The flow of capital from China to the United States dominates current thinking about cross-border real estate investment, occupying mindshare out of proportion with its true measure of activity. Despite conventional belief, the unimpeded growth of Chinese investment in New York City and other major markets is not assured. Recent events in China’s capital markets offer a reminder that even its powerhouse economy can face reversals.
At the time of writing this on July 27, stocks on the Shanghai Stock Exchange were in free fall, declining 8.5 percent on its worst single day, in spite of large-scale government intervention. The spike in market volatility hints at underlying challenges in the Chinese economic outlook. More important for an assessment of capital flows, government intervention to limit liquidity and foreign investors’ capital repatriation demonstrates that free markets are still conditional.
Whether from as far afield as Asia Pacific, or from as close by as our northerly neighbors, foreign buyers of residential and commercial property account for less than ten percent of property sales volume and a significantly smaller share of the transaction count. In part because of their concentration in gateway markets and their natural tendency to highly visible assets, these buyers loom large in our image of the investment landscape. The appeal of the American market is undeniable—long after the denouement of the Great Recession, the global economy has been punctuated by geopolitical and economic crises that have underscored the importance of diversifying into the safest havens.
Americans Look Abroad
While foreign investors might buy American for its stability, low yields prompt some Americans to look to foreign markets. And so even as U.S. assets remain perched atop the global investment hierarchy, meaningful diversification for large U.S. institutions means exporting capital. Direct investment and lending abroad require scale, however, so these options remain the purview of the largest players.
Among Western targets, the relative familiarity of the U.K., Northern Europe, and Australia put them in good favor with American investors making forays into new territories. In contrast, the potentially lucrative, but apparently volatile, Chinese market can seem impenetrable; the Indian market beset by the bureaucratic and infrastructure woes that have constrained the subcontinent’s growth for decades; Russia and its former satellites a geopolitical horror show; Brazil, at least for the moment, teetering on recession.
An African Century
Further down the list of potential targets, Africa, until recently, has hardly registered with global real estate investors. From a relatively paltry sum of just over $50 billion in 2013—spread across 55 countries—foreign direct investment into the continent has jumped sharply and may surpass $100 billion this year. In spite of an Arab Spring gone awry, Egypt was the largest target for foreign direct investment last year, according to the Financial Times’ fDi Markets. In Sub-Saharan Africa (SSA), Angola and Nigeria captured the largest shares of inflows.
The basic premise for investing in SSA is simple. The continent represents the fastest growing economic zone in the world, according to the African Development Bank. Demographics play a large role in driving that trend; in the best case, population growth and rapid urbanization have combined to support rapidly expanding cities, a burgeoning middle class, and demand for higher-quality housing and commercial property. Investors are intrigued by the notion of returns far exceeding those in developed or emerging economies.
Investment in Africa carries the same challenges as domestic investment, while introducing new layers of risk that will prove insurmountable for many sources of U.S. capital. Among them, the countries of SSA represent varying levels of political and economic risk. Needless to say, American investors are well served in finding local partners and in thinking long-term. Money destined for Africa should be more patient than money invested at home.
None of the continent’s viable targets for investment escapes these risks on all counts. In Nigeria, the largest economy in Africa thanks to recent statistical legerdemain, the country’s endowment of natural resources has slowed economic diversification and allowed inefficiencies to persist. The drop in oil prices has rippled throughout the entire economy. On the bright side, the nation has just completed the first democratic transfer of power in its history, surprising even the most optimistic observers with the smoothness of the handover; it augurs well for the nation’s future and the African opportunity.
Sam Chandan, Ph.D., is president and chief economist of Chandan Economics and an adjunct professor at the Wharton School, University of Pennsylvania. He can be reached at email@example.com.