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Deals & Dealmakers

Chinese investors still hungry for US real estate

The U.S. real estate market has become a favorite destination for Chinese outbound capital in recent years, reaching an estimated $10 billion, with approximately $4.37 billion being invested in commercial properties in 2015, according to KPMG’s China Inbound Investing in U.S. Real Estate – 2016 Semi-Annual Update report.

The report also highlights the dynamics of the six most active real estate markets in the U.S.: New York, Los Angeles, San Francisco, Washington, DC, Chicago, and Dallas.

“The U.S. market is very attractive to Chinese investors as they look to expand their global operations, diversify their portfolios by adding U.S. assets, and establish information exchanges with U.S. developers,” said Phil Marra, U.S. Real Estate Funds leader, KPMG LLP.

“While much of the investment has been focused in U.S. coastal “gateway” cities, where assets are considered most liquid, Chinese investors are starting to expand into other markets as they seek higher yields and diversification.”

According to the KPMG report, the overall U.S. real estate market is expected to reach record-setting growth in the next two years, based on a solid domestic economy, low interest rates worldwide, and increasing demand from both U.S. and global investors seeking yield.

“Chinese investors continue to show a strong appetite for U.S. development assets in gateway and increasingly in other markets with strong real estate fundamentals such as Dallas and Seattle,” said Roger Power, leader for KPMG’s U.S.-China Real Estate Initiative.

“Finding a strong local development partner or establishing a local presence with an experienced local real estate team are critical to achieving desired returns.”

The Chinese Insurance Regulatory Commission encouraged Chinese insurance companies to increase overseas investments by permitting investment of up to 15 percent of their assets overseas.

In addition, the Qualified Domestic Individual Investor program (QDII2) further offers an unprecedented channel for China’s middle-class and high-net-worth individuals to invest overseas.

“As Chinese investors continue to make significant investments in U.S. real estate, their understanding of the U.S. tax law and the benefits of proper tax structuring becomes increasingly more important,” said Jennifer Anderson, Tax partner, KPMG LLP.

“Pursuant to the income tax treaty between the U.S. and China, Chinese investors may protect the return in their investments by seeking the full benefits under the treaty.”

The growth in the U.S. economy, expected between two percent and 3.4 percent in the remaining quarters of 2016 and through 2017, coupled with solid job growth and better wage gains, support a positive outlook for U.S. commercial office space.

Global investment in U.S. office space buildings reached a record $28.8 billion in 2015, with China’s spending totaling $1.6 billion in 2015.

The increased demand for office space has pushed prices, up by 32 percent per square foot for trophy assets in 2015 over 2014, and lowered cap rates, and this trend is expected to continue through 2016.

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