For real estate investors, much is at stake in US-China trade talks

In the eyes of global capital providers, a resolution to the trade dispute between the world’s two largest economies would eliminate a top risk factor in US real estate.

Chinese vice premier Liu He is in Washington, DC this week for the latest round of trade negotiations with US officials. Both sides appear optimistic that an end to the year-long trade war is within reach.

If the impasse is resolved in the coming days or weeks, global real estate investors should be pleased with the outcome regardless of whether the White House can compel China to buy more US goods. A continued stalemate, on the other hand, could be cause for concern.

The tariff tit for tat has had little impact on actual investment activity in the US real estate market thus far. In fact, cross-border investment in real estate increased substantially from $64.5 billion in 2017 to more than $95 billion last year, according to data provider Real Capital Analytics.

However, the uncertainty the trade war brings has started to erode investor confidence. According to a survey of global real estate investors released this week by AFIRE, an association representing foreign investors in US real estate, 13 percent of those polled felt trade disputes posed the greatest risk of triggering a downturn in the US, while 16 percent cited geopolitical risks or conflicts as their biggest concern. These two factors were behind only rising interest rates as the top risks affecting US real estate in the eyes of investors. These unknowns make it difficult for investors to underwrite risk and feel bullish about long-term commitments in US real estate.

Indeed, nearly 80 percent of investors told AFIRE they believed ongoing trade disputes would be problematic for cross-border commitments in 2019. Roughly half of those respondents said tariffs have already affected their investment activities in the US.

These sentiments should not be taken lightly. Stability is the bedrock of real estate investment and the world’s two biggest economies butting heads does little to inspire confidence.

While investors have some concerns about construction pricing and cost of materials, “the biggest issue is the sense of uncertainty these types of trade disputes create in the market,” Gunnar Branson, AFIRE’s chief executive, told PERE this week.

Once a trade-war truce is reached, there is little reason to believe Chinese real estate investment will return to its 2016 peak, when its $19.8 billion of transactions accounted for a quarter of foreign investment in US real estate. The Chinese government’s crackdown on outbound capital diminished investment levels to $6.7 billion in 2017 and $6.4 billion in 2018, according to RCA.

Branson said this trend is likely to continue for the foreseeable future but that is not inherently problematic. A sound economy and solid fundamentals have most investors feeling bullish on the US market overall, according to AFIRE’s survey. Even without aggressive Chinese investors, US real estate saw more than $450 billion in total acquisitions in 2017 as well as 2018, according to CBRE. This year is expected to see a similar transaction volume.

Returning to pre-trade war relations with China therefore is not necessary for the US real estate market to continue capitalizing on current investor demand. However, a stable dynamic between the two economic superpowers would go a long way toward bolstering confidence among the real estate investors of the world. Anything to reduce uncertainty in the world’s largest property market will certainly be welcomed.

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