Increased Chinese Investment in US Commercial Real Estate
By James B. Heffernan On February 4, 2015
According to a recent NAIOP Massachusetts forum, Chinese foreign investment in U.S. commercial real estate has increased from $3 billion in 2013 to $6.6 billion in 2014. As a result, China is now only second to Canada in cross-border real estate investments. While traditionally focused on San Francisco and New York, Boston has started to become a major target for Chinese foreign investment.
The interest in Boston has to do with both national and local factors. Nationally, Chinese investors find the U.S. the most stable and secure venue for commercial real estate. As the U.S. pulls itself out of the Great Recession, Chinese investors hope to take advantage of favorable market conditions. Moreover, the Chinese government has relaxed restrictions on the flow of money out of the country. This, in addition to Chinese investors’ desire to diversify their assets, has lead to investment in both commercial and residential real estate. On the commercial real estate front, the investment has been diverse, from hotels and office buildings, to light industrial, to multifamily and mixed use developments.
At the local level, Boston’s stature internationally is rising. Many Chinese families send their children to Boston area colleges and universities. The area schools create a pipeline of Chinese engineers, scientists, and artists who add to the area pharmaceutical, medical, business, and creative industries. Additionally, combining the popularity of the EB-5 visa program and Massachusetts international reputation for quality primary and secondary education, Boston has become a top target for Chinese foreign investment. With the students come the parents and many of those are now able to travel to Boston more easily thanks to a direct flight from Beijing and a new direct flight between Boston and Hong Kong starting later this year. It appears that this trend will continue, given increased development of commercial real estate, increased and improving job growth, and the 2024 Olympic bid.
What Local Developers and Business Should Expect?
First and foremost, Chinese investors are looking to diversify their investments, both out of China and into different property types. Chinese investors are already well educated on property types and business models. They prefer real estate in general for its tangible value and stable returns. Where they need assistance is on geography and local legal, tax and other business practices. Brokers and other professionals doing business with Chinese investors need to take care in explaining the distinct geographical and cultural neighborhoods in the Boston area. Boston city limits are small relative to other major cities due to history. While an investor might want to “only invest in Boston”, she should be educated on the other strong communities that make up the greater metropolitan area of Boston.
Chinese investors are also looking for a “technology transfer” by partnering with local developers and local professionals. Local developers should expect an increase in Chinese investors interested in joint ventures for the first few transactions. Lawyers and accountants may also need to educate Chinese investors on the complex corporate and tax structures, in addition to IRS regulations concerning foreign ownership of real estate and possession of foreign bank accounts. Lenders need to advise them on interest rates, loan products in the US and the need for escrow accounts and other security. As a whole, Chinese investors are keenly aware of relationships – the Chinese word guanxi comes to mind - and desire to build long standing relationships with brokers, lenders, lawyers, developers and other professionals.
Finally, Chinese investment has increased in a large part thanks to the relaxing of the Chinese government’s policy on outbound investments and cash flow. This is a double-edged sword. On one hand, the current regulations slow the flow of money down, resulting in closing delays. On the other hand, this cash flow allows for simplified transactions. All parties to a transaction need to be patient and mindful that while most transactions will be cash deals, they may need more time than your typical cash-only purchase.
Chinese investors are sophisticated, patient, and wealthy. Barring changes in Chinese government policies, their growing investment in Boston commercial real estate should continue. Local professionals need to be aware of the new wave of investment, the reasons behind it and the expectations from it.
© 2015 by Rich May, P.C., James B. Heffernan. All rights reserved.
Disclaimer: This summary is provided for educational and informational purposes only and is not legal advice. Any specific questions about these topics should be directed to an attorney in our real estate practice group.
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