28 October 2016
Shanghai-based Greenland Group is investing US$5 billion on a joint venture residential project near Barclays Center in New York. Photo:
Shanghai-based Greenland Group is investing US$5 billion on a joint venture residential project near Barclays Center in New York. Photo:

Why Chinese developers will make more US moves

As wealthy Chinese increasingly seek overseas properties, either for investment or due to immigration-related reasons, mainland real-estate developers have sensed an opportunity to make their mark on the world stage.

Among the various options that have come on the radar, the US is being seen as a good testing ground for business expansion, given the vast scale of the market there and the large population of Chinese migrants. 

Since 2013, mainland developers have already invested more than 100 billion yuan (US$15.76 billion) in the US market, according to Chinese media reports.

China Vanke Co. Ltd. (000002.CN), the largest residential real-estate developer in the mainland, is among those that are leading the foray into America.

The Shenzhen-headquartered firm has already developed eight property projects in the US, including a 61-story apartment building in Manhattan.

The Manhattan venture, which was launched in partnership with New York-based RFR Holding LLC, went on sale last month after it was announced in early 2014.

Among other Chinese initiatives, Shanghai-based Greenland Group acquired a land site in Los Angeles for US$150 million early last year.

The company plans to spend US$1 billion to develop a 1.65-million-square-feet project in a prime area. Elsewhere, Greenland announced that it will invest US$5 billion on a joint venture Pacific Park Brooklyn residential project in New York.

Apart from the top-tier property firms, several second-tier developers are also expanding into overseas markets.

“As the infrastructure in the US gets older, I think Chinese investment is critical in rebuilding that infrastructure. The real ‘smart money’ and major investors from China are looking for long-term appreciation,” said Philip Feder, chair of the Global Real Estate practice at law firm Paul Hastings. 

Targeting 5-6% leveraged yield

Many Chinese insurance firms, meanwhile, have been seeking hotel acquisitions across the world in recent years, with luxury hotels in Manhattan the most sought-after.

Anbang Insurance purchased New York’s Waldorf Astoria Hotel for US$1.95 billion last October. And China Sunshine Insurance Group paid US$230 million for New York’s luxury Baccarat Hotel & Residences.

“For Chinese insurance companies buying office buildings in London and New York, they are looking at a long-term leveraged yield of 5 to 6 percent,” said David Blumenfeld, partner in charge of the Hong Kong Real Estate practice of Paul Hastings.

“If you are a long-term investor, you can take a long-term attitude. Everybody understands there are cycles. They have to be prepared not to sell at the down cycle,” he said.

As a global market, US property has many sources of foreign investment, not just China, Blumenfeld pointed out.

“There are many sources of foreign investment. We don’t think just the Chinese buying would support all the hype in the property prices. Capital today is global, if you are a sophisticated investor, you look around and you see where to put your money,” he added.

Long-term strategic investment

There are some worries about potential property price falls in major US cities, given the looming rate hike by the Federal Reserve. 

However, Chinese buyers won’t suffer the bitter experience that their Japanese counterparts underwent 20 years ago, says Feder.

Japanese investors flooded into the US property market in the 1980s when there was an economic boom in the island nation. That continued until the Japanese bubble burst in the ’90s.

A recession then forced some Japanese investors to sell US property assets at low prices as the firms sought to raise cash to defend their core businesses in Japan.

But the Chinese are unlikely to suffer the same problems. 

The Chinese are definitely looking at a long-term investment horizon, Feder said, noting that the investors have boots on the ground with some of them actually moving to the US.

Blumenfeld feels the renminbi’s recent slide could prompt more Chinese firms to park their money in foreign assets.

“The consensus remains that people expect the RMB to depreciate more. Meanwhile, the Fed is expected to raise its key interest rate, which would make US dollar stronger. If you are a smart Chinese investor, and you think over time your currency is going to depreciate, it’s not a bad idea to put your money into a currency that’s appreciating, he says.

“In spite of the recent Chinese economic turmoil, the long-term trend is still that the RMB will become more and more convertible. And China will allow more people to invest overseas.”

Over time, large Chinese institutions will become global, “and they will have more presence in the large money centers in the world” such as London and New York, Blumenfeld said.

Feder said Chinese investors should study local laws when they come to the US market.

“Some Chinese developers who have had projects in Shanghai or Guangzhou may think that they can come to the US and do it in the same way” but that would be a mistake, he says.

There are laws in the US that impose some restrictions on property ventures, so the Chinese firms “should look for professional advice in charting those waters to avoid potential problems,” Feder said.

Blumenfeld noted that Hong Kong, which has a large number of sophisticated investors and investment professionals, “can play an import role in the ongoing Chinese outbound property investment boom”.

“They are very skillful at operating in China and US and providing services to connect Chinese capital with US or other markets,” he said.

This is the last of a two-part series on Chinese overseas property investments. The article originally appeared in the Hong Kong Private Banking Journal on Nov. 18.

Translation by Julie Zhu

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