Chinese real estate investment in the US

December 2016 | FEATURE | FINANCE & INVESTMENT

Financier Worldwide Magazine

The US real estate market has long been an attractive destination for both domestic and overseas investors, the perception being that the industry helps facilitate financial success. In a recent survey by Better Homes and Gardens Real Estate, 96 percent of US real estate investors believed their decision to enter the market had generated significant financial rewards in recent years.

The attractiveness of the sector has been complimented by the relative stability it affords investors, offering the kind of concrete, saleable and income-producing assets which investors often hope to find in today’s global market. To underline this stability there is, in many circles, a belief that the wider US real estate market is set for a period of unprecedented growth. Over the next two years, the industry is expected to see record growth due to the strength of the US economy, low interest rates worldwide, and increasing demand from both US and global investors seeking yield, according to KPMG.

Furthermore, the appeal of US real estate has been boosted by a number of other external factors, including global volatility, the ongoing and complex process of Brexit and the economic changes gripping China.

China

Among the increasingly keen foreign investors, those emanating from China are perhaps most notable as they look abroad for their next investment choice. For a variety of reasons, many are targeting the US real estate space. Gateway US markets are proving particularly popular, with $5.5bn spent in New York alone during 2015, making it the most popular city for real estate investment, according to data from CBRE.

Though the US real estate market has long been a favourite of Chinese investors, in recent years it has begun to attract ever more capital. Under a mandate from Beijing, Chinese investors have targeted the US market in general, and New York, Los Angeles, San Francisco, Washington, DC, Chicago and Dallas in particular. These areas are hotbeds of Chinese outbound capital, with investment reaching an estimated $10bn in 2015, according to KPMG’s ‘China Inbound Investing in US Real Estate – 2016 Semi-Annual Update’ report. “The US market is very attractive to Chinese investors as they look to expand their global operations, diversify their portfolios by adding US assets, and establish information exchanges with US developers,” said Phil Marra, KPMG’s US real estate funds leader.

“A recent surge took Chinese investment in US real estate over the last five years past the $110bn mark.”

Another example of China’s burgeoning interest in the US is the $65.5bn deal which will see HNA Group continue its overseas acquisition spree of travel related assets by acquiring a 25 percent stake in Hilton Worldwide Holdings Inc. In April, it also agreed to acquire Carlson Hotels Inc and a majority stake in Rezidor Hotel Group AB, the owner of the Radisson brand of hotels. And HNA is by no means the only Chinese business active in hotel and travel industry M&A.

Split interests

Chinese interest in the market has been split between both residential and commercial interests over the last few years, according to a study from the Asia Society and Rosen Consulting Group. A recent surge took Chinese investment in US real estate over the last five years past the $110bn mark. The rich are investing in homes and luxury apartments. In 2015, China surpassed Canada to become the biggest foreign buyer of US residential properties, purchasing 33,000 homes, according to data from the National Association of Realtors (NAR). Chinese investors are also moving into funds that are acquiring or taking stakes in commercial developments.

The influx of Chinese capital into the US real estate space is showing little sign of slowing, particularly as the US economy continues to rebound. The national economy is expected to grow between 2 and 3.4 percent in the remaining quarters of 2016 and through 2017. This growth, alongside solid job creation and improving wage gains, should help to bolster the country’s commercial office space, further attracting inward investment.

Doing the deal

Those Chinese investors entering the US real estate space are encouraged to think about the logistics of such a move. Finding a strong local development partner or establishing a local presence with a local real estate team could help to deliver desired returns. Joint ventures can provide a foot in the door. Furthermore, Chinese investors are becoming more accustomed to ‘new’ types of investment vehicles, such as real estate investment trusts and private equity funds focused on real estate.

Looking ahead, it seems likely that the avalanche of Chinese investors tumbling into the US real estate space will continue. The UK’s Brexit vote may encourage them to turn away from the overheating London property market, with the US the most likely destination for additional capital.

There are, however, some clouds on the horizon. The state of the Chinese economy will need to be monitored, and capital controls implemented by the Chinese government may limit investment in the US. That said, this may be only the beginning of China’s push into overseas real estate investment.

Richard Summerfield