The Good, the Bad for CRE of a Cheaper Yuan

The initial shock of the sudden 1.9 percent devaluation of the yuan vs. the dollar is now passed, but what does it mean for commercial real estate interests in the United States?

The initial shock of the sudden 1.9 percent devaluation of the yuan vs. the dollar is now passed, but what does it mean for commercial real estate interests in the United States? As the Chinese economy has inexorably grown in recent decades, it’s become increasingly intertwined with the American economy, including direct real estate holdings, but also through the indirect impact of imports through U.S. industrial properties, and spending by Chinese tourists in the United States. The impact of tourism is relatively recent and still growing — the Obama administration relaxed visa requirements for Chinese tourists only late last year — but it’s definitely being felt in cities that Chinese tourists are fond of (L.A., New York, Seattle).

A weaker yuan could, in theory, slow down the frenetic pace of investment among the Chinese for U.S. commercial and residential real estate. After all, in a single day, the devaluation made dollar-priced real estate nearly 2 percent more expensive. And the volume of Chinese investment in U.S. real estate is no chump change. China has now emerged as the second-largest foreign investor, after Canada, with an 8 percent share of the total cross-border investments in U.S. CRE. In a single wildly market popular market for Chinese investors — metro New York — for the 12 months between the Q1 2014 and Q2 2015, the Chinese accounted for the largest share (26.6 percent) of foreign spending on Manhattan commercial real estate, totaling $3.9 billion, reports NGKF. It’s a factor in CRE’s steady appreciation these days in some markets.

But unless the devaluations are a persistent, ongoing phenomenon, the August yuan surprise might not have that much impact on the volume of Chinese investment in the United States. Investors can adjust their expectations, for one thing, and besides that, it’s true that Chinese investors tend to be long-term investors — or at least longer than a three- or five- or seven-year hold common enough on this side of the Pacific. Besides, once dollar-priced properties are acquired, their appreciation becomes a hedge against further devaluations of the yuan. Finally, the U.S. is seen as a safe place to put one’s money. In short, sophisticated investors can handle currency risk, and the fundamental reasons the Chinese like American properties are still in place, so a mass slowdown in CRE investment isn’t likely for currency reasons alone.

Other potential impacts of a weaker yuan include better times for U.S. industrial real estate, especially on the West Coast. Chinese imports are now less expensive, and while 2 percent doesn’t sound like much, it’s a meaningful amount in the world of international imports and exports. The volume of goods from China might slowly and surely edge up, and most of it passes through West Coast distribution facilities. As for the impact on retail properties of Chinese tourists with less money to spend — again, mostly on the West Coast — that too might add up over time, and take some of the wind out of the sails of SoCal retail properties. So far it’s too early to tell, though. Chinese tourists may simply decide the experience of shopping in glitzy U.S. malls is worth some extra yuan.