Chinese investment in US commercial real estate poised for comeback3 September 2021
Chinese investment into U.S. commercial real estate is, at its simplest, a tale of two cycles — and a really clear turning point. A few years back, Chinese capital sources were rampant across commercial-property investment deals. Data from Real Capital Analytics (RCA) put Chinese investors as the largest foreign investor group in the U.S. market as recently as 2016, amid a surge of overseas spending by players in the world’s most-populous country.
These activities, however, have been notoriously and heavily curtailed since then by the Chinese government’s external spending controls that were implemented in 2017. These measures led to much lower capital outflows — not only stateside but globally as well. Per RCA, investors from the Chinese mainland placed about $91 billion into income-producing properties in other nations between 2015 and 2017. After the capital controls went into effect, however, this torrent of funds was reduced to a comparative trickle of about $35 billion over the next three years.
The U.S., which had the largest volumes of Chinese-sourced transactions prior to the controls, predictably took the most substantial hit after they were put in place. Commercial property investment by Chinese players plummeted from a peak of $18 billion in 2016 to $727 million in 2019. China led all foreign sources of capital into the U.S. in 2016, backtracked to third the following year and tumbled all the way to 17th in 2019.
Undoubtedly, other factors led to the Chinese investment decline as well. Geopolitics, for example, played a part in hastening China’s retreat over the past few years. Consider the icy relationship China had with the U.S. during the Trump administration. The COVID-19 pandemic, too, contributed to a precipitous drop in investment deals last year, although China’s ranking among foreign sources into the U.S. actually improved to 13th place in 2020.
Funding sources that included Chinese participation were involved in only 12 U.S. property deals last year. The volume of these deals was slightly less than $640 million and comprised only 1.8% of all cross-border transactions by dollar volume. During the pandemic-impacted year, China was drowned out by far more active Asian neighbors such as South Korea ($5.2 billion in U.S. deal volume last year) and Singapore ($2.7 billion).
In the 12 months ending in second-quarter 2021, this still held true. South Korea ($4.2 billion in U.S. deals) and Singapore ($4.1 billion) remained far ahead of China ($820 million), according to RCA. As far as Asian sources, Bahrain ($983 million), Israel ($932 million) and Japan ($825 million) also superseded China in 2020.
Clearly, the current chapter of the Chinese cross-border story remains tied to its capital controls. As long as these measures are in effect — and RCA opined that they’re not going away anytime soon — Chinese investors remain effectively handicapped and the heights of their U.S. outlays in the mid-2010s will remain a distant memory.
Still, within the constraints of these controls, it’s worth noting that Chinese investors have been slightly more active of late. In the 12 months through Q2 2021, their transaction volume into the U.S. increased by 17% compared to the prior year. This surpassed each of the aforementioned Asian countries except for Singapore; the others, in fact, saw volumes drop by at least 10% year over year. Although this shift brings China nowhere near its historical investment peak, the uptick still bears mention.
It’s hard to say whether this upward movement portends anything moving forward. At the very least, however, analysts from multiple outlets have observed that Chinese investors appear to be looking to take advantage of the country’s relatively quick exit from the COVID-19 health crisis compared to other nations. There’s a lot of dry-powder capital in China, and even with government curbs in place, investors are eager to deploy. As the global recovery continues, investors from China may seek to take advantage of a window with less competition.