The Chinese government has formalised its restrictions on foreign investments, which will curb investment in US real estate and require further scrutiny from relevant Chinese agencies on properties over $1 million.
“This restriction will cause a decrease in available capital and buyers, especially for high-end real estate, where, historically, transactions with astronomical prices had foreign buyers at play”, said Samantha Ahuja, Partner at Morris, Manning & Martin, LLP, an adviser to owners and developers of hotels, casinos, retail and shopping centres, and data centres. “With the current, natural down cycle in real estate, we will see more bid/ask gaps, a dearth of inventory as well as more sellers becoming hesitant to work with Chinese companies out of fear of regulatory hold ups.”
We speak with Samantha about how this will affect the US real estate market, the decrease in transactions using Chinese capital in real estate and why such restrictions were put in place.
What accounted towards the Chinese formalising these restrictions?
In late July of 2017, Chinese governmental agencies released their updated ‘list’ on restricted and permitted outbound investments. This release modified their previous release from 2015, which puts real estate over 1M and other property and hotels in the restricted category. Essentially and simply put, this will limit the ability of the Chinese to invest in real estate in the US (and other locations) and will require scrutiny and approval by the relevant Chinese agencies. These restrictions are stated to curb ‘irrational’ or ‘non-genuine’ investments, including acquisitions in real estate to entertainment.
The policies that are modified reflect the governments prevailing view on current economic, political and socioeconomic goals and policies. This includes curbing currency outflow and limiting risks in the financial sector. The type and number of high-end, trophy or other large commercial real estate purchases will now be subject to additional scrutiny and therefore very limited in nature, at least in the short term. While the measures do not address investments by Chinese insurance companies, it is expected that there may be additional guidelines or regulatory framework released at a later date for such companies.
This process of updating the guidelines and lists occurs every three years or so, and was part of a regular process undertaken by the Chinese governmental agencies.
What restrictions are now in place, that will have the most impact on clients?
In the immediate future, the restrictions on investments in real estate will impact the inflow of Chinese capital available for the acquisitions and development deals that we have been used to seeing over the past years. Further, some of the Chinese based companies have recently either announced their desire to sell some of the assets acquired over the last few years or otherwise begun to sell certain assets in the marketplace. While many of these company’s holdings span multiple asset classes, the impact will vary based on geographic location and timing of disposition. The impact within the marketplace will certainly vary based on location, asset class and the state of the asset (income producing/profitable, requires significant refurbishment or development etc).
What was the initial effect seen once these restrictions had been announced? What further changes are you expecting?
Initially there was a real decrease in transactions using Chinese capital with respect to real estate. That trend should continue into the future so long as such guidelines and restrictions are in place. However, the revised guidelines include those investments which are encouraged. Those investments, which align with the current political and socioeconomic goals of the Chinese government, include, without limitation to:
- Participation in oil, gas, renewable energy, mineral and other energy resources, exploration and development;
- Promotion of construction in infrastructure and overseas investment and development of the same in conjunction with the “One Belt and One Road Initiative”;
- Investments in high-tech and manufacturing industries, cooperation with foreign high-technology and advanced manufacturing enterprises; and,
- Promoting and enhancing China’s production capacity and quality for good to be exported.
What do you think 2018 will now look like following on from this?
With respect to real estate, a continued downturn in acquisitions, however, we may see greater inventory of notable assets if any of these companies look to dispose of their assets.