Are we about to see a major pullback in Chinese capital inflows to the US real estate market? Our friend and prominent real estate attorney Bruce Stachenfeld shares his view from the front lines. Markets that have been buoyed by Chinese capital could be in for a rough ride.
My law firm is in NYC handling real estate transactions in the US that originate from counter-parties based all over the world. A bunch of these transactions depend on money coming in from China (debt or equity or other structure). It used to be there was always a degree of uncertainty about the viability of this capital, but this uncertainty was gradually diminishing as more Chinese players developed stature and reputation in the US.
However, there are some recent events that are hitting US real estate pertaining to the use of Chinese capital. I cannot say we are a canary in a coal mine, but as a law firm in the thick of deals in NYC and other places in the US, I have seen the following just in the past couple of weeks:
A China law firm that I have been dealing with regularly had a client planning on doing US deals. We were moving forward together until I received the following email:
“As you may know, recently China is facing to the emerging issues of increasing Chinese capital outflows and devaluation of the RMB. Therefore, the Chinese government has tightened the regulation policies on out-bound investments in recent days, especially the investments by Chinese [investment funds] in the form of partnership and investments into foreign real estate markets. This makes it difficult for the client to move forward with their US real estate projects. They are now under internal discussion and evaluation of the situations so we may have to wait for some time.”
A friend of mine in China who is very connected to the US and the Chinese real estate industries gave me the following quote. I respect him highly but he did not want attribution. He said:
“….. the open tap of Chinese money for US real estate was if not shut completely this week then it is now at best left a dripping faucet. The authorities may backtrack, or not fully implement the announced draconian controls, but the atmosphere has changed beyond recognition.”
A client of mine had its Chinese financial partner drop out of a deal due at the last minute due to the counter-parties China office overruling the New York Office, which had approved and strongly backed the deal.
There is much more going on as well, including the new Presidential administration, the sharp rise in interest rates, general volatility in the markets due to a possible belief that the up-turn in the US economy is getting long in the tooth, public statements from companies like Starwood that they are hitting the “pause button” on real estate acquisitions, stalled sales of luxury apartments in New York City, and much more.
As per prior Real Estate Philosopher articles, I do NOT make predictions about the future, except to state with certainty that neither I (nor anyone else) has a crystal ball; however, anecdotally it seems to be true that a fair number of investors in US real estate are indeed pulling back right now. And the China money spigot slowing to a trickle may have a deleterious effect on pricing, deal flow and other matters pertaining to US real estate transactions.
Of course, one party’s troubles is often another party’s opportunity; accordingly, potentially all of this may spell a chance to make advantageous US real estate investments for opportunistic real estate players. That is not of course a formal prediction but seems to be getting more likely every day.
One last point I will make about Chinese money is to distinguish between money that is “on-shore” (in mainland China) and money that is “off-shore” (outside of mainland China). If the money is “on-shore” that likely means that it will be a lot harder to have it show up in a US real estate deal. If it is already “off-shore” that likely means it will be a lot easier. I don’t have the skill-set to be able to dig much deeper here, but the foregoing is generally an accurate statement. So, if you are a US player working with the Chinese right now, this should be a threshold question that you might use to gauge the likelihood of the investment succeeding.
Finally, if you have anecdotes you would like to share, I would certainly appreciate learning as much as possible.
Here are links to some recent articles on this subject:
As the Managing Partner of Duval & Stachenfeld – a 70-lawyer law firm in mid-town NYC known as The Pure Play in Real Estate Law – I am inviting you to join The Real Estate Philosopher™. This will consist of my thoughts and also thoughts of friends and colleagues.
It will not be published in any traditional media – it will go only to friends of our firm. The purpose here is very simple – to put forth thoughts in the real estate world that are different, provocative, and challenging of accepted wisdom. Hopefully, nothing said here will be mainstream thinking.
You may be wondering how I am qualified to write on these topics since I am “just” a lawyer. However, I have an unusual place in the real estate world. As the managing partner of The Pure Play in Real Estate Law (one of the largest real estate law practices in NYC), I interact with an incredible number of real estate players. This ranges from small real estate shops with nothing but a gleam in their eyes, to some of the largest real estate institutions in the world, and everything in between. This gives me a unique and global perspective and allows me to act as an amateur philosopher in the real estate world. This has always been my hobby and it is what I love doing.
a.k.a The Real Estate Philosopher™
*Originally published by Duval & Stachenfeld