This week, TikTok, the viral video app, became the latest casualty in the conflict between China and the US. Chinese parent company ByteDance is said to be in talks to sell the app’s US operations to Microsoft to avoid further regulatory action by President Donald Trump.
The two superpowers have been sparring since trade tensions began in 2018 and the covid-19 pandemic has escalated their rift. That has created far-reaching consequences for US-based Chinese businesses and Chinese nationals studying in American universities, as well as those working in technology and other industries.
Out of the media glare, the implications have been severe for real estate, too. Put simply, these latest developments could well result in the complete withdrawal of one of the biggest, and once most acquisitive, sources of Asian capital.
Chinese investment into US real estate has fallen precipitously in recent years, due to prohibitions imposed by both countries. In the 12 months through Q1 2020, Chinese investment into US real estate dropped to $725 million, a 74 percent fall from the same period a year before, according to Real Capital Analytics. In 2018, China was the fourth-largest cross-border capital investor into the US. By Q1 2020, it dropped to 18th, lower than overseas investors like Turkey and Israel.
With so many unresolved geopolitical issues, Chinese investors will find it hard to reclaim their status as aggressive, cash-rich buyers of American trophy buildings. Some of the most high-profile spenders have been doing the opposite, in fact. This week, Chinese conglomerate Dalian Wanda Group agreed to sell its 90 percent stake in Chicago’s 101-storey Vista Tower for $270 million. The developer has now reportedly offloaded its entire overseas real estate portfolio.
Chinese insurance companies have been scaling back overseas investments since capital controls began in 2016. But others remained active. Chinese asset managers were still permitted to acquire US senior-housing and healthcare assets, as such expertise would help in developing similar projects in China. Chinese developers were also still building luxury residential projects to cater to the growing number of Chinese nationals moving to the US through the EB-5 immigrant investor program. The latter, though, faces a potential fraud investigation, given most EB-5 visas have gone to Chinese-born investors.
Evidence of how the US-China decoupling is impacting M&A and other transaction activity is mounting. In 2019, Chinese firms only filed 25 transaction notices for a Committee on Foreign Investment in the United States review, a 50 percent drop from notices filed in 2018. PERE heard from law firm Kirkland & Ellis this week how this year has been the first since 2011 that transactions involving Chinese buyers were not the largest category of notices filed with the committee. That number could reduce further this year, given political frictions as well as reduced cross-border investments due to travel bans and lockdowns.
The outlook for Chinese investments in the US is undeniably grim. But the implications for US managers remain mixed – at least in the short term. Certainly, managers that frequently partnered with Chinese capital, or sold to them at premium prices, will need to switch to less politically sensitive capital sources. Those with ample opportunistic dry powder, however, are strategically positioned to benefit if more Chinese firms offload their real estate portfolios in the country. China’s Anbang Insurance Group’s $5.8 billion sale of its US hotels portfolio to South Korea’s Mirae Asset Global Investments was reportedly terminated in May, for example. The current environment increases the chances of a US takeover when the assets are, inevitably, remarketed for sale.
US capital buying back US real estate assets is one outcome of current geopolitics. That stage has a natural shelf-life though, and, should be seen just an epilogue of a saga in the sector that, as in other financial markets, has ended in separation.
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