Between Monday night and Tuesday morning, all of New York’s real estate got 2 percent costlier – at least for Chinese buyers.
In a stunning move, the Chinese government devalued its currency, the renminbi, by 1.9 percent against the dollar – the greatest single-day markdown since 1994. The move appears in part designed to curb capital outflows from China, which would give New York real estate, an industry that has benefitted from these outflows like few others, something to think about.
Understanding how the move could affect the Big Apple requires a gander at China’s macroeconomic environment: As China’s economy has slowed down over the past year, the People’s Bank of China, the country’s central bank, has repeatedly cut interest rates to boost lending and kick-start a struggling economy. But cutting interest rates also decreases returns on investments such as Chinese domestic bonds, and Chinese investors looking for yield have increasingly looked abroad. In the first half of the year, China saw net capital outflows of $162 billion, according to government data cited by The Wall Street Journal.
This is where New York comes into play. The local real estate market has long been one of the most attractive destinations for Chinese citizens looking to invest abroad.“There haven’t been many times in my career where there’s been such a noticeable influx of capital from a particular group of investors,” Ronald Sernau, co-chair of the real estate practice at the law firm Proskauer Rose, told The Real Deal in February.
As returns on Chinese investments have shrunk, that appeal has grown even more. Between the first quarter of 2014 and the first quarter of 2015, Chinese investors accounted for the largest share (26.6 percent) of foreign spending on Manhattan commercial real estate, dishing out $3.9 billion, according to brokerage NGKF.
Monday night’s devaluation does nothing to change the discrepancy between returns in China and in the U.S., but it does make U.S. real estate more expensive. This could discourage investment, said Terence Tang of Colliers International’s Singapore office. Individuals and companies earning in Yuan will have to reevaluate whether “returns on investments [in U.S. real estate] are sufficient to cover the additional cost,” he said.
Tang argued that New York real estate, which is already seen as expensive, will likely see a drop in Chinese spending. “There will be a slowdown,” he said, adding that second-tier U.S. cities offering higher returns could in turn see more Chinese interest.
Tang added that both apartment buyers and investors in income-generating commercial real estate who need to convert Yuan into dollars before buying here could be affected by the devaluation. But major companies like Greenland Holdings or Xinyuan Real Estate, which are listed on the Hong Kong and New York stock exchanges respectively would be more insulated, since these companies get a chunk of their capital by selling dollar-denominated bonds or stocks outside of China and are freed from the need to convert.
David Dollar, an economist at the Brookings Institution and former U.S. Treasury emissary to China, is less pessimistic. He said the two-percent devaluation itself will not have a big effect on Chinese investment in the U.S. “The question is where the currency goes from here,” he said. “There could start to be a devaluation trend but I do not think that is likely.”