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      • Double whammy for Chinese capital
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      • Chinese investors eyeing US real estate deals now face intensifying cross-border regulations not just in their home market, but also Stateside.
        By: Arshiya Khullar
        Published: 10 February 2017
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        Chinese institutional investors ploughed a cool $16.9 billion into 37 real estate deals in the US last year, according to data from research firm Rhodium Group.

        But listening to US lawyers and analysts this week, it is increasingly likely those figures will not be surpassed in 2017 – despite the appetite of Chinese investors for American bricks and mortar. As far as they are concerned, it is now clear that foreign investors, particularly those from China, are in the crosshairs of Donald Trump’s administration as it embarks on its ‘America First’ program of policy reforms.

        Specifically, greater regulatory scrutiny will come from the Committee on Foreign Investment in the United States (CFIUS), the inter-agency committee authorized to review transactions that could result in control of a US business by a foreign person. According to Mario Mancuso, head of the law firm Kirkland & Ellis, CFIUS is likely to focus greater attention on the real estate sector than before. And China, he cautioned, is in ‘category one’ for the committee because of the complicated political relationship between the two countries.

        Any headwinds experienced from the US government will expose Chinese investors to a double whammy given they would come at a time when state-owned and private companies already are facing overseas spending curbs from the Beijing government. In January, foreign-exchange reserves in China fell to their lowest point in six years to $2.9 trillion. That has prompted the implementation of measures by Chinese regulators to control capital outflows on outbound investments of more than $10 billion and mergers and acquisitions of over $1 billion, if they are not part of a company’s core business.

        Additional constraints are not just bad news for Chinese real estate investors, but Chinese investors in general. According to Rhodium, they spent a record $45.6 billion across different sectors in the US last year, triple what they invested in 2015 and a tenfold increase on five years ago.

        According to brokers PERE spoke with this week, it is all getting too much for some Chinese real estate investors. They tell of requests to freeze live transactions until at least domestic controls ease. We were reminded how Chinese investors already typically take comparatively longer to approve transactions than their American counterparts, and additional curbs by American regulators are, for some, a bridge too far.

        The threat of an extra regulatory roadblock from the US government is also a throwback to the first quarter of 2016, when the State Administration of Foreign Taxes temporarily stopped issuing fresh quotas to Chinese companies wanting to invest in foreign financial assets once they had exhausted their previous limit. Blackstone’s sale of a hotel in its Strategic Hotels & Resorts portfolio to the Chinese insurer Anbang was reportedly stopped because of CFIUS concerns. That deal was one of 10 involving Chinese investors spiked last year on account of regulatory issues, according to a report by Baker McKenzie this week.

        So what are Chinese investors to do? If they are not already, political risk and regulatory assessment plans should be introduced to ensure capacity and time are not wasted on transactions that might trip over domestic and American hurdles for starters. Considerations at the asset level should also sit alongside considerations on the personnel front. With Trump’s focus on creating more American jobs, CFIUS could link national security to economic and unemployment issues. Kirkland & Ellis says even foreign limited partners in commingled vehicles could be brought under the purview.

        Deals involving hospitality assets, such as the Waldorf Astoria, have already been submitted to the CFIUS for review in the past and data centers and industrial assets could be next in the line.

        They say money talks, but in the case of Chinese investors looking to deploy capital in the world’s most institutionalised property market, it is increasingly clear that regulatory voices talk louder.

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