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Chinese exiting US real estate as Beijing directs money back to shore up economy

The Wall Street Journal. logo The Wall Street Journal. 1/29/2019 Esther Fung

Chinese net purchases of U.S. commercial real estate last year dwindled to their lowest level since 2012, as Beijing kept up the pressure on Chinese investors to bring cash home during a period of worsening economic growth.

Insurers, conglomerates and other investors from mainland China were net sellers of $854 million of U.S. commercial property in the fourth quarter, according to Real Capital Analytics. That marked the third-straight quarter Chinese investors sold more U.S. property than they bought, the first time ever these investors have been sellers for that long a stretch.

The selling during most of 2018 marked a powerful reversal from the previous five years, when Chinese investors went on a massive buying spree, often handily outbidding other investors for U.S. trophy properties. They spent tens of billions dollars on luxury hotels like the landmark Waldorf Astoria in New York, a nearly $1 billion skyscraper development in Chicago, and a glitzy residential project in Beverly Hills, Calif.

Now, many of China’s biggest overseas real-estate investors are unloading some of the same prized assets, or at least reducing their U.S. exposure by selling stakes to new partners.

The turnabout last year reflects an effort by the Chinese government to stabilize its currency, reduce corporate debt, and help arrest the country’s economic slowdown by clamping down on certain overseas investments. Some Chinese developers, now facing tighter credit conditions at home, have tried to raise money instead by selling some of their U.S. properties.

Simmering trade and political tension between Washington and Beijing has also made the U.S. a less hospitable place to invest for Chinese firms, analysts say.

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Chinese were net buyers of $2.63 billion of U.S. real estate in 2018, the lowest total in six years, according to Real Capital. China would have been a big net seller for the entire year if not for a $11.6 billion purchase of GLP, formerly Global Logistic Properties Ltd, made by a consortium of Chinese buyers a year ago.

Chinese have also been selling their U.S. homes while fewer new buyers are showing up. Home purchases by Chinese in the U.S. tumbled 4% from April 2017 to March 2018 compared with the same period a year earlier, according to the most recently available data from the National Association of Realtors. That sharp decline reflected higher home prices, a strengthening dollar and tensions between the U.S. and China, economists say.

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China’s pullback from the U.S. property market is the latest sign that slowing growth in the world’s second largest economy is reverberating across the globe, roiling financial markets and undercutting corporate earnings. China recently reported a 6.6% growth rate for 2018, the worst annual expansion since 1990 and a sharper slowdown than Beijing expected.

Chinese authorities aren’t likely to loosen capital controls anytime soon, and analysts expect Chinese investors to continue to dump U.S. real estate in 2019.

“They haven’t managed to stabilize anything, so the timeline is going to be extended,” said Arthur Margon, a partner at real-estate consulting firm Rosen Consulting Group, referring to China’s currency control policy.

China began investing heavily in the U.S. real-estate market a few years ago after Beijing loosened restrictions on foreign investment. Some Chinese investors were attracted to the stable returns in the U.S. property market and saw it as a way to diversify their holdings.

Yet some Chinese buyers seemed more interested in scooping up trophy properties that their new owners felt brought prestige, political clout and helped promote their brands for global expansion, analysts said. And while Chinese buyers never represented more than a fraction of the activity in any major U.S. city, the big checks they wrote helped push values higher in certain segments of the market.

“Without that big push from Chinese investors, the market doesn’t have that rocket-propelling fuel to it,” said Mr. Margon.

Anbang Insurance Group Co. paid the highest purchase price ever for a U.S. hotel with its $1.95 billion acquisition of New York’s Waldorf Astoria hotel in 2015. The owner is renovating the property and converting a number of hotel rooms into private residences.

But the insurer, now controlled by the Chinese government after its former chairman was detained and subsequently convicted on fraud and embezzlement charges, has placed another portfolio of luxury hotels in the U.S. for sale.

Other heavily indebted companies such as HNA Group and Dalian Wanda Group have also unloaded their properties in New York City, San Francisco, Minneapolis and Beverly Hills, Calif., after facing pressure from Beijing officials to rein in their aggressive expansion plans.

Brokers and bankers said most of these weren’t distressed sales. Even if the sellers sold for less than they bought, they likely still made a profit after converting proceeds to the weakened Chinese currency. The yuan has declined by around 12% against the dollar since the start of 2014.

Some Chinese investors are still interested in the U.S. real-estate market. But rather than pursuing soaring skyscrapers or luxury hotels, they have focused on more mundane  properties, such as warehouses and smaller retail buildings such as convenience stores that offer steadier returns.

China Life Insurance recently acquired an 80% stake in 10 shopping centers in places such as Marietta, Ga., and Charleston, S.C.. through a joint venture with Site Centers Corp. that valued the portfolio at around $607 million

While transactions above $1 billion now look like a thing of the past, there is still Chinese interest in real-estate projects selling for less than $30 million, said Xinyi McKinny, senior managing director of China Direct Investment at property consulting firm Cushman & Wakefield.

“Investors are more returns-driven versus before, when it was ‘I want to own the most expensive building in downtown New York or downtown San Francisco,’” she said.


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