Fears of a Chinese economic ‘meltdown’ have quickly found their way into the US commercial real estate markets as the industry grapples with the potential decline of one of the top investors in US property.
China was the second largest investor in US commercial real estate by country in 2014 with $5.8bn in purchases, according to data from Real Capital Analytics. But even as that pace has continued so far this year, Chinese investors could hit the brakes if the situation continues to worsen.
“It is doubtful that we would see multi-billion dollar investments in the US continue at the same pace given the financial meltdown going on in China at the moment,” said Brian Stoffers, global president of debt & structured finance with CBRE, noting that his views were his own and not necessarily those of his firm.
“For instance, I suspect that life insurance policy sales will slow considerably there and result in less investable dollars in the US,” he said.
The country’s central bank devalued the country’s currency two weeks ago, raising new concerns that a slowdown of its economy could be worse than originally feared.
Beijing officials dubbed yesterday (CST) China’s “Black Monday” when stocks closed down 8.5%, sending US and other foreign securities tumbling and signaling that the country’s greatest financial woes — and more government intervention — may still lie ahead.
On the commercial real estate front, the Chinese government has encouraged foreign investment in commercial real estate as a measure of diversification, with new rules allowing investors to invest up to $1bn into the US without government approval — up from the previous $100m.
“Individual investment into commercial real estate in the US could still continue, although on a more limited basis, if the government of China ‘changed the rules,’” Stoffers said.
CMBS experts are also concerned. “The big issue is really just the fear,” said Manus Clancy, senior managing director with data and research firm Trepp.
CMBS spreads had already widened to two-year highs by mid-August, when two new conduits priced at levels not seen since 2013. The 10-year AAAs on COMM 2015-CCRE25 and JPMBB 2015-C31 priced at 116 and 120 bps over swaps, respectively — 10 to 15 bps wider than deals from late July and early August.
That was due to heavy supply, typically low August liquidity, an impending rate hike, in addition to China’s decision to devalue the yuan, according to research from Trepp. The latest trouble in China could cause CMBS spreads to widen further, in addition to stunting the broader real estate markets and economy.
“Anytime you see this type of volatility, CMBS is going to get caught up in it,” Clancy said. “The worry is that when China gets a cold, the US gets the flu — stocks fall, businesses decline, stores close, unemployment rises, consumption declines — and the fear feeds into this downward trend.”
But others believe that the Chinese woes could ultimately benefit US commercial real estate, actually accelerating investment through a flight of capital.
“With their currency getting weaker versus the dollar, I suspect they will look even more favorably to owning US dollar-based assets like real estate,” said Terence Baydala, managing director, originations, at Pembrook Capital Management.