Recently, there has been speculation that mainland Chinese consumers will continue to pull back from U.S. commercial property purchases. This comes amid the Chinese government’s stricter capital controls, tightened regulatory scrutiny, China’s economic slowdown, and the country’s escalating trade war with the U.S.
These concerns are fueled by a few factors, including the 55 percent decline of Chinese investment in U.S. CRE in 2017. Los Angeles suffered the biggest blow, with a 67 percent drop in transactions, mostly relating to a decline in hotel volume. The second factor is that recent reports from Beijing have shown that China’s economic growth has slowed to its weakest pace since the first quarter of 2009, with the economy growing at 6.5 percent year-over-year in the third quarter of 2018, just missing the expectations for 6.6 percent growth.
These tough figures aside, the facts do not support recent forecasts of a continued Chinese pullback from the U.S. CRE market. On the contrary, Chinese investors continue to have ample means and appetite for U.S. commercial property.
First off, Chinese investment in U.S. real estate is not going away. Investment still supersedes 2014 levels, and some analysts believe that current levels are more sustainable given the overheated 2015-2016 market. Regardless of the imposed controls by the Chinese government, Chinese CRE investors still made up the largest share (20 percent) of foreign commercial real estate purchasers in the U.S.
Additionally, while data has shown that in recent years the Chinese economy (on paper) is slowing compared to previous levels, the Chinese government has been unable to detect and stop the flow of illicit money out of mainland China. Beijing’s capital outflow controls have been ineffective in stemming the international transfer of underground money, a phenomenon that continues at a rapid clip.
In recent years, money flow originating from illegal sources in China has been on the rise. In the first quarter of 2017, for example, US$58 billion of capital outflows from China came from illegal sources, demonstrating the difficulty of identifying and measuring the issue.
In some respects, this should not be much of a surprise. Due to the needs of corporations to maintain cash flow and liquidity, company executives continue to devise ways to facilitate the illegal and undetected flow of money. This can come in the form of direct investments, sometimes as current account transactions and at other times it is the flow of plain old-fashioned underground money.
Chinese regulators continue to be outwitted and overwhelmed by demand originating from their soil. Mainland corporations eager for returns and the prestige of holding U.S. assets are continuing their efforts.
All of this comes despite the slowing and topped out CRE market in both the Golden State and broader U.S.; the recent trend of rising interest rates by the Fed; and increasing disputes over trade and national security between Beijing and Washington.
Other factors at play are projections that mainland Chinese commercial property investment will rise from 3 percent to 8 percent from last year (raising investment totals to US$129.3 billion on a yearly basis) and that local policymakers will become more accommodating to Chinese property investors as the domestic economy feels the effects of rising interest rates, increased mortgage lending restrictions, and the slowing overall real estate market.
Some other numbers to consider …
- Outside investment in U.S. commercial property continues at a robust rate. In 2017, one in five active commercial agents in the U.S. closed a sale with a non-U.S. client, and over a third reported an increase in overseas clients since 2012, according to the National Association of Realtors.
- Taking into account larger trends in the global economy, Asia has been the fastest growing market for wealth management since 2013, consisting of 45 percent of global inflows from 2013-2018. Asia-based asset managers reported US$66 billion in revenue in 2017 and this trajectory is expected to double by 2023, according to McKinsey.
- Currently, China alone represents 37 percent of assets under management in Asia, and analysts are forecasting that China-affiliated assets will grow at a per annum rate of 17 percent over the coming five years.
Yes, a clampdown by regulators in Beijing is in effect. Nonetheless, it’s result will be moderated due to both the undetected flow of money to the U.S. and continued Chinese demand for U.S. commercial properties. For the time being, Chinese commercial real estate purchases in the U.S. will continue despite China’s government-mandated restrictions and other factors, i.e., the current U.S. real estate market slowdown, rising interest rates, and the U.S.-China trade war.