China’s love affair with U.S. property is still far from over
The slowdown in China’s economic growth has left the commodity and manufacturing sectors deeply wounded, with American businesses increasingly feeling the chill. Yet it hasn’t diminished Chinese demand for U.S. real estate, especially in New York.
“The yuan has fallen about 3.2 percent [against the greenback] so far. On the face of it, that’s not enough to hinder deals,” said Jim Costello, a senior vice president at Real Capital Analytics.
Chinese developers and lenders have stayed particularly busy in Manhattan this year, topping the list of gateway cities in the U.S. That includes Kuafu Properties, which has already snapped up five sites for luxury condominium projects in the past two years — its latest acquisition at 143–161 East 60th Street for $300 million, according to a press release by Cushman & Wakefield.
To date in 2015, Chinese real estate investment in Manhattan reached $4.4 billion, compared to $645 million in 2014, an analysis of commercial real estate data show.
While the need to diversify assets amid China’s turmoil is an obvious reason, industry watchers say interest rates are another major factor.
“Chinese developers will continue [to invest] in foreign markets because it’s still difficult for them to raise funds domestically,” said Andrew Polk, an economist at the Conference Board based in Beijing. “There’s still an interest rate differential between China and U.S., despite [that gap] has shrunk.”
Since November 2014, the Chinese government had slashed interest rates six times in a bid to shore up an ailing economy. A big chunk of that is driven by a sustained property slump and growing debt loads.
Shenzhen-based developer Kaisa Group Holdings raised the first red flag when it defaults on its dollar-denominated debt, Bloomberg Business first reported in April.
Glorious Property Holdings Ltd. has missed some loan repayments and fueled fear among offshore investors, but the company eventually cleared a $300 million bond due on Oct. 25, according to public filings.
Such domestic debt overhang casts uncertainty over the ability for borrowers to repay debt. As a result, banks do not want developers to become too loose and expansionist, making capital access difficult (especially for smaller developers) and leading to a slowdown in land acquisition.
Local real estate investment grew only 5 percent throughout the first half of 2015 compared to the same period last year. That number has averaged more than 20 percent from 2005 to 2013, according to China’s National Bureau of Statistics.
“Basically China wants a real estate correction to some extent,” Mr. Polk said. “They had to put administrative move to ensure that they’re not stimulating the part of the economy that they want to be slowing.”
The gradual liberalization of financial rules imposed on China, however, gave the country’s insurance industry a lift. In 2012, regulators eased rules for Chinese insurers to diversify their portfolio and be able to hedge against risks from local construction loans on housing developments.
Just last year, the China Insurance Regulatory Commission bumped up the limit for insurers’ real estate assets as part of their total assets to 30 percent. That opened up the door for insurers to deploy capital in the U.S., as evident in China Life Insurance Group Co.’s and Ping An Insurance Co.’s first investment overseas in Tishman Speyer’s mixed-use project in Boston’s Seaport District, according to the companies’ press release.
Another part of China’s key reform is to allow markets forces to determine its exchange rate, in a bid to secure an official reserve status by the International Monetary Fund. The People’s Bank of China has set a trading band of 2 percent above or below the daily fixing, though it jolted markets with a yuan devaluation this August.
“In order for China to keep its interest rate low, it has to allow further depreciation in the next 15 months,” Polk said.
As of December 9th, China’s yuan closed at 6.4378 per U.S. dollar on the mainland, hitting a four-year low. The PBOC has set a midpoint rate at 6.4236 before the market open on December 10th, its lowest level in more than four years.
While yuan devaluation makes overseas acquisitions and loan repayment more expensive for mainland borrowers, experts say this is not a game changer.
“Compared to other currencies, the changes in the value of the yuan versus the U.S. dollar have been relatively measured,” said Sam Chandan, founder and chief economist at Chandan Economics and a columnist for Commercial Observer. “At least at this point, institutional demand from China into the New York City market remains reasonably healthy.”
True to say, Chinese investors have been targeting gateway cities in the U.S. with high concentrations of Chinese American communities. They are also branching out to “secondary locations” amid growing concerns of aggressive property pricing.
More Chinese firms are eyeing risk situations that other investors have been ignoring, Mr. Costello said, citing a deal in Houston’s Galleria district.
Through its investment arm, CSCEC made its first U.S. purchase at Broadstone Post Oak apartments, a luxury multifamily property near the Galleria, according to a press release this May. CSCEC started as a state-owned enterprise and went public in 2009.
While all seems robust in the short run, a shift in Chinese investor sentiment might start to surface in data going forward.
“We’re not seeing a stronger desire but expressions of intent from Chinese investors with regards to potential [property] sales,” Mr. Chandan said. “That kind of adjustment in the market tends to happen slowly.”
One monkey wrench would be changes in government policies, though China’s push for yuan internationalization might lower such probability.
“To some degree you’re speculating on government policy, in terms of how much they allow financial liberalization versus pulling back,” Mr. Costello said. “I don’t think they’ll impose new controls on capital leaving the country. Their ultimate goal is to be included in the big kids table.”
Recently, China earned IMF’s green light to join its elite club of currencies. As the country is inching toward a more liberalized financial system and establish the RMB as a global reserve currency, experts say that will likely trump the impact of the slowdown in China’s economy.
“The U.S. real estate investment is a rainy day fund and hedge against both risks about the Chinese market slowdown but also uncertainty about fears of being swept up in the anti corruption campaign,” said Joseph Foudy, an economics professor at New York University. “Keeping a percentage of their net worth outside the country and safe is more important than a particular financial return on their real estate investment.”
