The Real Deal New York

5 factors that could impact Chinese property investment in NYC

Deregulation, changes to the investor visa program and tax policy seen as playing a part

October 01, 2014 04:55PM
By Tom DiChristopher

Chinese investment in New York City real estate

Chinese investment in New York City real estate

As Chinese property developers and investors look to generate bigger profits by looking beyond their local markets, questions have arisen about what’s actually driving the influx of cash – and what could slow the flow.

By any yardstick, China’s overseas real estate investment has skyrocketed in the past few years. The numbers tell the tale. According to global real estate services company Colliers International, outbound property investment from the People’s Republic in 2008 was close to $70 million. In 2013, that number was closer to $16 billion. Chinese investment this year, through Aug. 31, has already passed $8.5 billion.

Will the deals keep coming or will Chinese investors pull back? Here are five things that could well determine the answer to that question.

Further easing of capital controls

While many large Chinese investors are still learning the U.S. real estate market, the government’s policy around foreign investment is paving the way for increased capital outflows.

All of the indications for the past year or year and a half have been that the government wants to continue to increase flows of capital from the country to investment outside of the country,” said Dan Cashdan, senior managing director at HFF Securities.

This year, Chinese agencies have streamlined and deregulated rules around outbound investment. In April, the National Development and Reform Commission upped the monetary threshold on outbound investments that are subject to government oversight. The old minimum: $30M. The new threshold: $1 billion

Beijing will further simplify regulations by no longer requiring cross-border investments of $100 million or more to be approved by the Ministry of Commerce. That change is slated to kick in on Oct. 6.

Much of China’s growth is driven by real estate, and property companies are big employers, noted Brendon Frye, senior manager at Colliers International in Hong Kong. Thus, there’s an incentive to let those companies go abroad, invest capital and diversify in order to keep China’s economic engine chugging along.

China is also trying to boost international recognition of its brands, including its colossal developers.

“The Chinese are very happy to see groups become international and be recognized in multiple countries,” said Frye “I’d be very surprised if you saw any sudden shift in that.”

A change in U.S. visa rules

Under the Immigrant Investor Program – more commonly known as EB-5 – the U.S. grants visas to foreigners who invest $1 million or more into companies and developments. The pathway has proven especially popular among the Chinese, who accounted for about 85 percent of the EB-5 visas issued this past fiscal year.

This summer, the State Department announced that it was on track to meet its limit of 10,000 EB-5 visas and promptly stopped issuing the visas to Chinese investors until Oct. 1.

But the pause is unlikely to dissuade Chinese visa seekers, experts said.

“The increased popularity of the EB-5 program is not going to diminish the interest of investors from China for a number of reasons,” said Stephen Yale-Loehr, a professor of immigration law at Cornell Law School.

At the top of the list: the backlog is not so bad compared with other visa categories. What’s more, EB-5 visas are not only issued to investors, but also their spouses and children. Historically, for every EB-5 visa issued to an investor, 1.5 family members also participate in the program, according to Chris Bentley, press secretary at the U.S. Citizenship and Immigration Services. That means only 4,000 and 4,500 of the visa holders produce investment money.

Some groups have lobbied President Obama to use executive authority to reinterpret the language of the EB-5 program so that all 10,000 slots would go to investors. If left to lawmakers, Congress will likely take up the matter when it grapples with the larger issue of immigration reform, said Yale-Loehr.

Amped up competition from other countries

The United States is not the only country offering residency-for-investment programs, and with demand surging for EB-5 visas, some worry that Chinese investors could opt to put their money elsewhere.

But since many investors seek EB-5 visas not for return on investment, but as a means of securing a foothold and planting their family in the United States, the popularity of the program is unlikely to wane.

“If the investor primarily wants a green card for their children, because they want their children to get an education, then the U.S. is still the top destination,” said Yale-Loehr.

Still, Australia has an excellent school system, Frye said, and has consequently attracted many Chinese with its Significant Investor Visa. That plan provides permanent visas to foreigners who put 5 million AUD ($4.4 million) in certain types of investments for four years.

Portugal is also attracting Chinese investors and developers with its Golden Visa. By making a relatively small investment – 500,000 euros on property or 1 million euros in cash – foreigners can obtain residency in Portugal, allowing them to travel throughout the European Union and opening the door to European universities.

The arrival of institutional investors

One big question hanging over the market: Will Chinese insurance companies and large institutional investors take advantage of deregulation and buy into New York?

So far, big deals by such investors have been few and far between. They include the sale of the Lloyd’s Building in London to life insurance giant Ping An and the 70-percent stake China Life Insurance took in a 1 million-square-foot Canary Wharf office tower.

According to Frye, however, these firms are getting on planes and scouting potential assets in the United States. Still, Chinese insurers remain highly bureaucratic and significant investments are likely years away, said Frye.

“These insurance companies have so much regulation and so many risk-averse people,” he said. “It will take them a while to get there.”

Lack of progress on simplifying the US tax code

One reason London’s property market is more attractive to foreign investors than New York’s is the United States’ arcane tax structure.

“The biggest concern in investing in the U.S. is not that it’s not a mature market or there’s not enough growth,” Frye said. “It’s the complexity of the tax structure.”

Many Chinese companies that consider investing in commercial property in the U.S. – but ultimately opt to go elsewhere – are swayed by concerns over tax structure. According to Frye, it would be difficult to simplify the U.S. tax system sufficiently to mitigate investors’ fears.

At present, much of the buying has been done by ultra high-net worth individuals and large, sophisticated developers like China Vanke and Greenland Holding Group. Those businesses have committed to learning the market, partnered with U.S. advisors and tax experts and established a permanent presence in New York.

  • Jasper Alistair

    There are many Chinese investors who currently operate ‘under the radar’, buying up thousands of distressed properties that have come onto the market due to the economic downturn. Until real statistical analysis of these ‘underground’ property investments is made, the true figures will remain unknown.

    Jasper Alistair
    Builder Negligence