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EB-5 fallout following China's Black Monday

EB-5 fallout following China's Black Monday

Asian investors have lost over $1.5 Trillion dollars of net worth in the past four days with indexes across Asia hitting a three year low yesterday.  The Shanghai Composite Index has fallen by nearly 40 percent since June, after rising more than 140 percent last year. Tokyo’s Nikkei-225 index recorded its biggest drop in more than two years, falling 4.6 percent to a six-month low, while the MSCI index of Asia-Pacific shares outside Japan sank 5.1 percent to a three-year low.

 

Commodities are also sinking. Oil has hit a six-and-a-half-year low. A broader index of 22 commodities compiled by Bloomberg is at its lowest since 1999.

What is causing the selloff? Here from the Economist is a short explanation:

"A weakening outlook for Chinese growth, and a slip in China's currency, havecombined to put pressure on other emerging economies—and especially those whose growth model depends on Chinese demand for industrial and other commodities. Emerging markets have also been squeezed by the Fed, which has been preparing the world economy to expect the first interest rate rise in nearly a decade in September. Tighter monetary conditions in America have led to reduced capital flows to big emerging economies, to a rising dollar, and to more difficult conditions for firms and governments with dollar-denominated loans to repay."

What implications does this have for the EB-5 industry?  The most obvious is that there will be less wealthy foreign investors from all over the world as the fall in asset prices was global, not limited to just China.

This will be especially acute as most EB-5 investors come from less developed, emerging markets which are more prone to falling commodity markets, illiquid equity markets and poor monetary and central bank controls.  Many high net worth individuals from these markets have never seen such substantial market declines and may now be more skittish about investing in illiquid assets and limited partnership pools, typical of EB-5 Regional Center investments, for which they cannot easily divest. 

This raises the following questions:

  1. What does this mean for Regional Centers, developers, manufacturers and others looking to raise capital from foreign investors (EB-5 or FDI)?
  2. Which EB-5 investments (asset categories) are most likely to suffer from falling global asset prices? 

For now, the answers are fairly straightforward: 

1. There will be a smaller pool of investors who can afford to invest in what will most likely be a higher EB-5 investment threshold.  This pool will still far exceed the current 10,000 visa cap limit, so no worries about demand exceeding supply, simply that there will be less newly minted millionaire and billionaires.  

2. Commodity (oil, gas, metals) investments will be more likely to fail unless market prices reverse course.

3. High end residential real estate in markets such as New York CityLos Angeles,San FranciscoMiamiSeattleDallasChicago and others will be harder to sell as the cash market buyers from overseas may be more interested in selling assets to meet margin calls than purchasing multi-million dollar lofts.  

4. Casinos:  this should be obvious, with less disposable income and greater uncertainty about the future this may be the last place you may find foreign visitors.  It will be interesting to see how the levels of spending and revenue in Las Vegas will be affected in the upcoming quarters.  There are a large number ofcasinos in LV that have been and are being financed by mostly Chinese investors, it will be interesting to see if that trend continues in turbulent and falling equity markets.  So far the reports have not been promising and those were in a booming bull market. 

5. Lack of high net worth foreign "shoppers" may hurt high end retail stores, malls and outlets.  EB-5 offerings which focus on offering high end shopping to wealthy foreign buyers may find that there are fewer buyers coming to the U.S. on shopping sprees as their disposable income has shrunk along with their stock market portfolios.  High end luxury items may still be purchased, but not in the volume that was forecast when business plans were written during the booming asset markets.  

All of these could lead to failures to meet job creation requirements as well as the return of capital at term.  Immigration attorneys who simply rely on a Regional Center's track record to guide their recommendations may be in for a surprise when they later find that their client's asset is non-performing due to a changing global market environment that has nothing to do with past records of USCIS approvals.  

The result of this global market turbulence may be that liquidity will take a higher priority during these unstable markets than purchasing hard assets in non-liquid investment pools which may fall in value as commodity and real estate markets correct downwards in the face of decreasing demand and global markets corrections.


https://www.linkedin.com/pulse/eb-5-fallout-following-chinas-black-monday-michael-gibson?trk=pulse_spock-articles


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