Chinese Steer Billions Abroad in Quest for SafetyNadja Brandt, Oshrat Carmiel and Dan Levy
More than a dozen Chinese developers gathered for breakfast at a Los Angeles hotel one Sunday earlier this month before taking off for meetings with property brokers, attorneys and potential business partners.
The visitors, none of whom have invested in U.S. real estate development before, would then catch an evening flight to San Jose, California, and meet with more property executives there and in nearby San Francisco. In all, they would stop in six cities over 14 days, including New York and Washington.
“We like the stable and mature investment market in the U.S. relative to the Chinese market,” Jianrong Qian, chairman of Shanghai-based Chiway Holding Group Co., said through an interpreter before heading off to eat with the rest of his group at the InterContinental hotel in Century City. “We were encouraged by the pace of the recovery here in the U.S. after the financial crisis. It shows the resilience of this market.”
Developers from China are committing billions of dollars to projects around the world, from apartment towers in Brooklyn, New York, and a new business district in the U.K. to a residential redevelopment in Sydney and mixed-use buildings in downtown Los Angeles. Regulatory restrictions at home and concerns that the Chinese property market is overheating are spurring companies to venture outside their country for the first time and look far afield for construction opportunities.
“Chinese companies are getting bigger, so they want to diversify beyond their home base,” said Goodwin Gaw, co-founder and chairman of Hong Kong-based Gaw Capital Partners, which is raising as much as $500 million for its first U.S.-focused fund, to be used for real estate development and management. “They feel like it’s their time.”
Major U.S. cities and parts of Europe and Australia are appealing to developers for their relative stability and predictable population growth, as well as their popularity among wealthy Chinese individual buyers that may be attracted to the properties. The safety offered is enough of a draw that the companies are tackling cultural differences and unfamiliar approval processes, and at times accepting lower returns.
In the U.S., the six biggest metropolitan areas have attracted $2.88 billion in commercial real estate investment by Chinese companies this year, up from $321 million in all of 2012, according to New York-based research firm Real Capital Analytics Inc. The data include both completed and pending transactions. Manhattan and other New York City boroughs were the two biggest areas for deals, with Los Angeles third.
The Chinese are adding to a wave of investment in top markets by buyers including sovereign wealth funds, real estate investment trusts and private-equity firms. In the six major U.S. metro areas, commercial-property prices reached a five-year high in August, the latest month for which figures are available, and are up 6.2 percent this year, according to Moody’s Investors Service and Real Capital Analytics.
In exchange for relative safety, Chiway is prepared to settle for an internal rate of return of about 15 percent on U.S. projects, less than the 30 percent to 50 percent more common in China, Qian said in the interview in Los Angeles, the first stop on the tour organized by the China Real Estate Chamber of Commerce.
“These types of returns are going to end in China too,” said Qian, whose company has built about 12 million square meters (129 million square feet) of mostly residential buildings in eastern Chinese cities including Shanghai. “They will have to level out at some point. But it’s hard to predict, and it makes business-planning for the future difficult in China.”
Greenland Holding Group Co., the Shanghai-based builder of one of China’s tallest towers, has emerged as one of the largest Chinese investors in the U.S. In October, the company signed a memorandum of understanding to buy a 70 percent share of Brooklyn’s $5 billion Atlantic Yards project. Greenland’s investment in the 22-acre (8.9-hectare) development, which was approved in 2006 and has been delayed in part by the recession, involves 14 apartment buildings and one office property.
“The trend for Chinese companies going abroad has just started,” Greenland Chairman Zhang Yuliang said in an interview last month in Shanghai. The company’s projects include four of the world’s 10 tallest buildings, and it has developments in more than 80 Chinese cities, according to its website.
Greenland is providing funding for the Atlantic Yards project while New York-based Forest City Ratner Cos., the site’s original developer, will manage the day-to-day tasks. Such an arrangement is common for Chinese developers seeking U.S. partners to navigate the local building processes and cultural differences.
The Chinese “realize it’s more efficient to have a local partner,” Gaw said. “The ones who try to do it on their own will have the hardest time. It’s not financial but a cultural problem.”
In San Francisco, China Vanke Co., the nation’s biggest publicly traded developer, has teamed with New York-based Tishman Speyer Properties LP to develop the 655-unit Lumina high-rise towers in the South of Market area. Vanke, based in Shenzhen, has the majority equity position in the $620 million complex, while Tishman is the developer and project manager.
The companies have discussed possible sites for a second high-rise housing project in the city, according to two people with knowledge of the matter. Tishman is trying to assemble parking lots into a large parcel for the construction site, and is negotiating with San Francisco officials because some of the lots are owned by the city, said one of the people, who asked not to be identified because the talks are private.
Suzanne Halpin, a spokeswoman for Tishman, and Tim Feng, a Vanke representative, declined to comment on the negotiations.
In Los Angeles, developer Joseph Moinian is selling a 4.5-acre site designated for a retail, hotel and residential complex with a potential value of $900 million. The land sits near the Staples Center, the downtown arena where the Lakers basketball team plays, and is a few blocks south of a site where Greenland agreed to buy a $1 billion stake in a six-acre apartment, hotel and office development.
Moinian said he’s received five “serious” bids, more than one of which was from Chinese investors.
“Investors see the potential of a development site such as ours,” said Moinian, chief executive officer of New York-based Moinian Group. “Chinese tend to have a longer investment horizon, so this is very attractive to them.”
Offshore investments by Chinese developers are being fueled in part by the government’s tacit endorsement through a “hands off” approach, Gaw said. “The fact that the government hasn’t stepped in and stopped any of these deals is also a message” that Chinese companies can continue building internationally, he said.
In 2009, China loosened rules governing local companies’ direct investments overseas, broadening the types of funding allowed and scrapping other rules to help them seize opportunities with lower investment costs, according to the State Administration of Foreign Exchange.
“The government hasn’t gone as far as actually giving incentives to developers like us for investing abroad, but they have relaxed the restrictions and made it easier,” Qian said.
While limitations on developments abroad have loosened, curbs at home have been helping drive Chinese developers to seek opportunities in places such as the U.S.
China’s government has instated limits on homebuying as a way of cooling the booming market. In October, new-home prices in the country’s four biggest cities jumped the most since January 2011, the National Bureau of Statistics said yesterday. Prices rose 21 percent from a year earlier in the southern city of Guangzhou, 20 percent in nearby Shenzhen, 18 percent in Shanghai and 16 percent in Beijing. Prices climbed in 69 of the 70 cities tracked by the government.
In an attempt to slow the increases, China’s government is limiting members of one family to owning no more than two homes in major cities such as Beijing, restricting mortgage-lending and enforcing 20 percent capital-gains rules on some sales, according to Omer Ozden, managing partner of the private-equity unit of Beijing Capital, whose investments include real estate overseas. The rules have prompted some people to get divorced or enter “fake” marriages to circumvent the limits, he said.
Even stricter rules are expected at the end of the year, including guidance from the government on how high builders may price residential units, Ozden said. Developers and investors are responding to the restrictions by seeking deals elsewhere.
“It is cooling demand and limiting the pace of growth for Chinese real estate developers,” Ozden said. “Even though the demand is still there, even though people still want to buy, the government is imposing restrictions to slow things down.”
Last year, in a separate advisory role, Ozden represented Beijing-based residential developer Xinyuan Real Estate Co. in its acquisition of waterfront land in Brooklyn’s Williamsburg neighborhood for the construction of 216 condominiums.
In cities such as New York, Chinese developers are betting on rising demand from the increasing number of wealthy Chinese seeking property outside their own country, including homes for children studying abroad, according to Ozden and Chiway’s Qian. Xinyuan’s project, called the Oosten -- the Dutch word for east -- is scheduled to begin construction by the end of the year, and is expected to have a “significant” number of pre-sales to buyers who live in China once marketing begins, Ozden said.
It isn’t as common for U.S. developers to invest in real estate in China, said Gregory Karns, a Los Angeles-based attorney at Cox, Castle & Nicholson LLP, who has been advising Chinese companies for more than two decades.
Prologis Inc., the world’s biggest owner of industrial real estate, on Nov. 11 said it would form a venture to build and buy properties in the country. The venture, the San Francisco-based company’s second in China, has an investment capacity of more than $1 billion, including $588 million of committed equity.
“There are certainly U.S. firms investing in Chinese real estate, but it’s less so than the Chinese investing here,” Karns said. “For one, it’s easier to invest in U.S. property than in China. Essentially, all you need is money. But there is also a higher level of certainty in the U.S.”
The surge in Chinese real estate development overseas is reminiscent of the Japanese wave of property investments in the U.S. and other countries in the 1980s, which included purchases of New York’s Rockefeller Center and California’s Pebble Beach golf course. While the push for globalization and diversification by investors is similar, the timing is quite different, according to Karns.
“The Japanese set the top of the market and kept pushing it higher and higher,” he said. “Just like with the Chinese today, there was this push to internationalize investments. But what’s working in the Chinese favor is that the U.S. is coming out of a real estate recession, so prices are better.”
Japan’s relatively small population and declining economy at the time of its U.S. real estate expansion ultimately undermined the overseas investments -- untrue of China and its investors, said Greenland’s Zhang.
Foreign expansion by Chinese builders shows no signs of cooling. Vanke plans to increase its overseas investments to 20 percent of development spending from 5 percent today, with a focus on cities that have been attractive to Chinese for decades, such as San Francisco, New York and Boston, according to Chairman Wang Shi.
Outside the U.S., the U.K. and Australia’s largest cities also are attracting Chinese developers, according to Meisheng Nie, founder of the China Real Estate Chamber of Commerce, a 5,000-member organization focused on growth in the property sector. Greenland Holding is seeking projects in Australia and hopes to invest more than A$1 billion ($952 million) in the country, mostly in Sydney and Melbourne, in the next two years, Zhang said on Oct. 29.
The company plans to construct 1,000 apartments on a Melbourne site and expects to open a five-star, 180-room hotel in Sydney by 2015, Sherwood Luo, managing director of Greenland Australia, said last week.
China’s share of foreign direct investment in Australia has doubled between 2007 and 2012, with transactions in real estate growing faster than mineral exploration and development, according to broker Colliers International. Chinese were the third-biggest group of investors in real estate, accounting for A$4.2 billion, after the U.S. and Singapore, according to data from the Australian Foreign Investment Review Board.
In Europe, investments have totaled $3.82 billion this year, more than triple the amount spent in all of 2012, with London and Brussels topping the list of targeted cities, according to Real Capital Analytics.
Beijing Construction Engineering Group Co. last month said it formed a venture with Manchester Airports Group and other partners to build an international business district in the second-biggest U.K. city.
“Markets with a historically strong Chinese influx are generally very appealing,” Nie said through an interpreter at the breakfast meeting in Los Angeles. “Our members also prefer English-speaking places. It makes doing business there easier.”
Many Chinese developers new to the U.S. market will probably experience “culture shock,” said Karns.
“There is a cultural difference in how the deal is done, the level of paperwork necessary, attorneys are used differently, there is less negotiation in China,” he said. “That boils down to different costs and time frames from the get-go.”
Deals can break down. Earlier this year, talks between Miami-based homebuilder Lennar Corp. and Beijing’s China Development Bank Corp. ended over $1.7 billion in financing for the Hunters Point project and the nearby Treasure Island in San Francisco.
Among the issues was a U.S. tax law requiring foreign banks to report certain information about their American assets or pay a levy, two people with knowledge of the matter, who asked not to be identified because the talks were private, said in April.
China will remain the primary market for domestic developers in the foreseeable future as it provides the necessary platform to pursue offshore projects, according to Greenland’s Zhang. Chiway plans to generate 80 percent to 90 percent of its revenue in China, according to Qian.
“Without a strong business performance at home, you could never make good overseas investments,” Zhang said.
Still, as long as U.S. cities are expanding, boosting demand for housing, lodging and retail, Chinese property investments are likely to continue growing -- especially given the lack the real estate stability back home.
“In China there has been such an explosion of growth, it isn’t sustainable,” Qian said. “It is hard to predict when and how the bubble will burst, but it inevitably will. So we like to put some of our money into safer markets.”