18/07/2017 Whatll Happen to US Commercial Real Estate as Chinese Money Dries Up?

| Zero Hedge

Whatll Happen to US Commercial Real Estate as Chinese Money Dries Up?

by Wolf Richter
Jul 18, 2017 9:56 AM

6
SHARES

In the second quarter in Manhattan, Chinese entities accounted for half of the commercial real estate purchases
with prices over $10 million. By comparison, in 2011 through 2014, total cross-border purchases from all over the
world (not just from China) were in the mid-20% range.

At a time when domestic investors have pulled back, foreign parties have ramped up their holdings in Manhattan,
according to Avison Youngs Second Quarter Manhattan Market Report.
This includes the $2.2 billion purchase in May of 245 Park Avenue by the Chinese conglomerate HNA Group, the
sixth largest transaction ever in Manhattan. And at $1,282 per square foot, it was among the highest price per
pound for this type of asset.
The purchase of the 45-story trophy tower is being funded in part by money borrowed in the US via a $508 million
loan from JPMorgan Chase, Natixis, Deutsche Bank, Barclays, and Societe Generale, according
to CommercialCaf. The rest is funded by HNAs other sources, presumably in China.
The influx of Chinese money and the propensity by Chinese companies to hunt down trophy assets have propped
up prices in Manhattan. And yet, despite the Chinese hunger, total sales volume has plunged, according to Avison
Young:

At the end of the first half of 2017, the annualized forecast of total transaction volume was on pace to be 40% lower than 2016, and a 60% drop-off
from 2015. At the current pace, 2017 is shaping up to have the lowest sales count since the period from 2008 to 2010, the last market trough.
Dollar volumes tell a similar story at the years halfway mark. The first quarters $3.2 billion in dollar transactions was improved to $5.6 billion in the
second quarter, but this increase was largely attributable to a single $2.2 billion purchase while the first quarter lacked any billion dollar transactions.
From the third quarter of 2013 through the second quarter of 2016, the Manhattan market averaged 141 transactions per quarter and never recorded
less than 112 in that 12-quarter span. In the trailing four quarters ending 2Q 2017, the average transaction count dropped to 71, with the most recent
tally [in Q2] at 66 for this second quarter.

ADVERTISEMENT

This chart by Avison Young shows the peak in 2015 and the plunge since (click to enlarge):

http://www.zerohedge.com/news/2017-07-18/what%E2%80%99ll-happen-us-commercial-real-estate-chinese-money-dries 1/6
18/07/2017 Whatll Happen to US Commercial Real Estate as Chinese Money Dries Up? | Zero Hedge

Thats the gloomy data on investment activity. Office leasing activity, the underpinning of the office market, isnt
exactly booming either. According to Avison Youngs report, office leasing volume in the second quarter plunged
32% year-over-year to 5.0 million square feet.

Both in Midtown and Downtown, leasing volume in Q2 plunged 35%. In Midtown, the vacancy rate rose to 11.0%,
up from 10.1% a year ago; Downtown, it rose to 12.1%, up from 10.4% a year ago.
So the Chinese money is sorely needed to prop up the market. Since the beginning of 2013, Chinese companies
alone have poured nearly $18 billion into Manhattan real estate, the report says, but cautions: This flow of funds,
however, may soon be threatened.
Last year, the Chinese government got serious about imposing capital control. This year, its trying to crack down
on lenders to get a grip on the ballooning risks threatening its financial system.Just over the weekend, top Chinese
authorities struggled at the National Financial Work Conference with the rampant risk-taking and leverage.
The Wall Street Journal:

ADVERTISEMENT

Fear permeated markets, which tumbled Monday after President Xi Jinping gave a speech that supported efforts to tamp down complicated lending
along with other financial-system risks. Frightened investors seeing room for yet more policy tightening after cheery GDP growth data are now
searching for signs of the regulators next hit.
At hand is an ever-growing asset-management industry now around 60 trillion yuan ($8.8 trillion) and the deepening nexus of banks, brokers, trusts
and insurance companies. The central bank elaborated on the linkages it uncovered in the asset-management industry in its recently published
financial-stability report. That is likely telling of where regulators will go digging.
If regulators do take on the asset-management business, it could spell trouble for corporate borrowers. Corporate bonds account for more than 40% of
underlying assets in wealth-management products sold by banks. Asset managers have been the only active buyers of these bonds so far this year.

On Monday, following the conference, the Shanghai Composite Index dropped 1.4%, and the small-cap index,
ChiNext, which includes a lot of tech companies, plunged 5.1%, to the lowest level since January 2015.

Chinas crackdown on leverage and fund-flows already had some consequences in the US and elsewhere:
quashing a slew of Chinese cross-border deals, including Anbang Insurance Groups $14 billion bid to acquire
Starwood Hotels & Resorts.
http://www.zerohedge.com/news/2017-07-18/what%E2%80%99ll-happen-us-commercial-real-estate-chinese-money-dries 2/6
18/07/2017 Whatll Happen to US Commercial Real Estate as Chinese Money Dries Up? | Zero Hedge
Starwood Hotels & Resorts.

These efforts by Chinese authorities to get financial risks and capital flows under control could have the effect,
according Avison Youngs report, that the major Chinese players may be regulated out of the market. And with
Manhattan being a primary target for funds, it is likely to experience the greatest impact.

This will happen just when domestic buyers have lost their appetite for overpriced commercial real estate after a
breath-taking seven-year boom. The report identified near-term impediments to the commercial property market,
among them:

Chinese governmental regulations on capital allocations outside the country.

General investor sentiment.
Rising interest rates.
Pre-recession 10-year commercial mortgages that have been packaged into Commercial Mortgage Backed
Securities that are now struggling to refinance. Ratings agencies have also been warning about CMBS.
Slumping residential market, slow condo sales, and heavy concessions in rental market as asking rents
have been declining.
Dearth of construction financing and stalled construction sites needing funding.
E-retail depressing brick-and-mortar retail values. This meltdown has reached the Crown Jewel in American
retailing as seen in haunting photos of Shuttered Stores on Madison Avenue

ADVERTISEMENT

But unlike last time, theres no Financial Crisis tripping up the property market. Stocks and bonds are booming.
Wall Street is exuberant. Theres no catastrophic event causing the current correction, as the report explains. In
other words, these are still the best of times.
And its not just in Manhattan. Chilling photos of for-lease signs are lining the Great America Parkway in Santa
Clara, Silicon Valley. Read Silicon Valley Begins to Crack Visibly

Comment viewing options

Threaded list - expanded Date - newest first

50 comments per page Save settings

Select your preferred way to display the comments and click "Save settings" to activate your changes.

Hongcha Jul 18, 2017 1:16 PM

When the prices really start to roll over, the wave of Chinese cash will flow elsewhere.

The mainlanders only buy into ascending markets, where there is action. They are inveterate and inept gamblers
and they tend racially and politically to follow each other. In like manner, they buy in geographical areas where
there are other mainland Chinese. there are exceptions but exceptions prove the rule.

E.g. in all of Macau, all of it, you can only find 2-3 casinos where there are poker rooms. And I found those
populated mostly by other Lao Wai! Pai Gow rules the floors because it's fast flashy and mindless action.

Sitting patiently with my bullion, waiting for them to get interested ... {sigh}.

http://www.zerohedge.com/news/2017-07-18/what%E2%80%99ll-happen-us-commercial-real-estate-chinese-money-dries 3/6
18/07/2017 Whatll Happen to US Commercial Real Estate as Chinese Money Dries Up? | Zero Hedge

Truth Eater Jul 18, 2017 1:06 PM

Try buying property in other countries as a non-citizen.
Chinese money should not be buying any real estate in US.

ali-ali-al-qomfri Jul 18, 2017 12:36 PM

Space Available
not a good sign.

AKKadian Jul 18, 2017 12:30 PM

Americans will buy it, but a descent price. Same thing happened when the Japaneses were taking over the world,
sold them over inflated real estate and when their economy started to tank, they sold it back at a loss.!!!

mototard Jul 18, 2017 12:22 PM

Sum Ting Wong

rf80412 Jul 18, 2017 12:12 PM

Either prices will fall to market clearing levels - wherever those might be; it's in Mammon's hands, not ours - or
banks will sit on properties in order to avoid realizing losses on the underlying assets and let price discovery work in
a rental market.

Depending on where demand for retail and office space is physically located, new construction may continue at a
much slower pace ... at the cost of completely wasting existing retail and office space, but nobody's ever had a
problem with that, not even before Chinese money started pouring into RE markets.

http://www.zerohedge.com/news/2017-07-18/what%E2%80%99ll-happen-us-commercial-real-estate-chinese-money-dries 4/6
18/07/2017 Whatll Happen to US Commercial Real Estate as Chinese Money Dries Up? | Zero Hedge

http://www.zerohedge.com/news/2017-07-18/what%E2%80%99ll-happen-us-commercial-real-estate-chinese-money-dries 5/6
18/07/2017 Whatll Happen to US Commercial Real Estate as Chinese Money Dries Up? | Zero Hedge

http://www.zerohedge.com/news/2017-07-18/what%E2%80%99ll-happen-us-commercial-real-estate-chinese-money-dries 6/6