Ride the Wave of Chinese Investment in U.S. Real Estate
Posted by Saurabh Mahajan, Assistant Manager, Real Estate, Deloitte Services LP, on May 7, 2014
Between January 2013 and March 2014, Chinese direct acquisitions of U.S. commercial real estate (CRE) totaled $5.8 billion — over twice the cumulative amount invested in the previous eight years.1 Consequently, China is now the second largest foreign investor, after Canada, with an eight-percent share of the total cross-border investments in U.S. CRE.2 Is this wave of Chinese investments short-term in nature? We don't think so.
These investments are primarily driven by a shift in the Chinese government's policy to promote outbound investments by domestic entities. Consequently, Chinese real estate investors are now looking for comparatively modest and stable returns by targeting mature and developed markets, such as the United States. Chinese investor preference for real estate as an asset class, and the rising immigration to the USA for business and/or education, are other reasons driving these investments.
The bulk of Chinese investment has been in globally known U.S. markets such as California and New York (Figure 1). From a property type perspective, office and multifamily are the preferred options, although there is a growing interest in mixed-use under development projects, particularly by Chinese developers. The current Chinese inflow can potentially reshape foreign property ownership in the United States, which traditionally has been dominated by Canadian and Australian investors.
Figure 1: Chinese investment in U.S. CRE (January 2005 - March 2014)
Click on the image to view larger one
Source: Real Capital Analytics (RCA) and Deloitte Center for Financial Services Analysis
What does it mean for the U.S. CRE players? Before we answer this question, let's examine the Chinese investor profile.
Currently, Chinese state-owned enterprises (SOEs), including large developers and high-net-worth investors (HNWIs), lead investments in U.S. CRE, across investor classes. However, we believe that the investor composition will likely diversify as the Chinese regulators gradually open up international investments by financial institutions such as banks and insurance companies. According to HFF Research, Chinese insurers can invest $14.4 billion in overseas real estate in the future, with the USA likely to secure a large share.3
Coming back to the question of value for U.S. CRE players, we believe they can forge mutually beneficial partnerships with Chinese investors and developers.
For one, Chinese investors can provide additional liquidity to reinvigorate development activity in the U.S. CRE markets. We have seen this in the case of a few transactions involving large Chinese developers. One such deal is the Chinese Greenland Group's joint venture agreement to codevelop and acquire a 70-percent share in Forest City Enterprises' Atlantic Yards project. Forest City, a U.S. developer, acknowledged that the fresh inflow of capital from Greenland will likely speed up the development of the project.4
Additionally, Chinese investors can play an important role in resolving distressed U.S. commercial real estate. According to Real Capital Analytics (RCA), four of the 15 largest Chinese property investments in the United States in the past two years have resolved distressed situations.
That said, Chinese investors likely face challenges such as a lack of knowledge of U.S. markets, regulations and entitlement processes. Consequently, they can consider forming partnerships with U.S. players to overcome these challenges and also derive tax efficiencies. According to Jeff Rubin, Partner, Deloitte Tax LLP, "investments through intermediate vehicles and structures can reduce the overall tax burden and eliminate the requirement to directly file U.S. income tax returns." U.S. property owners on their part need to gain a better understanding of potential Chinese investors and their investment objectives. Hence, it is important for both U.S. and Chinese players to conduct a thorough due diligence with a trusted advisor to prevent the loss of time and money that could result from a potential deal fall-out, making it instead a likely win-win situation.
What do you think? Are you looking for a deeper assessment of the rising investor interest from China? If yes, please look out for our upcoming point of view: Chinese Investment in U.S. Real Estate — Collaborate & Benefit!, wherein we discuss the Chinese investment pattern in detail, the potential approaches for them to invest in U.S. real estate, and opportunities for U.S. CRE players.
1Real Capital Analytics, February 2014.
3Mark Heschmeyer, "Hit by Slowing Growth at Home, Chinese Investors Shift Billions to U.S. Real Estate," CoStar, January 29, 2014, http://www.costar.com/News/Article/Hit-by-Slowing-Growth-at-Home-Chinese-Investors-Shift-Billions-to-US-Real-Estate/156777.
4Eliot Brown, "Chinese Builder Charges Into Brooklyn," Wall Street Journal, October 11, 2013, http://online.wsj.com/news/articles/SB10001424052702304520704579127822887005590.