By Asia Society
Chinese investment around the world surged over the past decade, expanding from an early focus on natural resource extraction and energy in developing countries to broader industries and advanced products and services in developed markets.
In 2014, Chinese outward foreign direct investment (FDI) totaled $116 billion, and approximately $18.1 billion flowed into the United States. In 2015, Chinese outward FDI totaled $118 billion, and $22.3 billion of it went to the United States. Still, China accounts for less than 10 percent of all FDI in the United States.
Chinese direct investment in US real estate,negligible until 2010, has grown dramatically and visibly. In 2015, China ranked third in US commercial real estate acquisition volume, trailing only Canada and Singapore, and tied with Norway.
Chinese developers are building multibillion-dollar projects in major cities. A Chinese insurance firm in 2015 bought the prized Waldorf Astoria hotel in New York City and struck a $6.5 billion deal for Strategic Hotels & Resorts in early 2016. Chinese investors dominate an immigrant investor program known as EB-5, and in 2015, China overtook Canada as the biggest foreign buyer of US homes.
This anecdotal portrait reveals the rapid and widespread entry of Chinese investors, as firms and individuals, into the US real estate market, but it also underscores how real estate differs from other investment sectors. It defies the traditional definition of FDI—ownership of at least a 10 percent stake in a US company—with a broad range of entry points. Buying a home, for example, does not have an analogue in the technology industry but is critical in painting a full picture of Chinese capital flows into the US real estate market.
In addition to the unique channels of real estate development and EB-5 capital, Chinese investors are increasing investment in portfolios of US assets through real estate investment trusts and private equity funds. These real estate investments come on top of China’s position as the biggest holder of mortgage-backed securities issued by US government-sponsored enterprises, such as Fannie Mae and Freddie Mac.
Like US Treasuries, these bonds are important investments for Chinese government finances, because they allow for recirculation of dollars gained by the trade imbalance, and for the US housing market, because they help ensure liquidity and mortgage rate stability. Chinese banks have also become major sources of debt capital in the US real estate market, primarily for US firms.
To fully understand the role of Chinese capital in the US real estate market, it is vital to look beyond direct investment. More than any foreign investor other than Canada, China stands out for the breadth, depth, and speed of its participation in the US real estate market. Rosen Consulting Group, on behalf of Asia Society, has examined this broad range of direct and indirect investment—including our own proprietary dataset—to produce the most comprehensive analysis to date of Chinese capital in US real estate.
Our findings are that from a modest base in 2010, China was the source in aggregate of at least $350 billion in US real estate holdings and investments by the end of 2015. This figure includes the direct purchase of real property and indirect investment through the purchase of agency mortgage backed securities and provision of debt financing. In addition, we estimate that Chinese entities managing US real estate operations and individual investment through vehicles including the EB-5 program may have created or sustained 200,000 jobs.
For commercial and residential real estate, China was an important source of capital as the US economy recovered from the recent financial crisis and Great Recession. Chinese investment in US real estate is a recent development with considerable growth potential. While it is not as politically sensitive and does not directly impact national security as does Chinese investment in US technology or telecommunications, real estate affects more people and communities and involves policy makers at multiple levels.
The investment flow has come into the United States through several channels:
- Residential property Between 2010 and 2015, Chinese buyers spent at least $93 billion on homes, including condominiums, for occupancy and investment. Spending rose at an annual rate of 20 percent and provided important demand in many local markets hit hard by the housing crisis. Chinese buyers paid substantially more, on average, per home than other international buyers because of their concentration in prime neighborhoods in California and New York.
- Commercial property Between 2010 and 2015, Chinese investors acquired at least $17.1 billion of existing office towers, hotels, and other commercial buildings, representing an annual growth rate of 70 percent. Half of that investment came in 2015 alone. The buyers were mainly large Chinese companies, including real estate firms and institutional investors.
- Development By the end of 2015, Chinese-funded projects under construction or planned totaled at least $15 billion. These range from multi-billion-dollar mixed-use projects in Los Angeles and the San Francisco Bay area to smaller-scale developments in secondary markets. These investors include Chinese developers, builders, and construction companies, some of which have set up US offices, creating local jobs for ongoing operations beyond the construction phase.
- EB-5 visa program Since 2010, Chinese nationals have been the most numerous investors in the EB-5 US visa program. The program enables a foreign national who invests at least $500,000 in projects that create a minimum of 10 jobs to receive a US visa and, on completion of the project, a green card for permanent residency. Detailed data on these investments and the actual number of jobs created are not generally available. But based on the minimum investment and job creation requirements, and assuming all investments are successful, Rosen Consulting Group estimates that since 2010, nearly 20,000 Chinese EB-5 investors have generated at least $9.5 billion of investment capital and contributed to the creation of 200,000 jobs.
- Residential mortgage-backed securities (RMBS): Chinese government entities began purchasing US government agency-backed RMBS in the early 2000s to diversify beyond US Treasuries. As of June 30, 2015, China held $207.9 billion in agency-backed mortgage bonds, more than any other country, according to preliminary US Department of the Treasury data. These holdings contribute to enhanced liquidity in the US housing finance market.
- Real estate loans: In recent years, Chinese banks increased activity in lending for real estate acquisitions, recapitalizations, and construction and development. The banks have amassed at least $8 billion in loans and have become a major source of funding for large commercial real estate projects. This loan portfolio extends beyond Chinese investors and projects with Chinese partners, as leading Chinese banks are active competitors with US and international banks and private sources of capital in the commercial property market. Residential mortgage lending by Chinese banks in the United States is more limited, but growing.
As in other industries, Chinese investment in overseas real estate is driven by a combination of policy reform, economic conditions, and opportunities for growth. Real estate offers a range of Chinese entities opportunities to diversify, whether in financial assets or real property. Real estate as an investment may be particularly attractive given the likelihood that the renminbi will weaken against the dollar and other global currencies. Chinese builders and developers are looking to expand into attractive global markets for the long term, as the Chinese economy slows, and to improve their competitiveness, global stature, and brand recognition. China’s growing financial sector—banks, insurance companies, and emerging private equity groups—are looking to invest globally as they accumulate capital from businesses and consumers in China. Similarly, high net-worth Chinese may also view overseas real estate as a means to provide international opportunities for their children, and a safe haven from political and economic uncertainty in China. Finally, real estate investment and ownership can potentially offer an expedited path to Chinese families who want US residency for work and educational opportunities.
China’s economic turbulence is expected to create a short-term speed bump for real estate investment overseas, including in the United States. In the near term, a 6- to 24-month temporary period of increased capital controls is likely—either formally via policy announcements or informally through administrative processing—until the Chinese currency can be realigned with that of global partners. However, this does not mean investment will cease during this period.
The long-term investment drivers remain: strong US demand for capital; a widening and deepening pool of Chinese investors, many of whom have not ventured into US real estate; increasing global appetite by Chinese developers and construction companies; a $1.6-trillion insurance industry that has become active overseas but invested just a fraction of funds available for real estate projects; and new Chinese investment vehicles, such as private equity funds, which have only recently become a factor in the US market.
Chinese direct investment across existing US commercial real estate assets and residential purchases, excluding new development projects, could total at least $218 billion, cumulatively from 2016 through 2020. In the short term, capital controls will likely slow individual purchases of US homes, the biggest component of Chinese real estate investment, and slow the growth rate of commercial property acquisitions. Chinese-backed development projects are likely to remain a substantial component of the commercial real estate market even as the economic cycle in the United States slows the overall pace of new development announcements. Beyond 2020, Chinese investment in US real estate could accelerate further.
Large capital flows, accelerating substantially in a short period of time, do not come without challenges in both countries. In the United States, several policy areas will need attention in the next several years:
- Rationalization of taxes affecting foreign investment The Foreign Investment in Real Property Tax Act, while perhaps well intentioned at inception, is an onerous structure that creates an impediment to international investors in real estate. Every effort should be made so that there is a level field for taxes on foreign investors regardless of their domicile.
- Continuation of the EB-5 program While the program was extended through the summer of 2016, renewal is by no means a certainty. It has been a successful bridge builder, bringing capital into the marketplace, growing or retaining jobs in the United States, and allowing Chinese citizens and families access to visas and residency. The EB-5 program will likely undergo reform, but it should not be altered so dramatically as to cut off access to international capital and immigration, including those from China.
- Continued implementation of existing security policy Offshore investors are understandably screened for security risks and legitimacy of capital sources. So far, such concerns have not been an impediment to investment in US property, as it has been in technology platforms, manufacturing firms, or natural resources extraction and processing. Any proposal to restrict US government occupancy, including government contractors, in foreign-owned buildings—as is being discussed in congressional circles—should be carefully monitored.
On the Chinese side, the issues that deserve attention include:
- Continued development of legal and financial rules to encourage private sector investment in overseas property Chinese companies and individuals can benefit themselves and the Chinese economy by diversifying assets globally. It is critical that China develop a robust domestic legal framework for foreign investment, as many countries expect reciprocal treatment of foreign investors. Likewise, reforms that reduce bureaucratic bottlenecks and expedite outward investment should continue.
- Enhanced transparency in capital ownership The United States and other global financial centers are increasingly monitoring the identities of foreign investors and business operations. While China is not the only country that raises concerns, Chinese businesses historically have been less open regarding origination of capital and ties to government or military officials. Continuing progress toward the transparency required by international agencies—many of which are welcoming China as a significant participant—will be an important step.
- Avoidance of capital controls China’s economic growth rate has slowed, and its currency is realigning with that of other major economies. Chinese concern over capital outflows is understandable, but a hard capital-control regime could negatively affect the financial institutions the government nurtured over the past two decades.
- Development of professional education on US real estate practices Many aspects from land approval procedures to partnership agreements to local market valuation practices differ in the United States, and efforts to support increased education and awareness will benefit Chinese investors—particularly smaller companies and individuals—as they play a greater role in the global investment community.
Read the full report here.
About the author: Asia Society is the leading educational organization dedicated to promoting mutual understanding and strengthening partnerships among peoples, leaders and institutions of Asia and the United States in a global context. Across the fields of arts, business, culture, education, and policy, the Society provides insight, generates ideas, and promotes collaboration to address present challenges and create a shared future.