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U.S. CAPITAL INFLUX SURGES

Michel Rémy from Informa Canada* reports on how the U.S. has returned to being a prime target for foreign real estate capital, particularly from China.

August 2015

The U.S. market is taking on a likeness to the mighty Niagara Falls, as increasing billions of inbound foreign capital — primarily from China — surge over the crest and flow into major U.S. gateway cities.

The foreign capital influx has grown out of the U.S. recovery from the 2008-2009 financial crisis, when commercial real estate (CRE) values plummeted 40 to 50 percent. With American banks unable to cover loan losses in the financial crisis, funding for U.S. domestic investors dried up.

But over the last six years as the U.S. economy has recovered, CRE lending by U.S. banks has surpassed pre-crisis levels. According to numbers from the U.S. Federal Deposit Insurance Corporation (FDIC), last year CRE loans held by 6,680 FDIC-insured banks was USD 1.63 trillion compared to USD 1.6 trillion in the spring of 2007.

As domestic confidence returned and U.S. CRE investors began investing again, so has foreign CRE investment in the U.S. grown. In 2013, Canada was the number-one foreign investor in U.S. commercial properties, Avison Young noted in its 2014 outlook for North America.

Investors from other countries around the globe have followed Canada’s lead. Now, Asian investors have moved to the forefront as they pour billions into U.S. gateway cities.

“The Pacific United States receives a sizeable share of this investment, with property deals in Los Angeles, San Francisco and Hawaii alone adding up to USD 588 million during the first three quarters of 2014,” notes a February 2015 staff research report by the U.S.-China Economic and Security Review Commission (USCESRC).

Meanwhile, over the last two years, high-profile investments in New York City properties have totalled USD 9 billion. These include the purchase by Shanghai-based Fosun International Limited of Chase Manhattan Plaza for USD 725 million; acquisition of a stake in the General Motors building for USD 700 million by a group of Chinese investors; and the USD 2 billion sale of the famous Waldorf-Astoria Hotel to the Anbang Insurance Group of Beijing.

Rise of Chinese investors

According to the USCESRC report, Chinese investment in New York properties last year totalled more than USD 6.7 billion, with most transactions in Manhattan. California saw the second-highest investment in 2014, USD 1.6 billion. Most of that was in Los Angeles (USD 793 million) and San Francisco (USD 558 million).

New York-based Real Capital Analytics Inc. says Chinese investors have spent USD 39 billion in the six years between 2008 and 2014. In 2008, their total global real estate investment was just USD 92 million.

There has been a meteoric rise in outbound Chinese investment in little more than a decade. In 2002, Chinese investors’ spending on foreign acquisitions and greenfield projects was just USD 2.7 billion. By 2013, that had rocketed to USD 108 billion, 40 times the 2002 level.

Meanwhile, according to CBRE Group Inc., Chinese institutional investors could spend more than USD 150 billion on global real estate between 2013 and 2018. CBRE conservatively estimates real-estate allocation by Chinese investors increasing 2.5 to 3.5 per cent in the next five years.

The USCESRC notes that while the “nature and extent of Chinese real estate investment varies across the United States,” most transactions have been merger-and-acquisition transactions rather than greenfield investment.

Impact on the U.S. market

The influx of capital to date is contributing to a continued momentum in the commercial real estate sector across major U.S. markets. CBRE reports that the second quarter of this year was the twenty-first consecutive stable quarter in office vacancy rates since the 2008-09 recession. Vacancies reached their lowest rates since the third quarter of 2008.

Chinese investment in U.S. commercial properties has become so hot that Auction.com, a site geared to commercial and residential property investors, has formed a joint venture with Juwai.com, a similar Chinese-language site. Auction.com’s real estate sales will be open to Chinese-speaking users in mainland China and elsewhere.

The surge of Chinese investment capital into U.S. gateway markets is happening primarily because in October 2012, the Chinese Insurance Regulatory Commission relaxed restrictions on the country’s domestic insurance companies. They’re now allowed to invest in completed commercial properties in the gateway cities of 45 countries.

“According to industry professionals, the acquisition of stabilised assets like office buildings and hotels that require a longer-term commitment for rental incomes are seen as a ‘toe in the water’ — a gauge for the market, a way to become familiar with the local tax system and a basis for further development. This is especially true of Chinese developers investing in U.S. properties,” says the USCESRC in its research report.

As Chinese investment in U.S. properties has increased, so correspondingly has the number of EB-5 immigrant investor visa applications. Under the EB-5 programme, foreign investors who invest a minimum of USD 500,000 in projects in high-unemployment markets, or USD 1 million in other markets, can apply for an EB-5 immigrant investor visa.

According to Invest in the USA, the EB-05 industry trade group, EB-5 investors last year pumped USD 2.5 billion into projects in the U.S. There were 10,692 EB-5 applications filed in 2014, and Chinese investors accounted for 9,128, or 85 percent of them. That prompted the U.S. State Department to announce EB-5 visas would be “unavailable” for Chinese individuals until the next fiscal year. It’s the first time in the programme’s 24-year history that access to EB-5 visas has been blocked.

While most EB-5 visas have gone to Chinese individuals, U.S. State Department data shows that nationals from other countries are starting to step up their investment in U.S. properties. In 2014, Korea showed the second-highest number of EB-5 applications (225). As well, applications from the United Arab Emirates, Vietnam, Russia and Nigeria were all up from 2013.

Measures to spur investment

Federally in the U.S., more investment from overseas is being encouraged and proposed legislation would make it easier. On April 30, the Invest in America Coalition along with Republican congressman Kevin Brady of Texas and Democrat representative Joseph Crowley of New York, introduced the Real Estate and Investment and Jobs Act of 2015. The bipartisan legislation would reform the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), which has discouraged foreign inbound investment in U.S. commercial real estate for 35 years. The bill is before a congressional committee for review.

Some U.S. states are also actively promoting inbound investment. In California, there has been a coordinated effort this year between the CalAsian Chamber of Commerce, the Centers for International Trade Development and the United States Export Assistance Centers. They are hosting inbound investment missions in San Francisco, Fresno, Los Angeles, Orange County and San Diego. Investors from Chonqing, the largest city in southwestern China, are being matched with 75 California investment opportunities ranging from USD 20 million to USD 100 million.

*Informa Canada offers 20 real estate conferences on the North American real estate markets annually. For more details, visit www.realestateforums.com
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