"The Chinese are willing and able to deploy their unrivaled massif of excess capital in US real estate", according to Kurt Morgan Luedtke.
Chinese Outbound Investment in US Real Estate
Chinese Global Investment Strategy: Diversification
China’s ambition to emerge as an unequivocal superpower is no secret, however, the Communist Party of China (CPC) more often communicates this mission with international investment than with dialog. The Chinese recently began their enormous ‘One Road One Belt’ project that aims to resurrect the ancient and fabled Silk Road trade route at a projected cost of $1.0 trillion. The venture stretches all the way to East Africa where the Chinese have financed 90% of Kenya’s $4.0 billion 300-mile railway line and 70-85% of Djibouti and Ethiopia’s $4.2 billion 400-mile railway line.
To China’s dismay, political chaos has erupted in Kenya leaving seven people dead in the wake of the allegedly corrupt re-election of President Kenyatta on October 26th, 2017. On a continent chronically ravaged by political instability, it’s no stretch of the imagination to foresee China having some ROI issues.
Why on Earth is any of this relevant for a discussion focused on Chinese investment in US real estate? Precisely to provide supporting evidence that the Chinese are savvy investors covering the risk spectrum from low risk (US) to high risk (Africa). Having amassed $3.1 trillion in foreign exchange reserves as of October 2017, the Chinese are willing and able to deploy their unrivaled massif of excess capital in US real estate.
Chinese Investment: USA
Wall Street… depending on the audience is either the most glorious or notorious street in the United States. 23 Wall Street, otherwise known as ‘The Corner’, is an iconic neoclassical landmark constructed in 1913. The building had been owned and operated by JP Morgan & Co until China International Fund snapped it up in 2008. For those that do not understand the significance of a company with China in the name, any company incorporated in China with the word ‘China’ in its name is a state-owned enterprise.
‘The Corner’ example is far from unusual. Between Q2 ‘16 and Q2 ’17 the Chinese acquired 552 properties to the tune of $16.4 billion (see RCA citation) in hotspot major markets such as Los Angeles, Miami, New York City, San Francisco and Seattle. Anbang Insurance Group, which now owns the Waldorf Astoria in New York, led the Chinese charge with $5.5 billion in US acquisitions. Though Anbang is not a government owned entity, it’s important to note that Chinese companies don’t reach goliath status without the CPC’s bidding. HNA Group, another private Chinese investment group, funneled $3.21 billion into the US during the same period followed by China Life’s $2.5 billion. Given these staggering metrics, the fact that the Chinese have surpassed the US as the largest cross border real estate investor is no surprise.
Chinese Investment: Moving Forward
In aggregate, Chinese investment in US real estate declined 7% between H1 16’ and H1 ’17 (see RCA citation). This drop is the result of a larger phenomenon: Chinese transactions in the US have declined 65% on a nominal basis between August 2016 – August 2017. The roots of this are based amid efforts by the CPC to keep capital in China and efforts by the US government to block Chinese purchases due to “national security” concerns.
In addition, the RMB (Chinese currency) relative to the US Dollar depreciated by 13% between 2013 – 2016 which, according to Colliers International, resulted in aggressive acquisitions by the Chinese attempting to hedge inflationary risks by storing capital abroad. As the RMB’s depreciation is projected to slow moving into 2018, Chinese capital flows are expected to remain close to geographical home.
Considering this multi-faceted headwind, Chinese investment in US real estate has come to a head. It’s difficult to fathom a halt in outbound investment given China’s astronomical capital reserves, domestic concerns over a brooding financial crisis and need to deploy RMB capital for inflationary purposes. It’s not difficult, however, to foresee a temporary relative slowdown of Chinese investment in US real estate.
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