Why is Chinese Capital Flowing into the United States?

Wednesday, August 17, 2016

Real Estate Indicators from HFF Director Ben Sayles and Robert Butler of HFF's Boston office.

Each generation will reap what the former generation has sown.

– Chinese proverb

Foreign investment in United States real estate is a trend that dates as far back as 1792, when a syndication of Dutch bankers purchased 3.25 million acres in western New York under the name of the Holland Land Company. Throughout modern history, different groups have been particularly active, be it the Japanese in the late 1980s, the Germans in the late 1990s or Middle Eastern investors in the early 2000s. Today, Chinese investors, both private and institutional, are particularly active. So why is Chinese capital so actively targeting the United States and specifically, where is it going?

Why the United States?

Before we can understand how Chinese capital is being deployed, we must first understand why Chinese investors are focusing on the United States.

  • Massive Wealth Creation:  Until recently, the Chinese economy was experiencing double-digit annual gross domestic product (GDP) increases. Be it manufacturing or real estate, business owners have been able to take the most advantage of that rapid expansion. To put a finer point on it, CNBC reported earlier this year that there are now more billionaires in China than there are in the U.S. (568 versus 535).
  • Slowing Chinese Economy:  Recently, this unprecedented growth started to wane. Currently, nominal GDP is projected to be 6.7 percent. While globally still extremely strong, this is off the average annual growth rates of past decades, which averaged 9.9 percent in the 1990s and 10.3 percent in the 2000s.
  • Safe Haven:  Concerned about future growth prospects, Chinese investors increasingly look abroad for safer havens. They flock to Western countries with strong property rights, rule of law and historically stable economies. By purchasing fee simple real estate abroad denominated in a foreign currency, Chinese investors effectively seek a double hedge against investments at home. They protect themselves from a potential devaluation of the Chinese yuan and political instability in their part of the world. The wild swings in China’s stock market manifests the uncertainty of China’s economic future, further driving investors to greener pastures.

Why Now?

The desire to invest in more secure markets abroad comes at a time when the Chinese government is changing regulations to allow more outbound investment. This has spurred both private and institutional investment:

  • High-Net-Worth Capital:  Traditionally, the Chinese government has taken a very protectionist stance towards capital movements in and out of China. More recently, it has increased its efforts to globalize the Chinese yuan, colloquially known as the renminbi (RMB) or the "people’s currency."
  • Sovereign Wealth:  The regulations have also brought some clarity to the ability of China’s sovereign wealth fund, China Investment Corporation, (CIC) and other state-owned banks and insurance companies to invest in foreign real estate. CIC has indicated in numerous public announcements that investments into stable, cash-flowing properties abroad would be part of its strategy to pare down its holdings of U.S. Treasuries. Chinese holdings of U.S. debt has held steady at $1.2 trillion for 2016, according to the U.S. Treasury.
  • Insurance Companies:  For Chinese insurance companies, new provisions outlined by their regulatory agency, the China Insurance Regulatory Commission (CIRC), allow them now to invest up to 15 percent of assets in overseas investments including real estate. 

All of this has set the stage for the massive growth in Chinese investment in U.S. commercial real estate. According to a recent report from the Asia Society, direct capital inflows into the U.S. from China have totaled more than $17.1 billion in existing commercial buildings and at least $15 billion in new developments between 2010 and 2015. Half of the total amounts for the five-year span came in 2015 alone, representing 70 percent increases year-on-year. Chinese investment into U.S. real estate also comes in the form of residential homes ($93 billion), residential mortgage-backed securities ($207.9 billion held as of mid-2015) and real estate loans ($8 billion). As the report Breaking Ground: Chinese Investment in U.S. Real Estate points out, this is just the tip of the iceberg:

"We project that Chinese direct investment across existing U.S. commercial real estate assets and residential purchases, excluding new development projects, could total at least $218 billion, cumulatively, from 2016 through 2020. Beyond 2020, Chinese investment in U.S. real estate could accelerate further."

Commercial Real Estate Transactions

The most often-cited transaction of Chinese capital making splashes into U.S. real estate is Anbang Insurance Group’s $1.95 billion acquisition of the Waldorf Astoria in New York in early 2015. The majority of Chinese investment in U.S. commercial real estate was previously almost all in Los Angeles and New York City. More recently, Chinese companies have expanded into other gateway cities, including Boston, Miami, San Francisco, Seattle and Washington D.C. Three such transactions are detailed below:

  • Pierce Boston:  Samuels & Associates ultimately teamed up with Chinese developer Landsea and are underway on the 350-unit residential tower Pierce Boston. A portion of the investment for this project, which is located in Boston's Fenway neighborhood, comes in the form of EB-5 financing, an immigration program in which foreigners can receive a green card and path to citizenship in exchange for a $500,000 investment and proof of job creation. It would be surprising if all the EB-5 investors involved in this project did not come from China, as an estimated 90 percent of the participants of the program have been Chinese. Most telling, the Pierce Boston marketing website hosts information in both English and Chinese.
  • Pier 4:  Chinese investment has also struck in the red-hot Boston Seaport neighborhood. Ping An and China Life, two very large and influential insurance companies from China, have partnered with Tishman Speyer on the development of Pier 4. The Pier 4 site on the waterfront is being prepped for 350,000 square feet of new office space and 369 residential units. New York-based Tishman Speyer is reaping the benefits of doing projects on the China mainland, where it cultivated unmatched relationships and experience of doing joint ventures with Chinese firms.
  • EB-5 Financing:  On developments, EB-5 has stepped in as a critical form of mezzanine financing that can price at less than half the cost that developers would have to swallow from a traditional mezzanine lender. As construction lenders continue to check the amount of leverage they will accept on new developments, any project that is able to secure EB-5 financing as part of the capital stack have an inherent competitive advantage. Higher land basis and construction costs could result in EB-5 projects as the only way to get new development projects built.

Chinese Investment in U.S. Commercial Real Estate Outlook

While the deployment of Chinese capital is still in its early stages, the ultimate impact is sure to be game-changing. It will continue to touch every facet and product type of U.S. real estate. The wealth-preservation, defensive stance puts Chinese capital at a distinct advantage. Chinese investors understand that, while the prices they are willing to pay defy traditional metrics, their investment horizon and motivations are quite different from domestic players. Faced with headwinds at home, Chinese capital has moved quickly to seek shelter on foreign shores. If the impressive five-year growth of Chinese investment is any indication, we are only at the beginning of what could become one of the most influential sources of new capital flooding into U.S. commercial real estate.

About Ben Sayles

Ben Sayles is a director in the Boston office of HFF with more than 15 years of experience in commercial real estate. He is primarily responsible for investment sales transactions focusing on office, multi-housing and retail properties.

A graduate of Trinity College in Hartford, Connecticut, Mr. Sayles is the Director of the Commercial Brokers Association and an Executive Committee member of NAIOP Massachusetts. Additionally, he is active in several other notable commercial real estate professional groups, including Urban Land Institute and International Council of Shopping Centers.

About Robert Butler

Robert Butler is a real estate analyst in HFF's Boston office. He works with the debt and investment sales teams underwriting and preparing financing offering materials for all property types in the Boston market. Additionally, due to his fluency in Mandarin Chinese, he assists the increasing number of Chinese groups seeking investment opportunities in Boston.

Mr. Butler joined HFF in 2014. Prior to HFF, he had leasing and advisory roles for both JLL's office markets team in Beijing, China, and CBRE's retailer rep team in Chengdu, China. His responsibilities included helping Fortune 500 companies and Western brands expand their presence in China. Mr. Butler is a graduate of Wake Forest University, where he majored in business with minors in entrepreneurship and global trade and commerce.

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