MORE CHINESE MONEY COMING TO BUY US REAL ESTATE ?

Chinese U.S. Real Estate Demand Tip of the Iceberg

New study says Chinese buyers will spend $218 billion despite Beijing’s attempts to control capital outflows.

By        ABBY SCHULTZ       May 20, 2016

China’s efforts to stem capital flowing out of the country so its economy, and currency, stabilize, may dampen the fast-and-furious pace of investment in U.S. real estate. But as a new report from the Asia Society and Rosen Consulting Group predicts, China’s controls on this capital outflow only stand to temporarily slow -- and will hardly stop -- the tide of cash streaming to U.S. real estate.

By 2015, Chinese investors were the source of $350 billion into U.S. commercial and residential properties and investments, Rosen Consulting says. Even with tighter capital controls, direct investment into existing U.S. commercial and residential real estate alone in the next five years will reach $218 billion, accelerating through 2025 as China’s economy returns to equilibrium. More startling is Rosen Consulting’s figures don’t capture all the dollars coming from China to the U.S. through such means as partnerships, private equity funds and 

limited liability corporations.

Another crucial insight from the report: Chinese investment in U.S. property to date is the tip of the iceberg of what’s to come. This is true for institutional players, ranging from developers to insurance companies, but it’s also true for China’s wealthy.

The rich are buying homes and luxury apartments, but they’re also investing in funds and partnerships that are buying into commercial projects. An example is Ping An, the Chinese insurer, which is tapping China’s high-net-worth investors for an RMB private equity fund to finance U.S. residential projects in a joint venture with Pacific Eagle Real Estate Fund, the report says.

There are also uncounted smaller real estate investment projects funded by individuals who pool investors together to buy, say, a handful of budget hotels or several apartment units in a high-rise. “That’s going on way below the radar of what can be specifically tracked down and quantified and also from what most people see going on,” says Arthur Margon, partner at Rosen Consulting Group and an author of the report.

One reason U.S. real estate investment by China’s wealthy has only “scratched the surface” is common U.S.-style investing vehicles like real estate investment trusts and private equity funds focused on real estate are relatively new in China, Rosen Consulting says. Both avenues have potential to grow. Investing may also spike if the Chinese government opens its individual investor program allowing for foreign investment into U.S. REITs and other investment vehicles, the report says.

Certainly plenty of Chinese are buying U.S. property for themselves or family members, enough so that China blew by Canada last year as the biggest foreign buyer of U.S. residential properties, purchasing 33,000 homes, according to the National Association of Realtors. The actual number is probably far more as the identity of many investors using trusts and special vehicles to buy U.S. real estate isn’t known.

Home purchases by China’s rich could accelerate as buyers get more access to financing. Between 2013 and 2015, an average of 71% of Chinese home buyers paid for homes with cash, NAR reports. That’s in part because U.S. banks tightened lending criteria for foreign investors post financial crisis. Today some wholesale mortgage lenders are lending to Chinese buyers and Chinese banks with U.S. operations will lend to Chinese investors based on assets they hold in China, the report says.

A global push to expose tax evasion and money laundering by forcing owners of offshore companies to reveal who they are could mute buying enthusiasm, though. Many foreign investors use special purpose vehicles legally for tax and wealth planning, but they still may not want to be named. The U.S. government is piloting a program in Manhattan and Miami that requires foreign property buyers to reveal who they are if they pay all in cash or use a special corporation. If this catches on, some Chinese investors may say ‘forget it’, or they’ll wait until they have a better idea of how the rules will be implemented. “But the motivation to buy among lots and lots of people in China is strong,” Margon says.

Back in China, the government’s attempts to keep capital at home could also mute U.S. real estate buying. Chinese banks, for instance, are being asked to look for over-invoicing of exports, a common tactic for getting money out of China, while state-owned banks are on watching for “unusual transactions” that indicate friends and family are pooling together funds to buy real estate, the Asia Society report says. China limits foreign investment for most individuals to the equivalent of $50,000 a year.

Some big deals, like China’s Gemdale Properties’ high-profile partnership with Hines, a top-shelf global real estate firm, to redevelop Boston’s South Station are moving forward but “we are hearing other deals are happening much more slowly than they did two years ago,” Margon says.

But Rosen Consulting doesn’t expect brakes on capital outflows to last more than two years. That’s because China remains driven to be integral to the world’s global economy. “Our view is these global forces acting on Chinese financial services sector are long-term forces,” Margon says.