means more investment in New York,” managing partner at Chinese private equity fund Beijing Capital Omer Ozden told The Real Deal.

"So far, we're not seeing any slowing in interest from potential Chinese investors," Rick Sharga, executive vice president at Auction.com, told CNBC.

The site has partnered with Shanghai-based Juwai.com to sell American properties to buyers in Mainland China.

"And it's possible that the stock market crash may actually have the opposite effect, and stimulate Chinese high net worth individuals to move money out of the country and into the relative safety of US real estate," Sharga said.

Both on the record and off, sources said the consistent desire to get cash out of China should keep demand strong.

More dangerously, the overwhelming number of Chinese acquisitions could drive demand to bubble levels in the domestic CRE market.

"As competition in gateway cities continues to increase, Chinese investors will need to include other large metropolitan areas, such as Atlanta, Boston, Dallas, Denver and Seattle in the hunt for better investment opportunities,” said Brian McAuliffe, executive managing director, Americas, CBRE Capital Markets.

However, the lack of inventory—and an unwillingness to sell—should keep the danger in check, at least for now.

“In short, supply continues to be constrained while demand continues to increase,” Brad Case, SVP of Research & Industry Information, NAREIT, told Bisnow. “So property values are actually quite well supported by macro conditions in the real estate market."