25 October 2011
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On Friday, October 21, 2011 I did a Q&A interview with the National Real Estate Bisnow about Chinese investment in U.S. hotels. Here is the full Question & Answer exchange, a portion of which appeared in the Biznow article.
There’s been an explosion of Chinese investment in the US, especially real estate. And many people believe it will surpass the Japanese investment of the late ’80s (estimated to have exceeded $120B).
There’s been an explosion of Chinese investment in US real estate. Who’s investing and where, and how much investment do you expect in 2011?
The increasing wave of Chinese investment in the U.S. is being fueled by the Chinese government (generally acting through construction companies, banks and other intermediary companies) and an exploding class of wealthy Chinese. The top .05% wealthiest Chinese have investible funds of more than $2.7 trillion, and there is a rapidly growing class of billionaires and more than 800,000 millionaires. Plus there is a huge rising middle class looking to travel and enjoy life.
Of course, in addition to Mainland China there are the Chinese in Taiwan, and everywhere else such as Hong Kong, Singapore, and Indonesia.
A recent Merchants Bank report estimates that rich Chinese individuals — those with assets of more than 10 million yuan — have about 3.6 trillion yuan ($564 billion) invested overseas. No reliable numbers are available for total Chinese foreign investment or Chinese investment in the United States. The investors are largely staying under the radar to avoid publicity and possible adverse reactions, and there seems to be no means to track the investments and get an aggregate investment number.
Chinese investment in the U.S. and elsewhere
Chinese investment in the U.S. is just a very small part of total foreign Chinese investment. Chinese investment in the U.S. is being made all over the country, but there is a clear preference for the East and West coasts, and particular focus on the New York City, San Francisco and Los Angeles areas. Real estate in general – and hotels in particular – are a preferred class of investment.
Although numbers are elusive, an estimate of $5-10 billion of Chinese investment in the U.S. for 2011 may be a conservative estimate. Many believe that the wave of Chinese investment will exceed that of the Japanese in the late 1980s (estimated to have exceeded $120 billion).
Why is the US attractive to Chinese investors? Are there other parts of the world they’re looking for product?
The U.S. is attractive for Chinese investors for many reasons, including its political and economic stability. The economic returns on investment here can’t begin to match the 50 to 100% returns in China, but safety, education for children, and health care are very attractive.
It must seem to the Chinese investors like the U.S. is on sale. U.S. real estate values – particularly hotels- have been so depressed and the favorable exchange rate for the yuan makes U.S. real estate seem cheap. (The Chinese yuan strengthened to 6.4 per dollar in the summer of 2011 from 8.0 per dollar in early 2006.) Hotel values appreciated by 17% in 2010 and are poised to go significantly higher as industry fundamentals continue to improve with a record number of hotel rooms being sold.
Chinese investors, particularly the government, are investing all over the world for political and economic reasons. They are investing in undeveloped areas from East Africa to gain access to strategic raw materials to South America for the same reasons. Other investment is motivated by the desire the diversify the mountain of capital gained from large trade surpluses.
Why are EB-5 immigrant investment visas so popular?
The number of EB-5 investment applications are on track to double in 2011 over 2010 levels, and 70% of those EB-5 applications are from Mainland China. The main reason driving EB-5 applications is the desire for permanent U.S. residency – the “green card.” Immigration to the U.S. can take years and be a long and uncertain process unless there is a shortcut like EB-5. The EB-5 process bypasses most of the red tape and uncertainty.
For a $500,000 investment that creates at least 10 jobs, a foreign investor gets a clean path to a green card for the investors spouse and family. This is particularly attractive for the children of wealthy Chinese families, for education, health and building a business base in the U.S.
While EB-5 investments can be made in any kind of business, there is a clear preference among Chinese investors for investments in real estate – particularly hotels – with the usual protections and exit strategies expected by savvy investors.
Other articles on EB-5 Financing
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