Despite Temporary Trade Truce, Chinese Investors Aren't Coming Back To U.S. CRE

While the Chinese government has had heavy restrictions on capital leaving the country in place for years, 2019 was the year the flow of investment from China to the U.S. reversed.

Amid geopolitical tensions and Beijing’s unabated efforts to keep domestic capital within its borders, Chinese investors were net sellers in 2019 for the first time in a decade, selling $20.3B in assets last year, more than six times more than the $3.3B in real estate they sold in 2018, according to Real Capital Analytics data.

Buyers from mainland China bought $585M worth of commercial real estate assets last year, per RCA data provided by Savills, down from the $6.6B they bought in 2018.

Tensions between China and the United States are lingering, despite the U.S. and China reaching a Phase 1 agreement earlier this month to de-escalate their ongoing trade war. But experts expect restrictions on Chinese nationals investing out of the country to continue through at least 2020.

With mounting uncertainty about a potential downturn in the mix, lavish spending from Chinese investors on American real estate is considered a thing of the past.

“There’s not really a catalyst that means we would see a substantial pickup in Chinese investment in 2020,” Savills Chief Economist Heidi Learner said, pointing to buyer caution this late in the cycle, tense relations between the two superpowers and ongoing capital controls. “Certainly, we are not returning to the levels of Chinese investment of three or four years ago.”

Regulators in China began ramping up controls on offshore investment in late 2016 in response to a declining foreign exchange reserve.

Though some form of these controls have been a fixture in China for many years, investors must now declare the use for money they are moving offshore and sign a pledge that it will not be used for real estate. In February, China’s Supreme Court moved to impose minimum five-year jail terms on anyone caught illegally moving money to other countries, per the Australian Financial Review. 

“It's hard to tell … [but] I guess not many investors would expect any changes in capital control within years,” Ren Hor Wong, the CEO of Australian lender N1 Holdings, wrote in an email. “This is a new norm that investors and vendors alike have adapted into.”

The strengthened controls are working well for China, according to Hui Feng, a research fellow specializing in Chinese politics and political economy at the Griffith Asia Institute in Brisbane, Australia. Its first capital controls were originally meant to be removed by the end of the 20th century, he said, but the Asian financial crisis in the late 1990s changed their outlook.

The Chinese stock market crashed in 2015, which led to controls being increased. Now, he predicts at least another 12 months before any of the measures are to be relaxed in any way.

"The financial repression regime, that's the very foundation of the economic success of China's economy," Feng said. "So [regulators] may worry that if you abolish capital controls that means you are abolishing a successful model of economic development.”

To remove the controls, he said, something convincing has to happen. That may mean, for example, China’s state-owned enterprises would need to start performing well without heavy reliance on domestic capital. The ongoing reform of the stock market, which is continuing through this year, would need to go ahead without any market chaos. 

When President Donald Trump guided U.S. policy toward accusing China of manipulating its currency — it reversed the official label this month as part of the Phase 1 agreement — it gave Chinese regulators cause to the keep the controls in place, Feng said. And he doesn't think the Phase 1 agreement, which carries few long-term requirements for either side, makes a big difference.

“It's just a temporary truce,” Feng said of the deal signed earlier this month. “There's still ongoing pressure.”

Hans Hendrischke, a professor of Chinese business and management at the University of Sydney, said another reason Chinese investment won't return to its previous levels is the way it is perceived around the world today.

“The way in which China is covered in the press and in public discourse is much less supportive than it used to be a few years back,” he said. “That has an impact, and generally the Chinese are, from what we can see, taking a lower profile.”

To be sure, Chinese investor presence on the U.S. real estate market looks very different to what it did just a few years ago. Overall, Chinese buyers spent more than $41B directly investing in U.S. real estate and hospitality since 1990, according to research group Rhodium Group. Chinese investment hit a peak of $17.3B in 2016.

Leading up to the controls, the Chinese became known for pricey purchases such as Anbang’s Insurance Group's $5.5B deal to buy Strategic Hotels & Resorts. It also bought the Waldorf Astoria in New York City for $1.95B in 2015 in a record deal for a U.S. hotel.

But last year was marked by some high-profile sales. Anbang, for example, reached a deal to sell the 15-hotel portfolio to South Korea-based Mirae Asset Financial Group in September. It is still leading a massive renovation of the iconic Manhattan Waldorf property.

HNA Group sold its majority stake in 850 Third Ave. in Midtown Manhattan for a $41M loss last year. It paid $2.2B for another Manhattan skyscraper, 245 Park Ave., in 2017, and sold a piece of its equity and relinquished operation control over the building to SL Green the previous year.

Not all buyers have disappeared. Mainland China developer Hopson Development Holdings dropped $113.5M on a Manhattan development site last month with plans to build a 34-story residential tower. 

“There are some lessons learned from the past investment,” said Peng Liu, an associate professor in real estate at Cornell University.

He, too, expects that strict capital controls will remain in place for at least the rest of this year — and that Chinese investors will have a more cautious approach to real estate even if the controls are loosened.

Asset classes like healthcare facilities, infrastructure, medical office buildings and data centers will become the investment of choice over trophy office towers, he said. 

“[They are] becoming more informed, more rational," Liu said. "They will probably use more debt in the U.S. as well. They used to be using their cash or equity, and now they want to leverage other financing resources."

Real estate players have acknowledged that while China’s departure has left its mark, there are plenty of other overseas investors who are keen on United States real estate. 

Investors and wealth funds from Bahrain, the UK, the United Arab Emirates and Switzerland have been significant buyers in recent years, along with Canadians, Germans and Koreans. Countries from other parts of Asia are also playing a greater role in the world’s real estate market.

CBRE Head of Research Asia Pacific Henry Chin, who is based in Hong Kong, pointed to Malaysia, Japan and Singapore — which was the Asia-Pacific region’s top source of outbound capital in the first half of last year — as potentially taking a greater role in U.S. real estate this year.

“I think that we continue to see the wave of Asian capital into the global real estate market,” Chin said. “[But] there will be less trophy deals done by Asian investors, because where they are coming from, it's very different to the Chinese.”