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Bullish Chinese Investment in the U.S. Commercial Real Estate Sector Experienced Correction in 2017

Findings in new Report from Cushman & Wakefield

Los Angeles CA— Speculation that Chinese investments into the U.S. were headed for a nosedive when China’s State Council implemented a framework regulating outbound investments in August 2017, have been founded, according to a new report from Cushman & Wakefield. The firm’s experts, however, have emphasized that Chinese capital will continue to be a force in U.S. markets.

The 2017 China – U.S. Inbound Investment Capital Watch report estimates a 55 per cent drop in Chinese investment into the U.S. commercial real estate in 2017 ($7.3 billion) compared to the country’s feverous buying spell in 2016 totaling $16.2 billion.

Total volume of deals over $1B was down 75 per cent year-over-year (YoY) in 2017. By contrast, the total volume of deals under $250M fell only 12 per cent. The investment drop, largely a result of stricter capital controls and regulations, resulted in China’s fall from being the U.S.’ no.1 investor to no. 3 with Canada having re-assumed the no.1 spot and Singapore as no. 2.

Los Angeles metro volumes were down just 1 per cent across all investors in 2017. Acquisitions by Chinese investors, however, declined 67 per cent YoY on the back of a 90 per cent decline in hotel volumes.

Meanwhile, office acquisitions rose to their highest annual level on record, except for the outlier year of 2014—despite CBD office transactions in the overall market declining 42 per cent YoY.

Industrial volumes were higher than in any year except 2015, while apartment volumes posted a new record.

While the directionality in each case is impressive, the overall volumes remain relatively small. In 2014, 2015 and 2016, Chinese investment in the Los Angeles metro was driven by discrete deals in office/retail, industrial and hotel property sectors, respectively. These types of deals were absent in 2017, and so last year’s activity is a better indicator of the more or less permanent flow of capital from China into the Los Angeles market. That flow is increasingly well-balanced across property types, is likely to grow in the future, and will likely again be punctuated by large deals as opportunities arise.

Notable Chinese deals in LA Metro 2017:

  • The Alhambra was bought by Elite International Investment in a JV with Future Land from AIG for $117 million.
  • The DoubleTree by Hilton Los Angeles was bought by Han’s Holdings Group form UBS for $115 million.

“Over the past 12 months we have experienced a significant transition of the type of capital we are interacting with from China for investments in Los Angeles. Previously the capital was primarily the large state controlled conglomerates, today, it is for the most part very high net worth individuals,” said Marc D. Renard, Executive Vice Chairman, Cushman & Wakefield, Capital Markets, Los Angeles.

New York City has been the largest recipient of Chinese investment into U.S. commercial real estate for many years but findings show momentum has eased. New York experienced a sharp deceleration in mega deal activity – a stray from the extremely high value transactions that were commonplace in 2016. The imposition of capital export restrictions during the course of the year, resulted in the cancellation of at least two $1B+ transactions.

In 2017, New York metro investment volume declined 32 per cent across all investors, while investment from China and Hong Kong was down 54 per cent. The decline in acquisitions was broad-based across property types. In dollar terms, hotel was the largest contributor to the decline as investments fell 80 per cent YoY.

Cushman & Wakefield’s New York-based, Executive Managing Director of Capital Markets, Janice Stanton, said, “Although Chinese investor activity has been dampened due to government policies on currency export, we believe that the acceleration of the US economy will continue to provide international investors with a compelling investment opportunity in 2018. And while New York City may witness some isolated Chinese dispositions in 2018 for political reasons, we believe that appetite will be quickly backfilled by other international players as New York remains a top destination for global capital.”

China achieved two spots in the overall Top 10 deals in the U.S. (Manhattan transactions) and has continued to eye New York, San Francisco, Los Angeles, Chicago, and Seattle for its major U.S. investment. More than three quarters of capital has continued to be deployed into these five markets. New York and San Francisco alone received two-thirds of every Chinese dollar.

Americas Head of Capital Markets Research at Cushman & Wakefield, David Bitner, said the report findings also indicated a healthy interest in industrial and office assets.

“Industrial volumes remain elevated compared to pre-2015 levels and we expect them to increase further. Office overall received 50 per cent of all Chinese capital in 2017,” Mr. Bitner said.

He added that the attractiveness of opportunities in other countries also contributed to the diminished capital flows into the U.S.

“In the real estate context, capital that might otherwise have been investment in the U.S. flowed into the U.K. and Hong Kong, taking advantage of a lower exchange rate and greater land availability for residential development respectively. These factors would have weighted on flows regardless of capital controls and so we cannot fully extrapolate the decline in flow forward. At the same time, it is increasingly clear that the composition of Chinese investors and the assets they seek are evolving,” Mr. Bitner said.

For the Cushman & Wakefield corresponding blog: China has pulled back; what brought us to this point – and where to now?

For the prior blog on China restrictions: China Formalizes Restrictions on Overseas Investment

About Cushman & Wakefield

Cushman & Wakefield is a leading global real estate services firm with 45,000 employees in more than 70 countries helping occupiers and investors optimize the value of their real estate. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $6 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.

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