Foreign investors were net sellers of U.S. commercial real estate last year for the first time since 2012, posing a fresh setback for a market that is already showing signs of strain.
Chinese were by far the biggest foreign sellers of U.S. office towers, retail centers, hotels and other commercial property last year, unloading $20 billion more than they bought, according to data from Real Capital Analytics.
Insurers and other big investors in China have been under pressure from Beijing to bring money back home, reversing their multiyear buying spree of U.S. properties.
But investors from Japan, Canada, the U.K. and elsewhere were also active sellers last year, exiting properties in New York, Los Angeles and cities in Texas and Illinois. Their exodus is putting new pressure on the market as property values have leveled off, new state and federal regulations are kicking in and many investors see few catalysts to push prices much higher after a long run.
U.S. commercial property prices ticked up 2.5% in 2019, but they advanced only 1.1% in the fourth quarter and were unchanged in December, according to Green Street Advisors, a real-estate research firm. That compares with a roughly 20% gain for property prices in 2010, when the recovery was beginning.
“Prices are high relative to where we are in the cycle,” said Jim Costello, senior vice president at Real Capital Analytics. He added that there is increasing skepticism about being able to profit when properties are this highly valued: “It’s getting harder to make anything pencil out.”
Foreign investors sold $63 billion of property in 2019 and bought $48.7 billion, according to Real Capital Analytics. While stripping out the Chinese sales would leave other foreign investors as modest net buyers last year, their purchases were about half those recorded in 2018, when big foreign deal-making was more robust.
U.S. real estate has long been a favored destination for global property investors. The American market is one of the deepest and easiest to trade, with a variety of property types. During recent years where Japan and much of Europe have pushed interest rates into negative territory, U.S. property offered some of the best yields in the developed world, supported by a strong dollar.
Indeed, not all foreigners are dumping their U.S. properties. Many still view it as a haven whenever the global economy slows. Investors from South Korea ramped up their purchases last year, including the $475 million acquisition of a Manhattan office tower by Korea Investment & Securities and Samsung SRA Asset Management, according to Real Capital Analytics. Abu Dhabi Investment Authority was an active office buyer, while Qatar funds acquired luxury hotels in Manhattan and Beverly Hills.
But the receding interest by many foreigners is worrying to U.S. investors and could further slow growth in the commercial real-estate market. While foreign buyers represent only a small portion of the overall U.S. market, they often made headlines with the steep prices they were willing to pay that helped push up overall values in several major cities.
The Chinese retreat has been the most wrenching and least likely to turn around soon, since Chinese policy makers have given little indication of loosening capital controls.
Chinese companies spent tens of billions of dollars between 2013 and 2017 on American skyscrapers, luxury hotels and pockets of land where they intended to build residential towers. Sometimes Chinese acquirers set new records, like when Anbang Insurance Group bought the Waldorf Astoria New York for $1.95 billion, the highest price ever paid for a U.S. hotel.
In recent months, these firms have made news for their sales. Anbang sold a luxury hotel portfolio of 15 properties for about $5.8 billion only about three years after buying it (though that didn’t include the Waldorf Astoria, where the Chinese government is spending another $1 billion to renovate the historic hotel and turn hundreds of guest rooms into for-sale condos.)
Some Chinese owners, strapped for cash, feel compelled to make full or partial sales of their projects. China’s Oceanwide Holdings last month said it has sold its San Francisco condo and office project for a loss of 1.9 billion Chinese yuan ($274 million).
“The cost and difficulty of development and operations has risen sharply, putting a strain on the company’s overall operations,” the Beijing-based company said in a filing. “The sale is also in line with the country’s [China’s] latest policy guidance.”
Japanese firm Unizo Holdings, currently a target of a bidding war between Blackstone Group and a group partially backed by Texas-based investment firm Lone Star, sold five office buildings in Manhattan and Washington, D.C., last year, after a rash of purchases between 2015 and 2017.
A spokesman cited rocky conditions in the U.S. property market, pointing to “flat vacancy rates in some cities, rents in some cities being on a downward trend and real-estate prices beginning to fall.” He added that Unizo, which still owns six buildings in Washington, D.C., doesn’t intend to exit from the U.S. market entirely.
Other overseas investors have turned cautious after recent regulatory changes—such as rent-control laws in foreign favorites New York and California—which have stoked concerns that the new rules could weigh on income and property values. In New York City, values of rent-regulated apartment buildings have fallen by about 25% in a matter of months.
Meanwhile, greater federal scrutiny of business deals involving foreign money raises a new threat. The Treasury Department recently unveiled rules to clarify when overseas investors need clearance from the Committee on Foreign Investment in the U.S., or Cfius. That includes real-estate deals located near U.S. military bases or other sensitive U.S. government property.
Some foreign investors could be less inclined to buy if they would have to submit to a review by the committee.
“I’m sure it’s causing some deals not to happen,” said Jennifer Morgan, a partner at King & Spalding LLP’s real-estate practice.
Source: Wall Street Journal By Esther Fung
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