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Changing policies make for shift in Chinese foreign real estate investments
Brief:An easing of the rules by the Ministry of Commerce have opened the doors for swift, large acquisitions by Chinese investors.
The Chinese Ministry of Commerce made a game-changing move recently when it decided to allow Chinese companies to invest overseas without prior approval from the Ministry. Naturally, this easing of the rules regarding China’s foreign investments will have an effect on many an industry, the real estate market among them. The decision comes after 2013’s shift in laws regarding outbound investment by Chinese real estate companies as made by China’s National Development and Reform Commission. Big acquisitions in the U.K. and the U.S. have come about following these changes.

Leonard X Rosenberg, a partner at Mayer Brown and one of the leaders of the firm’s cross-border real estate practice, shed light on how the rule-alterations by the Ministry will influence the near future of international investments, particularly when it comes to real estate. He points out that “Under the old MOFCOM rules, central governmental approvals could take months and many sellers were unwilling to wait for the approval process to unfold, which meant that Chinese investors would lose deals to investors (domestic and foreign) who are not similarly constrained.”

These new rules will have multiple effects, not the least of which is “leveling the playing field for Chinese investors” as Rosenberg puts it. But the rules will also “drive up prices for competitive assets for all real estate investors” as a result of the added available competing capital. A combination of added capital and the simplification of these rules will streamline the process for foreign investors. Competition will naturally increase as investors in China will receive speedier approvals and be able to respond to market demands in a more timely fashion.

Indeed, large purchases by Chinese investors are already making headlines. The Waldorf Astoria hotel in New York City has been one of the highest profile purchases by buyers from China, given the hotel’s historical significance in American culture. Shanghai-based Greenland Holding Group Inc.’s 70 percent interest in the enormous Atlantic Yards project in Brooklyn was another headliner. FiveThirtyEight reports that Chinese investors spent $22 billion on U.S. real estate from March 2013 through March 2014 — 72 percent more than they invested the year prior. Clearly, the effects of the shift in policy in China are having widespread effects already.

As with most aspects of the China-U.S. relationship, these shifts do not come without political implications. Rosenberg notes that the new rules suggest “a greater opening to, and comfort with foreign markets as the central government surrenders a measure of control.” But these changes have been a long time coming. He says:

“When MOFCOM first permitted PRC insurance companies to invest in limited offshore assets in selected markets, it marked a significant first step in the process. The liberalization of these rules, together with the added push by the central government to seek improved returns in foreign markets, come after MOFCOM and PRC investors investigated foreign markets and local practices and gained the level of comfort necessary to dive more deeply. This globalization of markets has been seen in other industries, and real estate is the latest example.”

Perhaps the opening-up of the relationship between Chinese and U.S. investors in the cross-border real estate markets will have untold effects on the economic and political ties between the two nations.

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