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US-bound Chinese capital hits 'speed bump'

Chinese investment in US real estate may slow for at least six months due to Chinese capital controls, according to a report from the Asia Society and Rosen Consulting Group.

The growth of Chinese investment in the US real estate market, which reached an all-time high last year, is set to slow, according to a report released Monday from the Asia Society and Rosen Consulting Group.

Inbound Chinese capital measured a record $8.5 billion in 2015, and the groups predicted about $58 billion will be deployed between 2016 and 2020.

However, as China balances how to keep interest rates low, support its currency and encourage foreign investment, the report, Breaking Ground: Chinese Investment in US Real Estate, raises concerns about the sustainability of Chinese investment in US real estate. The report forecasted a six-month to two-year “short-term speed bump” when increased capital controls, either formally through policy announcements or informally through administrative processing, will slow outbound capital. However, after 2020, Chinese investment in US real estate, both residentially and commercially, could accelerate again, according to the report.

The biggest risk for US real estate investment is and will continue to be the potential for capital controls in China, according to the report. These are not unfounded concerns: One New York-based lawyer told PERE that he advised a US-based firm all the way through a signed deal before Chinese regulators stepped in and, for unknown reasons, blocked the deal.

Cultural issues between Chinese investors and their Western counterparts have also traditionally been a stumbling block for Chinese investment, and the report notes both sides must take into account cultural differences. For example, the report said Chinese parties may not see a signed contract as final, or the US partner takes the lead role on decision-making and does not keep the counterparty informed of the deal.

Another concern focuses on how Chinese investors will respond to their first down cycle in the US, an issue set against a history of foreign investment fleeing the country during downturns. However, the report contended that Chinese investors are better equipped than their predecessors because they are investing with a long-term view, and because the Chinese government is less likely to allow investors to default than other governments.

At a Monday panel to discuss the report and trends relating to this theme, Kai-yan Lee, a managing director at Vanke Holdings, said some Chinese investors are motivated to invest in the US to understand how to approach such down cycles.

“The learning was a very important part of our motivation,” to come to the US, he said. “Those are values that matter to investors in addition to returns. We shouldn't overlook that component of Chinese investors coming here.”

The report also outlined several opportunities for US-bound Chinese capital. Core US commercial real estate, for example, will increasingly be an investment target for its stable, secure returns, particularly for insurers. However, with heated pricing in gateway markets, the report noted that secondary markets are becoming more attractive for seasoned Chinese investors. The report noted that many insurers, including China Pacific, the country's third-largest insurer, have yet to enter the US market, representing a major source of future investment.