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China's investors find safe haven in American real estate

The sudden collapse in the Shanghai Composite (000001.SS) and the devaluation of the yuan in the past month have led some to worry that it could cause trouble for the U.S. real estate. But those who follow the market closely see potential capital flows from the turmoil in China to the relative safety of American property.

“There’s a fear that Chinese buyers, who have been such a market-maker in parts of the United States, may pull back,” said economist Jim Costello of Real Capital Analytics. “Those fears are a little unfounded.”

Worldwide in the last 12 months, Chinese investors bought $21.1 billion in commercial real estate – income-producing properties priced above $2.5 million – according to data compiled by Real Capital Analytics. Nearly $5.9 billion was invested in the United States, with the lion’s share – $4.5 billion – going to Manhattan.

During that period, the overall U.S. commercial real estate market was $459 billion. Foreign nationals bought $62.1 billion of those properties, with $19.7 billion from Europeans and $18.8 billion from Asian buyers. Canadians were the largest buyers of American income-producing real estate, with new investments totaling $13.2 billion.

High profile acquisitions by Chinese buyers of Manhattan landmark properties have been likened to that of another Asian powerhouse – Japan in the late 1980s.

When China’s Anbang Insurance Group bought the Waldorf-Astoria hotel late last year for $1.95 billion, some heard echoes of 1989. Japanese stocks were trading at record high when the country’s Mitsubishi Estate Company bought a majority interest in Rockefeller Center. In 1995, with the Nikkei (^N225) falling to half of its 1989 record highs, Mitsubishi walked away from the New York icon, losing nearly $2 billion in process.

But what’s driving Chinese investors now is very different from what drove Japanese investors in the ‘80s, maintains Costello.

“There’s a fear that Chinese investors may have to retrench in the same way that Japanese investors did,” he said “The fundamental forces that drove the Japanese investors to those decisions are different than what the Chinese investors are doing. The Japanese investors already had a global presence to a large degree. They had well-established financial markets, well-established portfolios. A lot of these Chinese investors have portfolios that they really need to diversify quickly to high-quality yield-driven investments around the world. It’s not the kind of thing where they’ll be able to pull back very quickly.”

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Commercial real estate isn’t the only type of property seeing large inflows of Chinese money. The country’s investors have also been active in the residential realty. They bought $28.6 billion in American residences, accounting for 28% of all foreign purchases by dollar volume, according to data from the National Association of Realtors. The homes they acquired tended to be on the luxury side; the average house in the U.S. sold for $255,600 but Chinese buyers spent on average $831,800 for their American homes.

According to Jonathan Miller, president of appraisal firm Miller Samuel, the tumult in China may lead to even more money finding its way into American residential and commercial real estate.

“There are not a lot of investment vehicles in China,” said Miller. “You have the [Chinese] housing market, which is a pretty significant bubble. You have thousands of ghost cities that have been constructed. On top of that, you have a pretty volatile stock market situation. So there is some speculation that there actually will be outflow as a result of this and maybe that will end up in the U.S.”

Costello concurs with Miller, noting that China’s insurance companies have been allowed by their regulators to invest in foreign real estate only since 2012.

“Unless and until they have to cover losses at home, they’re not going to sell these properties,” said Costello. “They’re going to hold them for the long term.”

Chinese investors have to diversify their portfolios, he added. “It needs to go to assets that have a little less risk than they have been taking on in other places, and U.S. commercial real estate still fills that role.”

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