5 Things To Know About How China's Reopening Could Impact U.S. CRE

China's reopening last month after pandemic-inspired restrictions that essentially sealed off the country, which has the world's largest population and second-largest economy, from the rest of the world has big potential implications for American business and commercial real estate.

The Chinese government, eager to put a good face on the situation, said that the move would spur new investment in the country as foreign executives returned to seek new opportunities. Also, pent-up demand among Chinese citizens for overseas travel would be good for hotels and other tourist-oriented businesses in destinations favored by Chinese travelers.

But the actual impact of China's reopening on U.S. investors in Chinese real estate is less certain, and even hotels in popular U.S. destinations might not see a mass uptick in business from Chinese tourists just yet. The situation will be more fluid in 2023 than official proclamations state, experts say.

Here are five considerations for CRE as China reopens to the world.

Investors Will Come Thundering Back

China is now open in a way it hasn't been since 2020, and investors have taken note, according to JLL Capital Markets Head of Investor Intelligence for APAC Pamela Ambler.

“We’re already seeing renewed interest from investors on China,” Ambler said. “There’s an acceleration of asset sales to take advantage of the positive sentiment with reopening of the border, though it will take take a couple more months before things get back to normal.”

Ambler notes that in the fourth quarter of 2022, the volume of investment in China real estate reached roughly $7.5B, a 125% increase from Q3, mainly driven by a major turnaround in office transactions.

Long-term U.S. investors in Chinese real estate seem optimistic as well. Earlier in January, Tishman Speyer said that it is planning to create new dollar-denominated funds to acquire properties in China.

"Now that [investors] are allowed to come to China, they can visit the projects and assets, it is very important and it's definitely good news for them," Tishman Speyer China CEO Wilson Chen told PERE. 

Tishman Speyer has also been able to find buyers for assets it wants to sell in China. In January, the company sold a 10-building mixed-use campus in Shanghai for about $1.1B to a fund co-managed by CapitaLand. The assets were part of a larger mixed-use development in that city that Tishman Speyer said it is committed to completing.

But Some Never Left

The pandemic might have prevented investors from seeing properties in China in person, but it didn't grind real estate investment in the country to a complete halt, at least not for experienced investors.

“Investors don’t want to let a good crisis go to waste, with some targeting assets with discounted pricing, semi-distressed opportunities,” Ambler said. "Market watchers are also expecting some land tenure policy changes in the coming months; that will provide further support to China’s real estate sector."

Before the Global Financial Crisis, U.S. commercial real estate investment in Chinese assets was relatively small, but it grew over the following decade, as the Chinese government loosened foreign investment regulations covering CRE and as the country's economy grew. Thus experienced investors became more experienced.

Blackstone and Goldman Sachs, for instance, have been major investors in Chinese real estate throughout the last decade or so, including pandemic-era deals. In recent years, the U.S. investment giants have sought logistics properties in China, just as they have elsewhere.

In 2021, Blackstone funds acquired a 70% stake in a logistics park in southern China, raising its industrial holdings in the country to 53M SF in 23 cities. In November 2022, before the lockdowns ended in China, Goldman Sachs Asset Management launched a joint venture with Shanghai-based logistics company Sunjade to accelerate its investment in Chinese logistics and infrastructure assets.

It's A Different Economy Now

Being open to investment and inspiring a burst of optimism is one thing, but it's only part of the picture. Until recently the economic growth mecca of the world, China took a turn for the worse during the pandemic.

In 2022, the Chinese economy grew only 3%, according to the National Bureau of Statistics, the weakest growth since 1976, when China still had a command economy. The government's efforts to enforce a zero-Covid policy, including massive urban lockdowns, is widely thought to have put a serious crimp in the country's economy.

Now that the restrictions are gone, the economy might grow more in 2023, upping the demand for real estate, but even so there are longer-term worries.

On Tuesday, the Chinese government reported that the country's population shrank for the first time in about 60 years, when Mao Zedong’s failed economic experiment, the Great Leap Forward, led to famine and the death of millions. This time around the event is less horrific, but real nonetheless, as a legacy of earlier draconian population control efforts — and the country's growing middle class with less ambition to have children — has slowed the birth rate dramatically.

“[China] will no longer be the young, vibrant, growing population,” Wang Feng, a professor of sociology at the University of California at Irvine who specializes in China’s demographics, told The New York Times. “We will start to appreciate China, in terms of its population, as an old and shrinking population.”

Relationship Status: It's Complicated

Now that China is open, experienced investors might have reasons to be glad, but less experienced ones still have reason to pause, according to University of New Haven associate professor Robert Sanders, a geopolitical risk expert.

Considering heightened tensions between the United States and China, and the possibility of further internal discord in China, the risk associated with long-term investment in the country is notably more than it has been in recent years, he said.

“The risk is getting involved in a place where the geopolitical ramifications could turn out to make your access to the property, and your ability to engage with people about the property, much more limited,” Sanders said.

The problems go beyond current tensions, he adds. Some longstanding issues with investing in China have yet to be resolved.

“For instance, does their legal system have not just equality, but even equity in terms of outside investors who are foreigners, and natives? No,” Sanders said.

Moreover, getting solid information is often a challenge when it comes to investing in China, Sanders said, especially as Covid cases surge in the wake of lifting the lockdowns. 

“The government is trying to cover up the real effects of the pandemic on their country,” Sanders said. “So we don't really know how Covid-19 is affecting China. We just know what they want us to know at this point. And as a result, there's a bit of shooting in the dark for investors."

Tourism's Turnaround Will Be Tepid

Besides direct investment in Chinese real estate, tourism is another important aspect of China-U.S. interaction for domestic CRE — specifically, middle-class Chinese travelers. As more Chinese started taking trips abroad in the 2010s, hotels in such popular destinations as Hawaii, California and New York benefited.

All that ground to a halt with the pandemic, as few Chinese were able to take trips of any kind during the last three years or so. The question now is whether Chinese travelers will return in force, and how long it will take.

Before the pandemic, Chinese tourists spent more than any other nationality worldwide, about $255B in 2019, with American tourists next at about $150B. Much of the Chinese spending was in closer destinations, such as Southeast Asia, but even so, the U.S. got about 13% of the total in 2018.

For now, limited airline schedules and restrictions on Chinese arriving (such as Covid testing) will probably keep a lid on Chinese tourist spending, The Wall Street Journal reports.

Even if the number of Chinese travelers returns to anything like its pre-pandemic levels, however, it isn't clear that U.S. hospitality will benefit as much as other parts of the world.

Before the pandemic, Chinese visits to the U.S. peaked in the mid-2010s, but by 2019 were slacking off. During the year after the Trump administration upped tariffs on Chinese goods, Chinese tourism to the U.S. was down by more than 8%, Quartz reports, partly due to the resulting strength of the U.S. dollar.

For now, whether Chinese tourists want to patronize American hotels is a moot point, since their return to international travel is going to be slow.

“Most consumers aren’t mentally ready to travel to another country right after recovering from Covid,” Chen Xin, head of China leisure and transport research at UBS, told Bloomberg. “We may need to wait until next year at the earliest to see the outbound travel return to pre-Covid levels.”