New Chinese Regulations could put the brakes on many commercial mortgage deals.

Chinese regulators are attempting to put the brakes on overseas real estate acquisitions by its citizens. The new regulations will make it far more difficult for Chinese investors to close commercial mortgage deals.

4page_img8-bigThis July the Chinese government introduced new restrictions on foreign investment that are already impacting US markets. In 2016 Chinese real estate investment totaled a massive 101.4 billion. That number has declined by 46 percent, to 48 billion dollars, during the first half of this year.

The new restrictions make every foreign investment acquisition over 1 million dollars subject to government approval. The question is why has the Chinese government taken such a harsh stance against foreign investment by its citizens?

China wants to ensure investment activity aligns with the communist parties economic and political agenda and also to protect its citizens from “irrational investments.” Regulators are concerned that recent real estate investments in the US by many firms may be backed by large debts. There is also concern on the part of regulators that many US commercial properties are overpriced. However the greatest reason for the new capital outflow restrictions seems to be the frenetic pace of foreign investment by Chinese citizens. Over the last three years 1 trillion dollars has left China. Such a large amount of money leaving the country at such a fast pace could put the Chinese economy at risk. It seems likely that Chinese regulators want to these vast sums to be redirected into the domestic economy rather than invested in foreign real estate.

More and more deals are likely to remain unapproved by regulators. The delay will make it harder for Chinese investors to close commercial mortgage deals.

According to Ten-X Commercial Real Estate Associate Director Conlyn Chan, “Chinese companies looking to invest in foreign real estate are required to submit requests for approval to the government, but the government is not required to respond to these requests, and in some cases they’re leaving them on the table unanswered.” Due to these regulatory hangups, US lenders may become wary of working with Chinese investors. Waiting for approval by regulators will no doubt make it harder for Chinese investors to meet deposit deadlines in real-estate transactions, or to secure down payments needed for commercial loans.

However the new regulations wont impact the demand for commercial mortgages tied to US properties by Chinese investors.

A recent analysis by Colliers expects Asian and Chinese investment in US commercial real estate to moderate. Investment by Chinese citizens in US real-estate will not decline dramatically in spite of the new regulations. These new rules are not likely to have any impact on particularly wealthy Chinese citizens. “The high net worth individuals in China have always found a way. They have their ability to move funds, whether it’s from inside the country or outside the country, despite what the government puts in front of them,” said Edward Mermelstein , partner at One & Only Holdings. The pace of Chinese investment will likely slow, even as wealthy citizens skirt the new regulations. Considering the pace of Chinese investment between 2010 and 2016 the slow down may feel more acute than it actually is. The US commercial real estate market remains fundamentally strong. Mermelstein claims that few of Chinese clients see any reasonable alternative to US commercial real estate as an investment.

Dennis Dahlberg
Level 4 Funding LLC  Private Hard Money Lender
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About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

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