Private Lender China’s Investment Slowdown

/Private Lender China’s Investment Slowdown

China’s Investment Slowdown

By |2019-04-15T17:33:05+00:00April 15th, 2019|Business Strategy|0 Comments

Will America’s real estate market be affected?

Over the past several years, Chinese investors were quite active in the U.S. real estate market. Both the commercial and the residential sectors benefited from the healthy appetite of Chinese institutional and individual investors. Early last year, however, the bloom began to come off that rose. Much of Chinese investing has now shifted to Europe and other parts of Asia.

You may have noticed some worrisome stories about the Chinese slowdown. The concern is that, along with rising interest rates, a continued shift of Chinese investment away from U.S. shores could trigger a crisis for the American real estate market. The good news is, there is no cause for that kind of alarm. Assuming China’s economy continues to struggle in 2019, it should simply contribute to what already appears to be a modest decline—in many cases a soft landing—for U.S. real estate prices.

China’s Appetite for U.S. Investment

Just a few years ago, China had a huge appetite for U.S. assets. The cycle began in 2014, when the Chinese government relaxed the rules governing cross-border investments. This relaxation was part of a concerted effort to expand Chinese investment overseas—not just in real estate, but also in manufacturing, technology and infrastructure—to promote its One Belt One Road strategy. Such investment was a means to increase Chinese influence in global and regional trade.

Less than a year later, China’s central bank shocked markets when it devalued its currency, the yuan, by nearly 4 percent to the U.S. dollar. Spooked by this, many Chinese investors started buying assets overseas to protect their wealth. The high-water mark for direct investment by Chinese investors into U.S. markets was 2016. Asset purchases and other investments across all sectors peaked at a stunning $46 billion.

For the U.S. real estate market, Chinese buyers became the top foreign purchasers, nudging Canadian buyers out of the top spot. In terms of residential real estate, more than two-thirds of Chinese buyers paid for property in cash, often above the asking price. Many bought homes purely as an investment vehicle, leaving them vacant but well maintained.

But, what goes up usually comes down. Starting in 2017, Chinese authorities reversed their loose policies on capital outflows to prevent the value of the Chinese yuan from dropping even further against other reserve currencies. The impact of this clampdown hit overseas real estate investing rather quickly. In 2017, U.S. commercial property purchases by Chinese investors declined by nearly 51 percent when compared to 2016. Residential purchases declined 18 percent. In addition to individual investors cooling on American real estate, the large institutional money pulled back too, including the most active buyers from 2016 like Anbang Insurance and Wanda Group.

In 2018, there was an even deeper cutback. In the first half of last year, Chinese investment in the U.S. was down an astonishing 90 percent compared to the same months in 2017. David Firestein, the founder of the China Public Policy Center at the University of Texas, called the drop “probably unprecedented” in an interview with The Week. During the third calendar quarter of 2018, Chinese conglomerates sold off more than $1 billion worth of commercial real estate in the U.S. while purchasing only $231 million, according to the Wall Street Journal.

China Investment

2019 Outlook

It’s a good bet that Chinese investment in U.S. real estate will continue to shrink in 2019, due to three big issues:

  1. Weaker Chinese Currency // By the end of 2018, the yuan was down another 5.7 percent against the U.S. dollar. This year it faces even more pressure from a combination of factors. These include the Chinese domestic monetary stimulus, a slowing growth rate, the trade war with the U.S. and a diminishing current-account surplus. Most analysts expect the yuan to devalue against the dollar by another 10-12 percent this year. This means that a U.S. property with a nominal purchase price of $500,000 today would cost a Chinese buyer between $540,000 and $545,000 after accounting for the yuan’s expected lower purchasing power. With property prices already peaked in many markets, continued yuan devaluation makes U.S. acquisitions far less attractive.
  2. Trump Administration Worries // The trade war currently playing out between the U.S. and Chinese governments is worrisome enough. But with far fewer headlines, regulatory agencies under this administration have become tougher too. Chief among these is the Committee on Foreign Investment in the United States (CFIUS), the U.S. regulatory body charged with policing foreign investment, which is much more hawkish. Several major deals involving Chinese investors were canceled due to CFIUS concerns. The combination of regulatory barriers and a harsher political spotlight has led many Chinese investors to conclude that the U.S. market is more trouble than it’s worth.
  3. Cooling Chinese Economy and Stock Market // Recent Chinese data have disappointed investors. Retail sales hit a 15-year low, industrial production dipped to a 3-year low, and auto and home sales are softening, despite new tax cuts designed to stimulate growth. The Chinese stock market began to chill last August after the Shanghai Composite lost 8.5 percent of its value in a single day. For the 12 months ending Feb. 4, 2019—the Chinese lunar calendar year—the Shanghai Composite Index was down 18 percent from the prior 12-month period, its worst plunge since 2008.

China Sneezes—Does America Catch a Cold?

Certainly China is the largest holder of U.S. debt, carrying more than $1.1 trillion in U.S. Treasurys as of last November. Right now, China needs liquidity to support its efforts to stabilize its economy. They trimmed their holdings of U.S. Treasurys by $63 billion year over year, down by more than 5 percent. That could have a knock-on effect on mortgage interest rates—the selling off of Treasurys puts more supply into the bond market, raising rates. At the macro level, the Federal Reserve is already planning two interest rate hikes for 2019, up from its current 2.5 percent benchmark funds rate. Continued increases in borrowing costs are probably going to halt or reverse the upward momentum of home prices.

With that said, a leveling off of home prices is not the same as a crisis. In this environment, the U.S. housing market is likely to experience a soft landing, not some scary contagion or crisis for the American economy. A reduction in the pace of home price appreciation is a good thing for buyers in markets that are already overheated. Price normalization may lift the number of deals in total.

The overall economy will also provide a tail wind to the housing market because workers are seeing wage gains, especially income earners in the lower 25th percentile of wages. That will boost demand for lower-priced homes. The inventory of homes for sale remains at historically low levels in comparison to the population, a result of the drought of new single-family housing starts in the years following the Great Recession. Finally, consumer spending is expected to remain strong throughout 2019, another reason for a soft landing.

So, while it bears watching how things play out in China, there’s no reason to worry about the American real estate market catching any kind of a cold from way across the Pacific. ∞

By |2019-04-15T17:33:05+00:00April 15th, 2019|Business Strategy|0 Comments

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