China Towers amid the U.S. real estate landscape
China’s international property investment has touched all-time highs, including more than $350 billion invested into U.S. real estate.
By The China Investor Staff
China Oceanwide Holdings Group is aiming high. The Beijing developer is in the midst of building twin towers in San Francisco that will stand among the tallest buildings in the city and transform its skyline when finished in 2019, according to the company. At an estimated cost of $1.6 billion, the structures at First and Mission Streets will soar 910 and 605 feet, just under the 1,070 of the Salesforce Tower, the brand-new giant in Northern California.
Just as Oceanwide Holdings makes waves in the U.S. real estate market, so does a flood of fellow Chinese developers, including China Vanke, Greenland Group and Dalian Wanda Group. China’s international property investment has touched all-time highs, according to Charles Pittar, CEO of Juwai.com, a leading Chinese international property website. By 2020, Chinese overseas property transactions are predicted to hit $220 billion, according to the site.
“We believe that it will continue setting records in the years to come,” Pittar said.
From 2010 through 2015, China invested about $350 billion in U.S. real estate, according to the Asia QuoteContentSociety, a global nonprofit with a mission to educate the world about Asia. Then in 2016, China took Canada’s spot as the largest source of cross-border capital into the U.S., said Jim Costello, senior vice president of Real Capital Analytics, an industry database of commercial property.
"RICH FAMILIES IN CHINA MAKE AMERICA THEIR PRIMARY CHOICE OF IMMIGRATION, SENDING THEIR CHILDREN TO STUDY ABROAD AND FOR PROPERTY ASSETS."
For many, the stable American market means security for investors, a place of opportunity for their families, quality of life and a fair legal system.
“The U.S. will always be a safe haven,” said Elizabeth Stribling-Kivlan, president of the New York real estate brokerage Stribling & Associates.
Not to mention “the biggest economy and property market in the world,” said Summer Zhen, a business reporter for the 100,000-circulation South China Morning Post. “For many Chinese, it means a mature and relatively safe investment destination. Plus, America’s leading position in education, health care and living environment makes it very attractive, not only for Chinese investors, but also for those eager to study or move to the U.S.”
Another reason is the expectation for a continued rise of the U.S. housing market and the dollar, bringing in speculative buying, she added.
"The long-term attractions of the U.S. market include liquidity, quality of life, good transport connections, a solid legal framework and a diverse economy,” he said. Many of the investors have children, another compelling reason to gaze across the Pacific.
“Rich families in China make America their primary choice of immigration, sending their children to study abroad and for property assets,” said David Wei, director of the International Business Department for the Beijing Jia Hua Four Seasons International Exhibition Co., which zeroes in on real estate investment abroad.
INVESTMENT FUNDS HEADING OUT OF CHINA
Last year, China’s total overseas investment into commercial real estate reached a record high of $38.3 billion, up 49 percent from 2015, according to data from Real Capital Analytics.
“A big part of it is the natural evolution of these companies,” said Jim Costello, senior vice president at Real Capital Analytics. “When Deng (former Chinese leader Deng Xiaoping in 1992) said it was good to be wealthy again, people went out and built up many parts of China. Then their kids went to business school. From there, they started local companies that turned into corporations. It was all a function of the next generations.”
The massive Chinese imprint comes from wealth creation in China and the desire or need to invest in quality, stable markets abroad, said Jonathan Karp, executive director of the Asia Society Southern California.
“The Chinese economy has created behemoth construction, real-estate development companies, insurance companies and, in some cases, conglomerates that comprise these industries,” he said. “These are the companies leading the charge into commercial real estate in the U.S. They have money to invest as well as ambitions to grow and modernize. The U.S. economy is growing, and the real estate market is one of the most stable – since the financial crisis.”
There is a prestige factor involved too, Karp continued.
“The better a Chinese company does in U.S. real estate, the more respected it is at home by investors and customers,” he said. “Chinese individuals have been significant investors, too, both in commercial real-estate financing, through the EB-5 visa program, and in fueling home purchases. The motivation for the home purchases is clear: a beachhead for educational opportunities for their children, an investment property, a potential refuge.”
America was the top overseas destination for Chinese investors, with $18.3 billion, which is four times higher than in 2015, according to the Real Capital Analytics report. Popular investment assets were office property with $17.3 billion and hotels with $10.3 billion. A stark shift from 1972, when President Richard Nixon’s visit to China opened the way to the communist country. Forty-five years later, the Middle Kingdom wears a crown as the second biggest economy after the United States, according to the World Bank.
China is a relative newcomer to the U.S. real estate market, joining a long list of global investors that have been active in the market for decades, according to the Asia Society’s report Breaking Ground: Chinese Investment in U.S. Real Estate.
“Chinese companies and individuals are looking for stable, high-return overseas investments, and the U.S. real estate market provides these assurances,” said Robert W. Hsu, associate director of the Asia Society Northern California. “In addition to strong property rights, the U.S. has a large and sophisticated business and financial sector to facilitate these transactions and the Chinese consider this transparency and expertise as an important part of their decision to come here. While the U.S. real estate market is hot right now, especially in urban locales like SF, NYC and L.A., for the Chinese, prices in the U.S. are a relative bargain compared with what is available in the mainland and in other cities such as London, Singapore, Tokyo.”
Greg Karns, partner in charge of the Pacific Rim Group for Cox, Castle & Nicholson, a California-based real estate specialty law firm, agreed.
“China is trying to make up for lost time,” he said. “The U.S. offers a transparent market with not a lot of barriers to entry. It’s easy to get in and easy to get out.”
IMPACT OF NEW RULES ON INVESTMENTS
Will China’s recent government controls on capital outflow affect the investment trends?
“So many thought a slowdown was coming after 2015. Then came 2016. I don’t see why it would change,” Karns said. “China wants to diversify. The objectives, the motivations are still there.”
A caveat: The amount of money leaving China might shrink, said Phil Marra, U.S. Real Estate Funds leader at KPMG, an international auditor.
“Because of the foreign currency restrictions and Chinese insurance regulators imposed limitations, we expect less cash flow out of China to the U.S.,” he said. “However, we believe there is still great demand for foreign direct investment to the United States. Chinese investors with capital outside of mainland China will continue to be active U.S. real estate investors in fiscal 2017 and beyond.”
Kevin Wright, an EB-5 economist and consultant with Baker Tilly Virchow Krause, a global accounting firm based in Chicago, anticipated the scenario a bit tougher.
“The currency restrictions that went into effect on Jan. 1 will have a huge effect, making it very difficult for the average Chinese person to invest in a foreign market,” he said.
"America is too compelling for chinese investors for the momentum to slow..."
Cushman & Wakefield, another Chicago-based commercial real estate firm, also warns that the policy changes in China might lower the speed of investment. Yet Xinyi McKinny, the company’s senior managing director of China direct investment in the San Francisco Bay Area and Los Angeles, said Chinese investors typically focus on long-term investment, so this short-term impediment will be viewed as such – temporary.
“Growth will likely experience a slowing phase until September 2017 due to Chinese government capital outflow restrictions, although the overall impact should be muted, given that investors were aware of the pending restrictions and had time to take action to meet their goals,” she said. “Traditionally, long-term capital gain is outweighed by the immediacy of short-term cash flow.”
Simply, America is too compelling for Chinese investors for the momentum to slow, contends Cushman & Wakefield’s executive vice chairman, Marc D. Renard, involved in selling Los Angeles’ iconic Union Bank Plaza, which he anticipates will attract considerable interest from the Chinese.
“U.S. commercial real estate offers current yield, diversification and an intrinsic hedge against inflation,” he said. “In addition, the historical performance of U.S. commercial real estate has demonstrated superior returns and lower volatility than most other asset classes. As result, we expect to see a continued acceleration of capital from Asia into the U.S.”
Rosen Consulting Group, a real estate economics firm in Berkeley, California, predicts the market will reach $218 billion in Chinese investment projects across commercial real estate assets and residential purchases – excluding new development - from 2016 through 2020. It also predicts an acceleration over the next five years as equilibrium in the Chinese economy is re-established, according to its report. Market expertise among institutional and individual investors is improving, according to the Asia Society’s “Breaking Ground” report. Relationships are forming and new opportunities are beginning to emerge as the Chinese presence in the market becomes more established, according to the report.
TOP CHINESE REAL ESTATE INVESTORS IN AMERICA
Who are the Chinese heavyweights lifting U.S. real estate to the stratosphere? China Life Insurance, with $7.8 billion in closed property acquisitions in America, is among the companies that flexed their muscles during the past two years, according to Real Capital Analytics.
“They’re heading to America because it’s easier to develop here,” said Costello of Real Capital Analytics.
Rounding out Real Capital Analytics’ top 20 real estate investors in America: Anbang Insurance with $6 billion; China Investment, $1.7 billion; China Orient, $1.2 billion; HNA, $1.1 billion; Bank of China, $600 million; Cindat Capital, $551 million; Ping, $760 million; Kuafu, $506 million; Greenland, $467 million; Shanghai Construction, $397 million; Taikang Life Insurance, $374 million; Shanghai Municipal, $325 million; Wanxiang, $285 million; China Huarong, $279 million; LeOco, $250 million; Sunshine Insurance, $230 million; China Vanke, $221 million; Elite International, $192 million; and Landsea, $186 million.
The top two companies on the list are insurance firms following China’s recent policy change allowing that industry to invest outside the country, Costello pointed out. Anbang wasted little time, buying New York’s legendary Waldorf Astoria for $2 billion in 2015.
“Talk about a home run the first time out,” he said.
Big scores continue, with China State Construction Engineering Corp., the Beijing giant and one of the largest investment and construction firms in the world, involved in building a waterfront condominium development, Park & Shore, in Jersey City, a short commute from Manhattan. The double structures, scheduled for completion in 2019, will house 358 residences, with one-bedrooms starting at $650,000, reports China Construction America.
Also, in the works is Greenland’s $1 billion project of the 1,500-condo Metropolis tower in Los Angeles, partly opened and set for completion in 2018. Another one is Dalian Wanda’s One Beverly Hills, a $1.2 billion condo and hotel development near the Los Angeles Country Club, with plans to open in 2019, as reported on Bisnow.com.
Developers that partnered with well-known U.S.-based real estate companies have had access to high-quality investments, Marra said.
“As all real estate is local, it is very important to have local expertise to identify and operationalize the local real estate projects,” he said. “In the future, we can see some of these larger companies invest without joint venture partners. There is more interest in real estate development projects because they can generate higher yields than existing operating properties.”
As for companies that are good bets to rise to the occasion in the coming five years, the best of them are China Vanke, Greenland and Vantone, said Wei.
“These developers have a long eyesight on the U.S. market and they entered America maybe 10 years ago,” he said. “They were the early birds.”
China Vanke likes to go big, and in 2013 partnered with New York-based Tishman Speyer Properties to build a high-rise condominium complex in San Francisco. This was the first North American investment for the Shenzhen firm, according to Tishman Speyer. The $620 million Lumina joint venture is massive, with two connected residential towers – 37 and 42 stories high – for a total of 655 residences.
“It is significant because that joint venture is one of a few between Tishman and Vanke,” said Karns. “It has become a program for them, the process is more streamlined since they’ve already worked out their joint venture/structural issues and they are bringing other (Chinese) investors into their newer joint ventures.”
China Vanke is a company with a global view, which learns from peer enterprises, said Shi Wang, chairman of China Vanke in an announcement on Tishman Speyer’s website.
“We are entering the U.S. market to continue this learning process, to understand business models in a mature market and accumulate management experience through project cooperation,” he said in the statement. “We selected the San Francisco 201 Folsom Project, as Tishman Speyer is a global industry leader and a business partner who inspires our full confidence.”
Lumina was completed in 2016, and now China Vanke is back at it, teaming up with San Francisco’s Align Real Estate to buy two adjacent buildings on the city’s Mission Street at an undisclosed price. When the China Estate Research Association teamed up with the China Real Estate Industry Association to compile The Top 500 Chinese Real Estate Developers in 2013, China Vanke towered at No. 1. Right behind were Evergrande, Poly, Dalian Wanda, China Overseas, Greenland, Longfor, China Resources, Shimao and Guangzhou.
The following year saw a shuffle, with Greenland at the top, followed by ChinaVanke and Dalian Wanda. With so many companies in flux, Karns lauds Elite International and Landsea along with Singpoli, an outfit deeply into U.S. real estate since the 1990s.
“Beyond Greenland and Oceanwide, some smaller, private companies are doing really well,” he said. “They might not be doing projects of a large size, but they’re doing a lot. These companies are taking advantage of the adage that a rising tide lifts all boats. They got in at the right time – 2010, 2011. Some of the companies, like Elite, find repeat partners, so they’re doing a lot in a short amount of time. The market is hot.”
TOP AMERICAN MARKETS FOR INVESTORS
As for the hottest U.S. markets, New York, San Francisco and Los Angeles are on the front burner. But more than those Gateway Cities are simmering. During 2016, New York City had $6.8 billion in Chinese real estate capital, according to Real Capital Analytics. That was followed by $2.5 billion in San Francisco, $1.4 billion in Los Angeles, $962 million in Chicago, $537 million in Phoenix, $475 million in Miami and South Florida, $202 million in Washington, D.C., $147 million in Seattle and $11 million in Houston.
No question who the heavy hitters at the top of the lineup are.
“The vast majority of investments have flowed into three regions: New York, Los Angeles and the San Francisco Bay Area,” notes the Asia Society in its “Breaking Ground” report.
What is so attractive about that trio?
“New York, Los Angeles and San Francisco have large Chinese populations, robust real estate markets and great educational opportunities,” said Karp. “For Chinese investors, that’s the trifecta: cultural affinity, sound prospects for returns and quality of life.”
In addition to stability and high returns as important factors, so are other less financial ones, said Hsu of the Asia Society in San Francisco.
“Chinese companies, for example, see these cities as important markets to build and expand upon their global brand while learning how to navigate the complexity of the U.S. real estate market,” he said. “If they can succeed here, where competition can be fierce, they can succeed anywhere. For individual investors, the cultural and educational opportunities in cities such as New York, Los Angeles and San Francisco are highly attractive. The concentrated Chinese-American and Asian American populations make these cities a home away from home and investors consider the proximity to world-class educational institutions such as the University of California system, Stanford and Columbia as great opportunities for their children. As we note in the report, quality of life factors also come into play, such as clean air, food safety issues and being in the middle of a vibrant urban life.”
Nearly 80 percent of the dollar volume has been concentrated in the markets New York, Los Angeles San Francisco with two-thirds of development site transactions, according to the Asia Society’s report. At least six projects in these markets each have total project costs exceeding $1 billion, including Pacific Park/Atlantic Yards in New York, First and Mission and the Brooklyn Basin project in the Bay Area and One Beverly Hills, Metropolis and Oceanwide Plaza/Fig Central in Los Angeles, the report stated. The Chinese seem to focus on the big three despite those areas’ skyrocketing prices, Karns said.
“The Chinese investors over time want to be in New York, San Francisco and Los Angeles,” he said. “They’re here for the long haul. Sure, Seattle is white-hot, and Portland, Atlanta and parts of New Jersey are attractive, but it’s not easy to get Chinese off the New York, San Francisco and Los Angeles maps. Simply put, if you’re in Shanghai, it’s tough to get comfortable thinking of Kansas. They might not even know where Kansas is.”
Meanwhile, a real estate mogul, Donald Trump, sits in the White House, and Wei contends that is a plus for Chinese investors.
“Since your new president was a developer before, it makes Chinese investors more excited,” he said. “According to what he said during the presidential campaign, he will reconstruct America. I think there will be a lot of chances for Chinese developers to share and benefit from it.”