There are mixed signals coming from China now. The head of Fosun is the latest CEO out of 30 to "disappear". In China when you disappear these days it means you were arrested by the anti corruption police and the next time you appear, may be many months and in prison. We have no idea why this executive was arrested, but they were major investors in US real estate, and this will surely end that for now. At the same time there is a new clamp down on capital outflows. To move capital legally for investment in CRE you need to file a very long questionnaire, and then be interrogated going back over your last 20 years of how you, or your company accumulated al this capital. These are questions most do not want to have to answer as most of the investment capital was accumulated in questionable ways. Many investors in EB5 are officials who got rich through corruption. The same is true o bankers where it was common that to get a real estate loan you gave the banker 10% equity interest in the deal.
There is also a liquidity crunch now for small and medium sized companies. These entities had to borrow in the shadow market at rates that were in the teens. With the economic slowdown there is substantial delay in being able to collect receivables, especially form large state companies. These businessmen who had been doing very well are now often in default on their loans. All that excess cash is now needed to save their business.
Lastly there is the new untying of the yuan from the existing dollar peg and the tie now to the currency basket. This will lower the value of the yuan in dollar terms further making it harder for Chinese investors to accumulate US dollars for real estate investment.
Now we have Third Ave defaulting on redemptions in its junk fund. It is not out of the realm of possible that there could be a serious liquidity squeeze in the junk market, and that can flow over to other capital markets. Contagion is a real possible outcome. There is a fairly high correlation between CRE and junk bonds. While there is no crash coming in CRE, there is a high possibility that we may be at the top of value increases, and 2016 could see a flattening or even a small decline as the year progresses. The war against radical Islam, which will be materially heating up substantially despite Obama, more terror attacks, here and in Europe, and the election will serve to further unsettle the markets.
Each of these things alone would not be critical, but all of them together, and the continued weakness in the Chinese economy, make investing in US real estate less likely. Certainly not stopping, but harder and less of a driver of the high prices for properties we now see even in secondary markets. This may prove to be the canary along with Sam Zell selling, and it may be a better thing to be a seller now.
2015 is very likely to be seen as the peak. There are starting to be many investors here and offshore who are now just waiting for the downturn and the new buying opportunity in 2-3 years.
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