Xi-obama Summit: investors watch for signs

If the meetings of the leaders of the world’s two biggest economies produce greater cooperation on trade and investment, it may herald bigger and more deals in the US, especially in commercial real estate, reports from New York.

They just can’t get enough. With Chinese investors eager for deals in the US and the country needing those investments to accelerate its economic recovery, the business world will be looking for any signs of greater economic cooperation that may come out of the twoday summit between Chinese President Xi Jinping and US President Barack Obama that starts tomorrow.

And one group in particular will be watching: commercial real-estate developers and sellers.

“A potential outcome of the current meetings may lead to further business interactions and capital flows between the two countries, which could increase cross border real estate flows,’’ said Sonny Kalsi, founder of New York-based GreenOak Real Estate and former global co-head of Morgan Stanley’s real-estate investing business. ``I already believe the flow of Chinese capital into US real estate will continue to increase and the meetings may lead to even more.”

Chinese investors seeking prime commercial property in the US moved to center stage this week when a group led by real-estate tycoon Zhang Xin acquired a 40 percent stake in the most expensive building in the United States — the General Motors office tower in midtown Manhattan.

The announced sale on June 2 was reminiscent of Japanese investors who bought iconic US commercial properties in the 1980s and 1990s, including New York’s Rockefeller Center and the Pebble Beach golf resort in California.

Comparing Chinese investors’ aggressive moves in the US property market with those by Japanese investors a quarter of a century ago isn’t far-fetched, according to real-estate industry observers.

“China has always had the potential to be a major source of capital for real estate globally, and in the last few years we have really seen this market gather pace,” said Arthur de Haast, head of the international capital group at property-services firm Jones Lang LaSalle.

The GM deal, reportedly valued at $1.4 billion, came four days after Shuanghui International Holdings announced it would buy US pork producer Smithfield Foods Inc for $4.7 billion, in what would be the largest takeover of a US company by a Chinese buyer if approved by US regulators.

More than a month before Zhang’s group completed its purchase of the minority stake in the GM building, executives with Chicagobased Jones Lang LaSalle had forecast that globally Chinese real-estate investment this year could reach $5 billion, paced by a billion-dollar first-quarter spending splurge on London office properties. The projected total would represent a 20 percent jump from 2012.

The global acquisition trend is expected to continue for the next 20 years, as China and the Asia-Pacific region chalk up more than $1 trillion in direct commercial real estate deals by 2030, Jones Lang LaSalle’s De Haast told a Beijing real estate-investment forum in April.

By 2021, the Asia-Pacific region is expected to overtake the EMEA countries — Europe, the Middle East and Africa — in commercial real-estate growth.

The $4 billion that flowed out of China a year ago into foreign commercial property represented a 33 percent increase over 2011. If Chinese outbound commercial property investment does hit the projected $5 billion total this year, it will propel the country into the ranks of the sector’s five biggest crossborder investors, confirming China’s growing influence in the global marketplace, Jones Lang LaSalle said.

Chinese investment growth has been especially strong in the five “super cities” of Hong Kong, New York, London, Singapore and Sydney, according to Jones Lang LaSalle. The first three cities have seen investments of almost $2 billion to $3 billion between 2003 and 2012, the firm said. David GreenMorgan, Jones Lang LaSalle’s global capitalmarkets research director, told financial-news cable channel CNBC that Chinese individual investors are primarily interested in the industrial and hotel spaces in those cities, but a lot of demand is also coming from companies, he said.

“The Chinese government has a policy of globalizing Chinese companies, so we see a lot of demand from corporate who like to own their own buildings when they go overseas,” Green-Morgan said. “They may rent some office space for a year or two and then look around for a building they can buy themselves.”

Another reason for increased Chinese interest in commercial property is because “institutional investors and high net-worth individuals are able to transfer money out of China more easily now,” Green-Morgan said. “That is a big hurdle taken out of the way”.

Many Chinese property developers have found in the Chinese mainland market closed to them as the government takes steps to cool the domestic property market amid skyrocketing housing prices. They are looking abroad to diversify and meet demand from Chinese investors.

On the books is a plan by Chinese development firm ABP Chinese (Holding) to build a Chinese and Asian financial and business center in eastern London’s 130-year-old Royal Albert Dock area. ABP received approval on May 31 for the 1 billion pound ($1.51 billion) project, claimed to be the largest commercial real-estate undertaking involving Chinese investment in Britain.

In Australia, Shanghai-based Greenland Group in March acquired a residential and hotel building in downtown Sydney from Canadian firm Brookfield Asset Management for A$107.5 million ($111.4 million).

In Canada, where the housing market has seen frenzied Chinese buying, the commercial sector is poised for a wave of new investment amid low interest rates, the continued availability of equity and debt, and healthy supply-demand fundamentals, according to CIBC World Markets Inc.

In the US, the wave of Chinese real-estate spending is helping to revive a commercial real estate market that was damaged by the recession and slow economic recovery.

Bloomberg News, citing sources with direct knowledge of the situation, reported on May 27 that China is studying the possibility of investing a portion of its $3.4 trillion in foreign-exchange reserves in US real estate. The State Administration of Foreign Exchange began the study after seeing signs of a recovery in the US property market, the sources said. China may acquire properties, invest in real estate funds or buy stakes in property companies, the sources said.

Investing in US real estate would tie in with China’s move to establish an operation in New York to make alternative investments in the US, an effort by the country’s foreign-exchange reserves manager to diversify away from US government debt, the Wall Street Journal reported, citing people it did not identify.

“In the long run it should be a good opportunity, as the US property market is gradually recovering,” Frank Chen, head of China research at CBRE Group, was quoted as saying. “It will help diversity the foreign reserves’ investment portfolio. Properties such as office buildings have stable yields, which match its investment strategies.”

Two US deals in particular earlier this year appeared to represent a step in the progression of Chinese investment in the US since the global financial crisis.

In mid-February, China’s biggest property developer, Vanke Co, formed a joint venture with Tishman Speyer of the US to develop two high-rise condominium towers in San Francisco that are likely to draw wealthy Chinese buyers. It is Vanke’s first foray into the US market, the companies said.

The project, to be managed by Tishman Speyer, will cost about $620 million, with Vanke contributing $175 million and Tishman Speyer $75 million, Reuters reported, citing a source familiar with the deal. Debt financing will cover the rest of the cost. Vanke will have a 70 percent stake in the joint venture and Tishman 30 percent, the source said.

Just two weeks later, Malaysian gambling company Genting Group agreed to pay $350 million to acquire from Boyd Gaming Corp 87 acres in Las Vegas. Genting plans to start construction on a multibillion-dollar casino complex called Resorts World there next year. It would be the first major casino initiated in the wake of the economic downturn of 2008.

The two deals are worth a combined $1 billion — a fraction of the $102 billion in investment abroad from companies in the Asia-Pacific region in 2012, according to Thomson Reuters. But they signal a strategic shift. Instead of pursuing natural resources, the driving force behind many of Asia’s biggest recent foreign acquisitions, these companies are investing in the US to cater to Chinese consumers abroad.

Jeremy Aguero, a Las Vegas economist and consultant, called the move by the Malaysian company “a game changer” in that it reversed a recent trend by Las Vegas casino companies to expand in Asia, where casino markets are generally seen as a much greater growth opportunity than in the US.

“I certainly didn’t expect something like this would happen quite this early,” he told the Wall Street Journal. “People were expecting a big new casino in Las Vegas was still three to five years away.”

Until the Genting and Vanke deals, there was little evidence that large Asian companies were following the money trail to the United States.

“You have Chinese money sitting in US houses and Chinese money sitting in US banks. If you’re smart, you start setting up places for Chinese people to stay and things for them to buy,” said Derek Scissors, an economist who tracks Chinese foreign investment for the Heritage Foundation, a research organization in Washington.

Analysts said that for Vanke, venturing into the US makes sense now because Beijing is clamping down on property speculation at home. New restrictions announced March 1 may speed the flow of Chinese property investment abroad.

“Vanke will go anywhere” that mainland Chinese want to go, said Du Jinsong, a property analyst at Credit Suisse in Hong Kong. “Their target customer is not overseas Chinese. Their target customer is mainland Chinese who want to migrate to overseas, or have a home outside the country.”

Chinese buyers also are investing in Seattle-area real estate in growing numbers. The Seattle Times reported that Chinese investors are “accelerating the real-estate market’s recovery, sometimes edging out other buyers with all-cash offers, and deepening ties between Seattle and China”.

But for Chinese investors, New York holds special allure. Cross-national exchanges in a multitude of areas, from fashion to luxury lifestyle to entertainment to cuisine have paved the way for new investment in the Big Apple. In real estate, the soaring towers built by developers such as Zhang Xin’s Soho China Ltd, the biggest developer in Beijing’s central business district, would have a place amid Manhattan’s canyons of steel and glass.

The Zhang-led group’s purchase, together with Brazil’s Safra family, of the interest in the 50-story GM building is seen as signifying the revitalization of the high-end New York property market. The 2 million square-foot tower built in 1968 sits in a prime midtown Manhattan location on Fifth Avenue, home to one of the world’s most prominent shopping districts, and across from Central Park, making its office rents among the city’s highest.

Michael Knott, a real estate analyst with California-based Green Street Advisers, said that the sale of the GM building stake to the Zhang group by a Goldman Sachs Group Inc real-estate fund and Meraas Capital on behalf of Middle Eastern investors “represents a big but fair price for a trophy US office building, the trophy among trophies”. More broadly, the reported sale price “shows that the highest quality US commercial real estate is faring well amid low interest rates”, Knott said.

Zhang, ranked by Forbes as the world’s seventh-richest self-made woman, invested in the GM building with her own personal wealth, estimated at $3.6 billion, not with Soho China’s funds, Reuters reported, citing sources.

Darcy Stacom, who co-handled the stake sale for CBRE Group Inc, described the deal as “a return to the billion-dollar plus level for an individual investment transaction”. She said it underscores “both the GM building’s universal appeal as one of the world’s most important commercial assets and New York City’s undiminished value, as the premier location for trophy investment properties.”

Foreign projects are still a fraction of the overall portfolio of Chinese developers, who had $226 billion in residential and commercial sales in the first quarter, up 61 percent from the same period in 2012.

Nicole Wong, a property analyst for brokerage and investment group CLSA AsiaPacific Markets in Hong Kong, told Forbes that although foreign projects amount to side interests for Chinese developers, those who do venture overseas could prove more resilient in a domestic downturn.

“The problem in China is that every [asset] moves together … By having offshore activities, particularly for larger companies, they can find some countercyclical business that helps offset their Chinese businesses,” Wong was quoted as saying.

Overseas projects offer a hedge for both developers and their wealthy customers, who typically own multiple properties at home and see offshore real estate as a track to a foreign residency.

Credit Suisse’s Du told Forbes that developers are starting to follow their customers into offshore markets. “Most developers that I talk to definitely won’t rule out overseas ventures,” he said. “But they’re going cautiously. This is only the start of the trend.”

Based on Chinese investors’ current buying spree, the meeting of that trend and the XiObama summit could have profound implications for the commercial property market — not just in the US, but around the world. Contact the writer at michaelbarris@chinadailyusa.com

DANIEL ACKER / BLOOMBERG A 40 percent stake in the 50-story General Motors building (center) in midtown Manhattan was sold this week for a reported $1.4 billion to a group of investors led by Chinese real-estate tycoon Zhang Xin. The office vacancy rate in Manhattan, the...