Markets & Economy

What China’s ‘strict’ overseas investment controls mean for real estate

Transactions are slowing
  • The Chinese regulator is trying hard to stop the continuing weakening of the currency, but this bites into the foreign exchange reserves of the country.
  • The Chinese regulator is likely now looking to request a review of any overseas investment of more than $10 billion (USD) and foreign real estate investments by state-owned companies with deal value of more than $1 billion.
  • Individual Chinese investors are not impacted by this new directive.

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Chinese investors, both individuals and institutions, have been investing in the U.S. real estate market for years. New policies might make it more difficult for Chinese companies to do large overseas merger-and-acquisition deals and invest in the overseas real estate markets.

Over the past week, the media in Asia have been inundated with news of potential new policy changes to prevent further capital outflows.

It is certainly understandable that the Chinese government is acting more forcefully to stem the capital outflows. The Chinese currency (yuan) has been under pressure for more than a year.

The Chinese regulator is trying hard to stop the continuing weakening of the currency, but this bites into the foreign exchange reserves of the country. Mainland China’s foreign exchange reserves decreased $45.7 billion to $3.12 trillion in October.

As a result, according to the Wall Street Journal, the Chinese regulator is likely now looking to request a review of any overseas investment of more than $10 billion (USD) and foreign real estate investments by state-owned companies with a deal value of more than $1 billion.

This will affect many institutional investors (insurance companies) who had been becoming very aggressive in investing in overseas real estate assets.

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Commercial versus residential

The policy shift toward tighter controls around capital outflow is likely not good news for these cash-rich institutional Chinese investors who are eager to diversify and put their funds in trophy assets in cities such as New York, San Francisco and Los Angeles.

It is fair to say that large commercial real estate deals will take now much longer time to complete.

Individual Chinese investors are not impacted by this new directive.

The data continues to indicate a strong interest from Chinese nationals for U.S. real estate purchases. A survey done by Eastwestproperty.com immediately after the election indicates that 53 percent of Chinese property investors are now more likely to invest in the U.S. real estate market.

However, since January this year, our team in Shanghai has seen an increase in challenges for individual investors related to their money transfers out of China.

China has a policy in place that limits the amount of money that a Chinese individual can transfer out of the country to a maximum of $50,000 per year. Although this $50,000 limit has been in place for a while, the local regulator in China has become much more active this year in enforcing it.

What the regulation crack down means for U.S. agents

As such, research done by Eastwestproperty.com indicates a significantly longer time before deals with Chinese buyers can be closed; 60 percent of Chinese nationals are now searching longer than six months before they are able to buy that dream house in the US.

A major cause is the challenging process of moving funds to the U.S. The implication is that U.S. real estate agents need to assess whether the funds of the overseas Chinese buyer are already offshore or still locked up in China.

In conclusion, the stricter regulations will likely affect the number of transactions for commercial real estate agents in the U.S. Due to the size of the commercial real estate deals, the expected sales volume from China in 2017 will likely indicate a decline.

However, the number of inquiries of Chinese families is expected to continue to rise due to the growing demand from private investors looking for returns, families looking to send their children to study in the U.S, immigration, and, of course, a hedge against a falling yuan.

Sam Van Horebeek is a director at East-West Property Advisors, a U.S. real estate advisory firm based in China. You can follow on Facebook and Twitter.

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