By Jacob Bourne
In May the Asia Society and Rosen Consulting Group published Breaking Ground: Chinese Investment In U.S. Real Estate, to analyze the increasing trend of Chinese foreign direct investment in real estate in several major cities and regions in the U.S. Acceleration of investment in recent years is part of a greater reality, decades in the making, fueled by economic, social and environmental conditions in China along with favorable opportunities in parts of the U.S. Despite, or perhaps due to, the recent leveling off of China’s economic growth, investment in U.S. real estate continues to grow and is expanding to less saturated markets such as Seattle.
Recent acquisitions by Chinese developer, Create World America, signifies this ongoing phenomenon. The developer, in a recent transaction, purchased a Seattle property for $16.25 million and may be breaking ground on a 242 unit residential project this fall. Skip Whitney, Head of China Services for Kidder Matthews in San Francisco and a broker for the negotiations, views the cited Chinese economic downturn as exaggerated by certain media reports and that residential development by Chinese companies will continue to increase.
In China your high growth story is over—Chinese are coming to the U.S. to diversify
“Seattle has increasing opportunities while Bay Area opportunities are drying up,” said Whitney. “In the Bay Area there’s very limited opportunity for Chinese capital. Most transactions have been entitled and are in process. That will change when there’s a softening of the market. Everything’s pretty much developed in the Bay Area; that’s why so many people are moving up to Seattle, which is known as a gateway. I think there’s going to be ongoing interest because of diversification, wealth conservation and yield.”
Whitney expects the current trend of Chinese developers leaping at opportunities in Seattle to continue for the next year or so but that the focus will be predominantly multi-story residential as returns in the Seattle commercial market are not as robust as they are in the Bay Area relative to the similarly high cost of construction.
According to the Asia Society report, it’s the expansion into secondary markets like Seattle that show increased and more prolonged interest in U.S. real estate. Data from Rosen Consulting Group indicates that between 2010 and 2015, $194 million was spent in Chinese commercial real estate acquisition in the Seattle metropolitan area. This was the eighth highest by volume in the nation, with San Francisco at the third highest and Silicon Valley coming in at sixth.
In terms of overall foreign commercial real estate acquisition in the U.S., China was the third largest by volume in 2015 and also surpassed Canada as the largest foreign buyer of U.S. homes, which includes single-family homes, condos and townhomes.
Historically, Chinese investment has been spurred by health concerns caused by air and water pollution in China as well as the desire by many parents to send their children to U.S. universities. While these factors continue to drive investment, Chinese business entities have found that U.S. real estate provides greater financial diversification, which is crucial in restrained Chinese economic growth conditions.
“In China your high growth story is over—Chinese are coming to the U.S. to diversify,” offered Anton Qiu, Executive Managing Director of TRI Investment Advisors, based in San Francisco. “China has had a 30 year unprecedented boom in their own development. Back then they were not as interested in U.S. investment because there was a 20 to 30-percent return on investments in China, which was more attractive than in the U.S. Now, the Chinese market has reached a plateau and government policies have changed. With wealth accumulation, big corporations are looking to diversify. The recent market crash was a wake-up call. The excess Chinese capital needs to be diversified.”
Qiu views the Chinese market as overbuilt in terms of supply and excess inventory in real estate and manufacturing and mirrors a similar past growth pattern experienced by Hong Kong, Japan and Taiwan. He envisions real estate investment to continue in a more systematic fashion in the next five years, and though New York and California have been the primary gateways up until now, greater geographic diversification will ensue.
The Asia Society report emphasized the impact of the EB-5 program on Chinese real estate investment with Rosen Consulting Group estimates of $9.5 billion in investment capital and 200,000 jobs generated by Chinese visa program participants. The EB-5 program allows foreign investors to obtain permanent residency for investing at least $500,000 in projects that create at least 10 jobs. The program is up for legislative review this year, and the Asia Society report recommends its continuation.
“EB-5 will always be there, but the business investments are going to grow at a fast pace,” added Qiu.