What You Need to Know About the Decline in Chinese Direct Investment in U.S. Commercial Real Estate

There continues to be an abundance of investor capital, both domestic and foreign, chasing too few commercial real estate deals in the United States. Direct foreign investment in U.S. commercial real estate has been and continues to be attractive for a number of reasons:

   -Low interest rates and modest yields on other asset classes for investment

   -The perceived safety of the U.S. real estate market 

   -No comprehensive federal or state restrictions on foreign investment in real property 

These regulations are unlikely to change in the foreseeable future.

All of these factors support continued direct investment activity in commercial real property within the U.S. by foreign investors, including the Chinese. 

Yet, in the past year, Chinese real estate investors, both private and governmental, have significantly slowed their direct foreign investment in the U.S. A portion of this slowdown can be explained by the Chinese reaction to the variety and volume of unexpected political news coming out of the U.S. A larger part of the slowdown can be attributed to the capital outflow restrictions enacted in China in 2016 designed to keep more capital at work in China. 

According to a report released on March 27, 2018 by Cushman & Wakefield, Chinese outbound commercial real estate investment to the U.S. fell 55% in 2017. This reduction occurred amid the Chinese issuing new investment restrictions and Chinese investor caution prior to the 19th Party Congress meetings in Beijing. In 2016, Chinese real estate investors were the largest foreign real estate investor group in the U.S. One year later, Canada was in the top spot, Singapore was second, and China had dropped to third place. 

Historically, the top five markets Chinese investors have preferred have been the New York City metropolitan area, San Francisco, the Los Angeles metropolitan area, Chicago and Seattle. Recently, investment dollars have been spread among a wider variety of locations. Los Angeles suffered the steepest decline in deal volume in 2017—a reduction of 67%. “The slowdown of Chinese direct foreign investment in Southern California began in early 2107” according to Stephen Cheung, President of the World Trade Center Los Angeles (“WTC”). WTC Los Angeles is a non-profit organization whose objective is to create jobs in the Los Angeles metropolitan region by attracting new companies and capital investment. The reduction in direct Chinese investment was also caused by a perception that many of the best deals “were already taken by the early investors immediately after the Great Recession, and almost all of the entitled projects were already purchased” said Cheung. Much of the decline in Chinese foreign investment in Los Angeles was the result of a 90% reduction in investments in hotel projects.

Formerly, Chinese investors favored hotel and office buildings in the central business district of a top tier city. More recently, there has been a shift away from these product types in favor of suburban office and industrial properties. For example, investment in suburban office real estate nationwide grew by 136% in 2017 compared to 2016. “Given the enormous future demand for senior care (as the Chinese population continue to age without a growing birth rate), Chinese companies are seeking opportunities to provide such needed services to the aging population,” according to Cheung. “Furthermore, as the middle class in China continues to grow, the demand for quality educational services will continue to grow as well. Many Chinese companies are following the trend, and are exploring options in the LA market to help meet the demand from China.” 

In addition, Chinese investors who removed their money from China before the capital restrictions went into effect are continuing to invest in the U.S., and especially in California. Experienced investors “who have subsidiaries in the US, Hong Kong, Singapore, and other destinations are not facing the same types of capital restrictions” as faced by investors whose funds are in China, says Cheung. I have also spoken with a Los Angeles-based investor who has access to Chinese funds that were already in the U.S. prior to the Chinese outbound investment restrictions. He reported that his contacts have invested in several $50 million dollar commercial projects throughout the western U.S., all in the last year.

The lack of regulatory factors which have attracted direct foreign investment by the Chinese in U.S. real estate are unlikely to change. As a result, Chinese (and other) direct foreign investment is almost certainly going to be an important source of commercial real estate deals, especially in Southern California. 

Direct foreign investment (FDI) opportunities will be the subject of a two day event in Los Angeles - https://www.selectla.org/.

What has been your recent experience with foreign direct investment in real estate?