By: David Scharf, Partner, Morrison Cohen LLP
After three consecutive years of Chinese buyers serving as the top foreign purchases of U.S. real estate, the Chinese government is now intensely restricting foreign direct investment into the United States. In fact, a Baker McKenzie report found that, between 2016 and 2018, there has been a near 90 percent drop in investment into the United States from China—from more than $45 billion in 2016 to less than $5 billion last year.
And this investment cliff doesn’t even paint the entire picture. As EB-5 investment funds from China slow to a trickle, Chinese investment funds are also fundamentally shifting their strategies. At the instruction of the authorities in Beijing, they are pulling nearly every investment dollar out of the country. That means the divestment and selling of assets, in addition to a slowing of direct investments.
When Chinese private equity firms have chosen to engage in recent months, there’s a dramatic shift in their willingness to invest in real estate projects as limited partners. The deals proposed now either require strict compliance from US-based partners with respect to the return of capital and investment returns, or these firms seek to maximize short-term benchmarks to monetize and return capital.
This combination of declining investment and shifting strategy is especially daunting for New York City.
For years, Chinese investment funds could be counted on to pay a premium to snap up marquee properties across New York. Chinese insurance company Anbang, for instance, paid a record amount—nearly $2 billion—for New York’s Waldorf Astoria hotel. In 2017, the HNA Group paid $2.2 billion for the purchase of 245 Park Avenue. This trend is not limited to commercial real estate—in 2013, a Chinese woman bought four $20 million units in Manhattan’s One57 for family members.
In general, “over two-thirds of [Chinese buyers] paid in cash, they sometimes paid anywhere from 40 percent to 60 percent above the asking price, and they often bought the homes purely as an investment vehicle,” according to “The Week.” These high profile and flashy deals have helped buoy the New York City real estate market, preserving buyers’ faith in real estate values.
While it’s true that New York City may still see major deals, such as the recently reported purchase of 43 Park Avenue for $60 million by Chinese billionaire Zhang Xin, purchases of this kind will become anomalies moving forward.
The end of deals of this nature not only hurts the markets, but it hurts New York City tax revenue. Property taxes are New York City’s largest source of revenue, and in 2018, property tax revenue was expected to reach $25.8 billion—or the equivalent of 45 percent of all of New York City’s revenue. To put that in context, the amount the city reaps from property taxes is twice as much as the second largest source of revenue for the city: personal income taxes.
So, when Chinese investors decide to tighten their belts, both New York City and its high-end commercial real estate sector feels the pinch more than most.
New York City remains the crown jewel of the global real estate sector. And no one understands this more than President Trump and his team. But as this trade war drags on and on, New York City can wave goodbye to the flashy billion real estate deals—and the tax revenue—it saw just years ago.
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