When the Chinese government made a list of “negative” foreign investments that were attracting Chinese investment capital in 2016, the global real estate investing community held its breath. Would Chinese investors accelerate their buying in order to move their funds out of the country, or accede to their government’s wishes and bring their portfolios home? While the initial reaction appeared to be acceleration of international spending, in the first half of 2017 Chinese investors pulled a full 84 percent of their overseas property investments globally. By comparison, one in four London commercial property buyers were Chinese in 2016 according to Morgan Stanley analysts. Those same analysts blame this mass withdrawal for recent softness in the London property market in the residential sector.
To put some hard numbers with that soft market, Chinese investment in foreign property globally was estimated at $10.6 billion in 2016. Now, that estimate has dropped to $1.7 billion in 2017 and is projected to remain low in 2018. The pullback is likely to affect the commercial property sector more than residential, since China’s government has labeled hotels, cinema, media, and sports clubs “irrational” investments according to the Morgan Stanley data team. The shift has already affected U.S. markets as well, with Manhattan commercial real estate prices falling 55 percent year-over-year as of August 2017. Chinese investment capital accounted for nearly one-third of all transactions in Manhattan during the first half of 2017.
What Does it Mean?
What the Chinese pullback will mean for U.S. housing is yet to be seen. The United States stands to benefit from its status as the most popular destination for Chinese immigrants and students as well as corporate investments. The U.S. housing market, while highly susceptible to Chinese infusions of capital on a municipal scale, is more able to stand on its own than other international markets that may be less regional and diverse. For example, Chinese investment capital is concentrated largely in coastal cities like San Francisco, Los Angeles, and New York City. While these extremely hot markets might soften in a manner similar to London, interior metro areas are less likely to experience heavy, direct fallout from the withdrawal.
Furthermore, the United States real estate market has an “ace in the hole” when it comes to Chinese investment: A powerful, cash-flowing rental sector sustained by capitalism rather than government intervention. James Fisher, director at Hong Kong-based online real estate platform Spacious, observed recently that Chinese investors’ interests have shifted from “second homes and places to park cash to investments that generate rental income and appreciation.” Not only does the U.S. have plenty of rental housing investment opportunities available for Chinese investors looking abroad; the country also has a massive sector dedicated to the development and management of single-family rentals (SFR) as well as larger commercial spaces. Eighty-four percent is still an enormous hit to the reservoir of available capital, but U.S. markets will likely still attract the bulk of the remaining billions of dollars that Chinese investors place each year.
Carole Van Sickle Ellis is the editor-in-chief for Think Realty Magazine. You can reach her at cellis@thinkrealty.com.
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