Once the Dust Settles

The 19th National Congress of China occurs every five years and introduces the most important political decisions, such as leadership reshuffle and sets the tone for economic and monetary policy making in the second largest economy of the world.

This week-long event concluded last month and we now turn our attention to how the decisions taken in China will impact commercial real estate markets in the U.S.

Outbound commercial real estate investment from China is projected to exceed its 2016 record, globally. China’s outbound investment totaled $27 billion in 2016. By the first half of 2017, it reached $25.6 billion–this includes a $13.2 billion purchase of EMEA logistics portfolio. Without the one-off transaction, it still grew 23% over last year.

Outbound activities had a sharp decline during the third quarter against the backdrop of the National Congress. American market noticed a 40% decline, year-over-year, in inbound commercial real estate investment from China by the third quarter. The primary destination of Chinese investors, particularly Sovereign Wealth Funds (CIC and SAFE) and state-owned enterprises, shifted to the EMEA region, in keeping with the government’s “Belt and Road” infrastructure initiative.

Capital control is another factor. Commercial real estate investment is somewhat neutral on the cross-border investment spectrum, neither encouraged like the R&D business nor discouraged like “irrational investment” on entertainment, sports and clubs. But Chinese regulators warned investors against overpaying for trophy assets (especially hotels) overseas in a form of capital flight. State Administration of Foreign Exchange conveyed earlier this year that the government would not take a step back into strict capital control amid the ongoing financial reform, but its priority was to maintain market stability and avoid systematic risk. We estimate that the capital control will be in place for another 18 months.

As expected, the financial reform moves forward. Liu He—a mastermind of China’s recent financial reform—was promoted during the October Congress and will continue to lead economic policy-making. He believes the government should monitor the financial market very closely. China’s central bank leaders hold a similar view while approaching debt issues.

The implemented capital control is not loosening anytime soon. That is, essentially, to stabilize the currency exchange rate and the overall economy. Dollar Yuan (USD/CNY) exchange rate has become more volatile since 2016 while remains under control. RMB movement is carefully monitored within the SDR basket—a point proved in 2016. China’s central bank raised foreign exchange reserves at mid-year, making it more stable.

In general, this supports continued activity among institutional buyers such as state-owned enterprises, sovereign wealth funds, developers and investment managers. If they have established global investment strategies, they will largely stay on track once the political dust settles.

By Wei Luo, Analyst, Americas Research, CBRE.