Earlier this week, US President Donald Trump signed the Foreign Investment Risk Review Modernization Act (FIRRMA) into law. In a recent interview with South China Morning Post, I discussed how this new law might impact Chinese investment in the States, but I want to elaborate further on what it means to real estate markets.
FIRRMA essentially allows the Committee on Foreign Investment in the United States (CFIUS) more bandwidth to respond to potential national security concerns stemming from foreign investment in to the US. The legislation was designed around concerns surrounding Chinese investment into US high-tech industries, but the structure of the law means that it will affect other segments of the economy as well, including real-estate.
The aggregate impact of the bill will likely be tricky to gauge in China. Chinese outbound foreign direct investment (FDI), including that to the US, has been slowing since capital controls were introduced in 2017. Given Chinese domestic corporate refinancing risks are likely to remain elevated through 2020, the Chinese government will likely continue to attempt to keep capital inside the country to control borrowing costs — this will likely have a more significant impact on aggregate Chinese outbound investment.
However, it will certainly affect some segments of the economy, and will likely limit the amount of Chinese capital available to US tech firms. Lower-profile deals involving Chinese investors taking minority stakes in firms will likely become much more difficult to clear with CFIUS.
There are two issues to consider when we assess how this legislation might impact the appetite of China and Hong Kong investors for US property. The legislation is unlikely to have a significant impact on demand for US residential property from mainland Chinese buyers, as the individual transactions are unlikely to get picked up by CFIUS. As I wrote earlier this year, Chinese homebuyers in foreign markets are driven by several factors, and this is unlikely to change that. If anything, Chinese homebuyers will be more likely to respond to exchange rate fluctuations. As we’ve already seen this year, on a risk-adjusted basis, the euro and Singapore dollar have become more attractive currencies for mainland Chinese investors to hold than the US dollar.
This may, however, have a more significant impact on Chinese institutional investors. The legislation itself largely does not target real estate, but only that near a military base or an air/maritime port. However, a second-order effect of restricting investment into US businesses, such as high-tech firms, may be that there is less demand from China for US commercial property assets. These Chinese companies won’t require as large of a corporate footprint in the US. However, I would still expect capital controls to have a larger effect, which will restrict aggregate Chinese outbound real estate development.
Growth in outbound Chinese investment will continue to be limited by capital controls, both by geography and asset type. However, the composition of investment is likely to change. The Belt and Road Initiative does present a feasible alternative for Chinese investors looking at real assets. This doesn’t mean that Chinese demand for US assets will disappear completely — the US is still a large, liquid, and transparent market (see JLL’s transparency index) with a highly-developed financial system. However, US real estate’s share of total Chinese outbound FDI could be diminished.
Senior Economist, Asia Pacific
Sean is responsible for the RICS Economics team’s research into the Asia-Pacific property sector, identifying market risks to the sector and analysing economic events and their effects on real estate.