Chinese investors were the single largest group of foreign investors in commercial real estate in the U.S. last year, with deal volumes reaching a record high of $19.2 billion, up 10% from $17.3 billion in 2015, according to a new report from Cushman Wakefield. Chinese investment made up about 29% of total foreign investment in U.S. commercial real estate, ahead of Canada, the second largest foreign investor, which invested $13.1 billion.
In a rush to diversify holdings and hedge against a slowing economy and depreciating yuan, Chinese investors have sought better returns overseas and become an important driver in U.S. commercial real estate. Much of their investment in the sector has been through mega deals. Most transactions in 2016, 62% to be exact, were over $1 billion.
Some of the largest deals were by Chinese insurance companies, which were allowed to invest up to 15% of their assets overseas starting in 2012. Between 2015 and 2016, more than half of all investments by Chinese investors were by Chinese life insurers. Angbang Insurance Group closed on most of its $6.5 billion acquisition of Strategic Hotels Resorts in September (Hotel del Coronado was removed from the deal due to security reasons, lowering the value by an estimated $1 billion) and China Life Insurance bought a portfolio of hotels from Starwood Capital Group for $2 billion in October.
The current wave of investments is likely only the tip of the iceberg. Only 1% of Chinese insurer assets are invested overseas and of that, only a fraction is invested in U.S. real estate. China’s insurance industry is valued at approximately $1.83 trillion, according to figures from the Chinese Insurance Regulatory Commission.
The east and west coasts have been the primary recipients of Chinese investments. That continued to be the trend last year with New York City receiving 46% of total Chinese investment, the San Francisco Bay Area getting 15%, Los Angeles 7%, Chicago 5% and Seattle 2%.
New York City, the main recipient of Chinese investment into commercial real estate, was home to many of the largest deals of the year. Of the ten largest transactions in 2016, half were in Manhattan and 63% of those deals were in office buildings.
In the San Francisco area, investment grew to $2.9 billion in 2015, up from $464 million in 2013, while in Los Angeles, investment stayed steady in 2016, down slightly from a high in 2014 when several mega deals raised the total.
In all, hotels and offices remained the most popular assets. Chinese investors poured $8.6 billion into U.S. hotels last year, up from $2.8 billion in 2015. Investment in offices similarly jumped to $7.5 billion in 2016, up from $3.5 billion in 2015. Meanwhile, investment in industrial properties has slowed down dramatically, totaling $859 million in 2016, down from $8.27 billion in 2015.
Though Chinese investment in the U.S. has been rising dramatically, some see that slowing this year due to new capital controls. Designed to stem capital outflows and preserve China’s massive dollar reserves, which prop up the yuan, the capital controls are slowing dealflow and making it more difficult for even state-owned enterprises to move money out of China.
Mergers and acquisitions more than $1 billion outside of a company’s core business are now banned. The Chinese government is also cracking down on large deals and there is some expectation that the CIRC will cut the 15% overseas investment limit to the low single digits for firms with weak solvency ratios. Though requiring paperwork for special clearance for deals is nothing new for Chinese companies doing investments overseas, that process is now expected to take longer.
As a result of the government capital outflow restrictions, growth will likely slow for the first three quarters of the year as Chinese regulators take longer to approve investments abroad, the report said. Despite this, the overall impact should be muted given that investors were aware of the pending restrictions and had time to take action to meet their goals.
“Chinese investors typically focus on long-term investment so this short-term impediment will be viewed as such – temporary. Traditionally, long-term capital gain is outweighed by the immediacy of short-term cash flow,” Xinyi McKinney, senior managing director overseeing China direct investment at Cushman Wakefield, wrote in a statement.