China stock swoon could boost US real estate

Chinese investors purchased $8.6 billion in U.S. commercial real estate assets in 2015, according to CBRE, a global real estate services and investment firm. That does not even include real estate development, in which Chinese are also investing in a very big way. China still ranks second behind Canada in this race, but it nearly quadrupled its play in just one year. As China's economy and stock market spiral, will that help or hurt U.S. real estate?

"Volatility from China is the new normal, and the sooner we get used to it the better. At the same time, a certain amount of volatility isn't all a bad thing as global instability often leads to more foreign capital flows to the safe havens, notably London and the U.S," said Spencer Levy, CBRE's head of research for the Americas.

Skyscrapers new york city, office buildings, corporate, corporate america
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The U.S. is now well-positioned to reel in foreign investors, thanks to recent changes in tax law. Last month, President Barack Obama signed into law a provision that waives taxes imposed on foreign pension funds under the 1980 Foreign Investment in Real Property Tax Act (FIRPTA). In addition, these funds can now buy up to 10 percent of a U.S. publicly traded REIT (Real Estate Investment Trust), without falling under FIRPTA; the limit had been 5 percent.

"The current volatility in China has underscored for Chinese investors the importance of diversifying their investments into the U.S. and elsewhere," said Sam Chandan, a professor at the Wharton School of the University of Pennsylvania. "It does, however, raise the possibility of a policy intervention on behalf of the Chinese government that will limit capital outflow and roll back some of the liberalization at least temporarily."

Bottom line: If China is not growing quickly, not creating a lot of capital, there is less money to export. China's gains have been a boon to the U.S. in both commercial and residential real estate during the recent U.S. recession.

While Chinese purchases of properties like the Waldorf Astoria hotel in New York City or the Standard Oil Building in San Francisco grabbed headlines, much of China's 2015 investment in U.S. real estate was focused on the warehouse sector. It even knocked the glitzier office sector out of first place.

"It has been rediscovered as an asset type generally, but the whole trend of merging industrial and retail is showing up in the investor base. You're seeing what went formerly into retail goes into industrial," said Levy. "Before, it didn't look as good on the cover of an annual report as an office building in Manhattan. Now it does."

Whatever the sector, Chinese investors are in it, both in purchasing properties large and small or developing new ones. The desire on the part of the Chinese is certainly there and growing; their ability to invest in the U.S. in 2016 remains to be seen.