Earlier this month, Morgan Stanley warned that commercial real estate prices in New York City, Sydney and London would likely take a hit over the next two years as Chinese investors pull out of foreign property markets.
The pullback, they said, would be driven by China’s latest crackdown on capital outflows and corporate leverage, which they argued would lead to an 84% drop in overseas property investment by Chinese corporations during 2017, and another 18% in 2018.
Sure enough, official data released by China’s Ministry of Commerce have proven the first part of Morgan Stanley’s thesis correct. Data showed that outbound investment in real estate was particularly hard hit during the first half of the year, plunging 82%.
“According to official data, outbound investment by China’s real estate sector fell 82% year-on-year in the first half, to comprise just 2% of all outbound investment for the period.”
Overall, outbound direct investment to 145 countries declined to $48.19 billion, an annualized drop of 45.8%, according to China Banking News.
The decline is a result of a crackdown by Chinese authorities after corporations went on a foreign-acquisition spree that saw them spend nearly $300 billion buying foreign companies and assets, with China’s four most acquisitive firms accounting for $55 billion, or 18%, of the country’s total. The acquisitions aggravated capital outflows, creating a mountain of debt and making regulators uneasy. Late last month, Chinese authorities ordered Anbang Insurance Group to liquidate its overseas holdings. In June, authorities asked local banks to evaluate whether Anbang and three of its peers posed a “systemic risk” to the country’s financial system. As Morgan Stanley noted, these firms were responsible for billions of dollars of commercial real-estate investments in the US, UK, Australia and Hong Kong.
The pullback will likely be equally as devastating for residential home prices. Average sales prices for Manhattan residential real estate has continued to climb, but cracks are starting to appear. As we pointed out two days ago, 25% of homes sold in 2Q still experienced a price cut, with that number rising to 40-60% in trendy neighborhoods like the Upper East Side.
While falling real-estate prices would be an inconvenience for corrupt Chinese officials and other shady investors trying to stash their money as far away as possible from their homeland, they’d be a welcome relief for renters and young couples or individuals looking to buy their first home.
Across the US, asking rents hit all-time highs earlier this year.