Just as a variety of factors came together a few years ago to kickstart China’s rise in U.S. commercial real estate investments, a perfect storm of headwinds have combined to slow its roll in 2020.
The COVID-19 pandemic is not the only factor either, although that has certainly played a large role. In some respects, it’s a tale of two downturns.
The Great Recession and coinciding global financial crisis were a propellant for outbound Chinese investment, with the country’s capital sources largely shielded from the doldrums that rocked the West. Sensing pay dirt due to plunging prices for American and European assets, eager Chinese investors pounced, boosted by Beijing policies accommodating to outbound spending. In 2011, the application process for EB-5 visas — given to foreign investors who spend more than $500,000 on stateside job-producing projects — was streamlined, further encouraging deep-pocketed Chinese investors to look to U.S. real estate.
The Chinese government’s leniency began to cool in 2016 as it enacted capital controls that fueled concerns about the country’s overseas investments drying up. These anxieties were only further amplified as President Donald Trump escalated a war of words and tariffs with Beijing throughout his White House tenure. Although Chinese capital hasn’t vanished — as recently as 2018, China was the fourth-largest source of overseas capital into U.S. properties, according to Real Capital Analytics (RCA) — it has been ebbing for the past four years.
By last year, China had dropped to 16th among foreign sources of investment into the U.S., RCA reported. Chinese investment declined as 2019 wore on. In the third quarter of last year, for example, Bisnow reported that Chinese investors placed $1.41 billion into U.S. commercial real estate, a 75% year-over-year drop. And although the National Association of Realtors noted that China accounted for the largest share of foreign buyers among its commercial member agents in 2019, the dollar volume of these activities was far smaller than in recent years.
This year, of course, the coronavirus outbreak reared its ugly head, grinding transactions from China to a veritable halt during the first quarter. China’s status as the geographic source of COVID-19 hampered its investment outflows just as the Great Recession kneecapped the U.S. and Europe, while the virus further exposed and exacerbated downward domestic pressures on China’s financial stability.
From third-quarter 2019 through second-quarter 2020, Chinese companies have remained generally quiet, investing only $618.9 million into U.S. properties. That volume was down 65% year over year, ranked 18th among overseas funding sources, and was outpaced by Mexico, Saudi Arabia and Ireland — countries whose outbound investments were once dwarfed by Chinese capital.
And although no Chinese companies appear among RCA’s list of top 20 cross-border buyers since midyear 2019, a company with major Chinese ties, GLP, topped RCA’s ranking of foreign sellers of U.S. properties during that period. Over these four quarters, GLP jettisoned 787 properties, accounting for a volume in excess of $17 billion.
At this point, China seems to be at a crossroads. At least some of its investment fate seems tied to the upcoming U.S. presidential election and whether the current administration stays in power. Despite reeling heavily from the initial impact of COVID-19, China also was one of the first nations to enter recovery mode. Its opportunistic investors may have a head start on scooping up discounted American assets as the U.S. continues to struggle through its own post-virus reemergence.
China’s funding sources have shown an appetite in the past to capitalize on global financial weaknesses. Whether history will repeat itself remains to be seen. ●