Lessons from "Forest City" project in Malaysia? Chinese buyers, unable to get money out, no longer buying real estate
And yet the greatest blow to Forest City last year was struck by the Chinese government, through a set of new restrictions that underscore the tension inherent in Beijing’s economic vision, in which it encourages companies to “go global” yet fears the exodus of its citizens’ new wealth. Over the last decade, China has seen an estimated $3.8 trillion in capital leave the country, much of it going into offshore real estate. In an effort to crack down on rampant capital flight, Beijing tightened its capital controls, making it nearly impossible for investors to send large amounts of money out of the country. The limit on foreign transfers remains $50,000 a year per person, but now senders must sign a pledge that no money will be used to buy property — and face investigation if they violate the pledge. The tougher controls have strengthened China’s currency and stabilized its foreign reserves, but many Chinese investors, including some Forest City customers, were left stranded: They had made down payments on their tropical idylls, but banks wouldn’t let them send the rest.This just doesn't affect Forest City in Malaysia, but also Forest City in the United States, the Cleveland-based Forest City Realty Trust, and its Forest City New York subsidiary. (The name comes from Cleveland's historic nickname.)
Actually, it most affects Greenland Forest City Partners, which later this year will be 95% owned going forward by Shanghai-based Greenland USA.
Future condo buyers in Brooklyn?
Not only has the joint venture been hampered by changes in the 421-a tax break which will make it difficult to build condos going forward (though don't count them out), but it raises questions about whether individual Chinese buyers would be able to buy into a future condo building. After all, they made up a significant chunk of early buyers of 550 Vanderbilt, the only condo building constructed yet.
In fact, the restrictions on Chinese buyers removes a key advantage that the giant developer Greenland brought to the project: access to willing buyers back home, given the attraction of New York/Brooklyn, and Greenland's local prominence.
If condos come back--and I wouldn't bet against that--Greenland might have to look to other countries for overseas buyers willing to stash cash in a real estate project. Or, perhaps, Greenland's appetite for Atlantic Yards/Pacific Park will diminish.
That means it would seek--despite now restructuring its deal with Forest City, eager to leave, to take on more of the project--to offload some of the project to another buyer/investor.
Exposure to a volatile economy
As I've noted before, it's worth recalling a warning at a 3/28/14 board meeting of Empire State Development, the gubernatorial-directed authority that oversees and shepherds Atlantic Yards.
Gib Veconi of the Prospect Heights Neighborhood Development Council focused on the state’s failure to consider the option of bringing in other developers. The pending Greenland transaction would not represent a multiple-developer strategy, Veconi observed, but rather a single-source development project, one "under the control of a partner exposed to one of the world’s most volatile economies.”