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Hit by Slowing Growth at Home, Chinese Investors Shift Billions to U.S. Real Estate

CRE Investments in U.S. Property by Chinese Investors Jumped More Than 900% Last Year
January 29, 2014
Chinese investors broke sales records in their drive to purchase U.S. commercial real estate in 2013, and analysts expect they will remain active in the global market, with untapped billions more to invest in coming years.

The U.S. real estate market attracted $3.1 billion of capital from China last year -- an increase of more than 900% from just $264 million invested in 2012, according Jones Lang LaSalle.

New York attracted the most money from China last year as Chinese investors poured $2.9 billion to buy property in the global capital, representing a considerable increase over the 2012 investment level of $200 million.

"There was a dramatic increase in the amount of Chinese investment in U.S. real estate in 2013, with transaction volumes more than tripling the previous high year,” said Rob Hielscher, managing director, Jones Lang LaSalle’s International Capital Group.

Migration for investment in overseas real estate markets has become a top choice for Chinese applicants, according to a report on China's capital migration status released by a Chinese think tank last week.

The Annual Report on Chinese International Migration 2014 found that a growing number of Chinese investors are rushing to go abroad in order to buy properties in places like North America.

The report, put out by the Center for China and Globalization and the Social Sciences Academic Press, noted that in 2011, China became the second-largest overseas property buyer in the United States.

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Facing Slower Growth Prospects, China Gives Green Light to Cross-Border Investment

The main reason for the influx may have more to do with what is happening inside China more than what is happening in the United States.

China's GDP (gross domestic product) has slowed dramatically from an average of 9.2% from 2008 to 2012 to about 7.7% in the last two years, and GDP is projected to drop to 6.7% over the next four years.

At the same time, the Chinese government has encouraged outbound investment with the introduction of a new ‘Go Global’ policy. This relaxation of former government-imposed restrictions is actively encouraging outbound investment across all sectors of the economy.

"This is a long term structural shift where Chinese capital will become a permanent and growing feature of the global real estate markets," noted Alistair Meadows, director and head of JLL’s International Capital Group in Asia Pacific.

Facing the prospects of slower economic growth in their own country, and with the approval by their government, Chinese investors increasingly are looking to invest some of their considerable real estate equity outside of their home country, according to Dan Cashdan, senior managing director and principal of HFF LLC.

"In 2013, some 18 investments totaling over $2 billion of equity were completed," said Cashdan, a guest speaker last week on a Deloitte & Touche LLP webinar on the expanding Chinese investment in U.S. commercial real estate. "Among these were large investments in Los Angeles, San Francisco and New York, including the acquisition of stable, core office buildings and investments into large-scale new developments."

Total Investment Impact Likely Under-Reported

The reported investment numbers alone don’t even begin to depict the scope of the inflow of Chinese money, Cashdan said. The sources of information for outbound capital flow comes from official Chinese government sources, which are not believed to take into account capital that first flowed to the Cayman Islands or other offshore money transfer points.

Nor do the private, fee-based data providers track residential investments or Chinese capital provided to private funds, which may then invest in U.S. commercial real estate, Cashdan explained.

He estimates that Chinese investors bought more than $8 billion of residential properties in 2012, and he assumes they acquired even more last year.

The office sector continues to dominate as the preferred CRE property type among Chinese investors who are active overseas, accounting for 85 percent of all transactions they made in 2013, according to Jones Lang LaSalle.

However, they are increasingly interested in retail and hotels, as well as residential land development.

For example, China’s largest real estate developer, China Vanke Co. Ltd, this week announced it has teamed up with U.S. real estate firm Tishman Speyer Properties to develop two residential towers in San Francisco.

It is the Chinese heavyweight investor’s first venture into the U.S. market.

The project will cost about $620 million with China Vanke contributing $175 million and Tishman Speyer $75 million, a source familiar with the deal told Reuters. Debt financing will cover the rest of the cost.

"After 30 years of development, our go-global strategy is ready to be implemented," Tan Huajie, Vanke's board secretary, told the China Daily. "And access to an open international capital market is necessary for such a strategy."

Steve Collins, International Director, Jones Lang LaSalle’s International Capital Group added, "We expect interest and activity from equity rich Chinese buyers in overseas real estate markets to continue to grow in 2014; we think it is possible that the total volume of spend by Chinese investors on commercial real estate outside of China could pass the $10 billion mark in 2014.”

Cashdan added that major segments of China’s investment community, insurance companies and a large percentage of its high net worth individuals, have not as of yet joined the overseas investment trend.

HFF research shows no U.S. property investments by Chinese insurance firms to date, although there are indications they might allocate up to $14.4 billion to overseas real estate in the future, with the U.S. likely to secure a large share.

In addition, HFF research suggests that $180 billion of private family investable assets may be allocated to overseas real estate markets but not exclusively in the U.S.

As one example, Cashdan noted that Zhang Xin, CEO of SOHO China, Beijing’s largest commercial real estate developer, and her family acquired a 40 percent stake in Manhattan's famous GM Building in June 2013 in a joint venture with Brazilian investment firm Safra, in a deal that values the trophy property at approximately $3.4 billion. Xin used family money to buy the building, not money from SOHO.

Overseas Investment Creating Opportunity for U.S. Firms

As more individual Chinese nationals begin investing here, U.S. firms are jumping in to help facilitate more deals.

Seattle-based North America Real Estate Investment Group Inc.(NAREIG) has partnered with Taikang Asset Management Co. Ltd. in Beijing to create the first QDII fund established to allow direct investment by Chinese investors into overseas real estate.

A Qualified Domestic Institutional Investor (also known as QDII), is a capital markets structure set up to allow financial institutions to invest in offshore markets such as securities and bonds -- and now, real estate.

In the past, it was illegal for Chinese individual investors, and extremely difficult for small- and medium-sized firms, to transfer more than $50,000 out of China. By creating a new channel for individual investors and small- and medium-sized firms to make overseas real estate acquisitions, the new QDII fund is expected to facilitate the already robust Chinese outbound real estate investment market.

"We're aiming to innovate. Our goal in forming this partnership is to make the real estate transaction process as fast and smooth as possible for everyone involved,” said Hunter Lin, the founder and CEO of NAREIG.

Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. A new issue is published Monday mornings.
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