Already Down, Chinese Investment in U.S. Real Estate Evaporates in First Quarter

As Sentiment Shifts, Chinese Conglomerates Became Sellers, Leaving Owner/Users as Buyers

2018 will see far fewer big deals involving Chinese buyers such as the $680 million deal to buy One Prudential Plaza in Chicago

Chinese investment in U.S. real estate continued to tank in the first quarter, dropping about 75% from the first quarter of last year.

The trend of declining outbound Chinese investment in real estate here has continued since the third quarter of last year when China's government deployed new outbound investment regulations restricting investments in foreign real estate and redirecting investors to different world destinations in Europe and Asia.

Most notably, that crackdown led in part to a China court verdict yesterday jailing the former high-flying head of troubled Anbang Insurance Group. He was sentenced to 18 years in prison for defrauding the company of more than $10 billion.

Wu Xiaohui was toppled as Anbang's head last year as China's Insurance Regulatory Commission took over the conglomerate in February. In doing so, it seized control of its U.S. properties including the 1,413-room Waldorf-Astoria Hotel in New York City purchased for $1.95 billion and another portfolio of 15 U.S. hotels bought for $5.5 billion.

As reduced levels of investment capital trickled into the U.S., the makeup of Chinese investors is also changing, as are the size of the deals.

First quarter deals involving Chinese buyers totaled $444 million down from $1.79 billion in the same period a year ago, according to CoStar data.

The sudden reversal in investment activity is largely sentiment driven, according to Cushman & Wakefield researchers in China.

"Times have changed dramatically, and given the recent rhetoric from both sides on trade we anticipate this will not bode well for a recovery in [Mainland Chinese real estate investment overseas] volumes in the near future," according to James Shepherd, managing director, research Greater China at Cushman & Wakefield.

The most notable deal concluded in the first quarter involved the sale of the land underneath 7 Bryant Park in Manhattan, which was purchased for $200 million by the Bank of China. The bank occupies the property on the land and owns the leasehold. As an occupant, the deal did not face the same level of Chinese government scrutiny, according to Cushman & Wakefield.

Other smaller deals in the first quarter included other user-buyers, Cushman & Wakefield noted.

That is a significant change from before the new restrictions took effect when Chinese investment conglomerates were the major buyers of U.S. properties spending hundreds of millions on a single deal. Those conglomerates have now become sellers.

For example, in February HNA Property Holding Group of China sold 1180 6th Ave. in New York in February for $305 million and 19 E. 64th St. in New York for $90 million.

Moreover, with the sentencing yesterday of Anbang's former head officer, the way may be cleared for China's Insurance Regulatory Commission to sell off Anbang's $7.5 billion in U.S. hotel properties.

"There has been great discussion of late around the tightening of regulations and the increasing number of dispositions of overseas assets by Chinese investors," Shepherd noted. "Our analysis of recent regulations suggests that the [Chinese] government still supports a 'go global' mantra. However, certain companies are looking to reduce debt levels or comply with close government scrutiny of their overseas dealings and are no doubt looking to restructure their global investment portfolios."

That does not mean deals will dry up altogether, Cushman & Wakefield noted.

In fact, the second quarter started off with one sale that surpassed the entire first quarter total.

The American arm of Wanxiang Group Cos., a Chinese multinational investor that also owns a global automotive components manufacturing company, is part of a joint venture with Chicago-based Sterling Bay and an affiliate of Blackstone Group that wrapped up their acquisition of the 2.3 million-square-foot Prudential Plaza office complex in downtown Chicago for $680 million.

Outside of a few such deals, Cushman & Wakefield expects Chinese overseas investment volumes into the U.S. will likely remain muted for the remainder of 2018 as long prevailing trade sentiment and tighter restrictions remain in place.