The tide turns: Chinese real estate investors end "buying spree"; Greenland pulling back too

The tide is turning, with this week's Wall Street Journal analysis of Greenland USA's apparent stumbles--and loss of support from its home base in Shanghai--just one data point. 

The evidence was emerging a few months back. Chinese Reversing Big U.S. Real Estate Buying Spree That Had Helped Boost Prices, the Wall Street Journal reported 7/24/18:

Chinese insurers, conglomerates, and other investors have turned net sellers of U.S. commercial real estate for the first time in a decade. They have spent tens of billions of dollars to acquire hotels, office buildings, and vast swaths of empty land to build residential towers.

But Chinese investors sold $1.29 billion worth of U.S. commercial real estate in the second quarter, while purchasing only $126.2 million of property, according to data firm Real Capital Analytics.

Or as Jim Costello of Real Capital Analytics wrote 7/25/18 on RCA Insights:

The heyday of Chinese investment in U.S. commercial real estate seems to be over. These investors, who have bought U.S. assets priced over $54.1 billion since 2000, became net sellers for the first time in the second quarter of 2018.
...One quarter does not make a trend, but clearly the peak of their investment activity was in 2015 and 2016.

That represents less a pure market reversal than a reflection of changing policy from Beijing, which began encouraging domestic real estate companies and investment funds to look overseas, but now is reining in foreign investment.

Beyond commercial real estate, the trend now includes individual home investors:

Hah. Chinese investors who have purchased homes in the U.S. are selling them too. “This might be the first time in my career that I’m seeing more Chinese sellers than buyers.” https://t.co/PB9TZ9k5Ms Impt story by @LauraKusisto

— Esther Fung 方心恩 (@estherfung) July 27, 2018

Capital controls and a potential trade war are prompting Chinese buyers to pull back on U.S. home purchases, But I have to believe that nonstop negative coverage of U.S. politics and failed EB-5 projects has to be at least as big a factor. https://t.co/Y9OD8xxC1y pic.twitter.com/IUA0qkzlot

— Laura Kusisto (@LauraKusisto) July 27, 2018

Those pulling back include Greenland

That's led various big-name companies to sell or step back, including Anbang and HNA Group. Greenland USA sold a South San Francisco property called Oyster Point before launching construction, pulled back from negotiating a potential North Hollywood investment, and put part of its glitzy Metropolis project in Los Angeles on the market.

(Separately, Greenland Hong Kong in 2016 reportedly invested in a controversial conversion of the Park Lane Hotel in Manhattan, but later withdrew, calling the asset "not mature." Others said the asset was tainted by money-laundering charges.)

Greenland's Brooklyn path has been more tangled. In 2014, it bought 70% of the Atlantic Yards project going forward from Forest City Enterprises (now Forest City Realty Trust), and the joing venture Greenland Forest City Partners built three towers.

Then Forest City unilaterally paused the project. The joint venture tried sell stakes in three towers containing condos--B4, B12, and B13--but gave up in 2017. Greenland recently bought nearly all of Forest City's remaining share of the project, owning 95%, then sold the rights to three towers (B12, B13, B15) to two other companies.

Would Greenland sell more of Pacific Park? That shouldn't be ruled out. After all, the original developer, Forest City, had said it didn't "build to flip," but wound up selling to stave off losses. Those sales include separate transactions regarding the modular tower (B2, aka 461 Dean); the Barclays Center operating company and the Nets; and then the Greenland deals, which involve the rest of the project.

“The decision to sell Oyster Point was purely a business decision,” said Hu Gang, president and CEO of Greenland USA told the 7/24/18 Wall Street Journal.

Regarding Metropolis, Greenland told the 8/8/18 Real Deal, said it remains “open to exploring opportunities as the market dictates.” Citing the L.A. Business Journal, the Real Deal 8/16/18 reported that Greenland had gotten a $310 million construction loan to finish the third Metropolis tower, but noted that it was unclear "whether Greenland plans to see the project through itself."

Don't rule out more changes in Brooklyn. After all, Atlantic Yards is a "never-say-never" project.

Earlier optimism

The news coverage, for a while, was quite sunny. In August 2014, The Real Deal reported, These 6 Chinese real estate titans are snapping up NYC property, noting that they were looking abroad for stability. They included:

• China Vanke, the largest residential developer in China
• Greenland Holding Group, a Shanghai city enterprise [now listed on the Shanghai Stock Exchange, and partly owned by the city] specializing in "ultra high-rise towers" (and, of course, the new Atlantic Yards/Pacific Park investor)
• Fosun International, China’s largest closely held conglomerate
• Zhang Xin and Pan Shiyi, a wife-and-husband team who head SOHO China, the country’s largest developer of high-end office space
• Wang Jianlin, the Wanda Group chairman and China’s richest man
• XIN Development, the U.S. arm of the Beijing-based homebuilder Xinyuan Real Estate 

Graphic from The Real Deal

A 3/1/15 article in The Real Deal, The Year of the Chinese Investor, had the subheading, "Inside the growing wave of investors buying and building in the five boroughs," and began:

Chinese investors pumped more than $3 billion into the New York real estate market last year. That was nearly 43 percent more than they invested in 2013. And it appears to just be the tip of the iceberg.
With China’s economy cooling, investors are throwing their money into deals in New York. And it’s not just individual Chinese buyers snapping up condo units these days. Institutional players, investors and developers, who’ve made a splash buying trophy buildings over the past two years, are not only continuing to ramp up purchases, but also are accelerating their involvement in condo development and looking for developable New York land.

A 4/21/15 Bloomberg article, Vornado, Related Seeking Chinese Partners for Development, cited that company's goal of involving Chinese investors.

The move was international. London's Guardian reported 10/22/15, in a generally even-handed article provocatively headlined "'It's an insult': Chinese property developers race to the top of London’s skyline," on Greenland:

The Shanghai-based developer Greenland was also here to showcase its £1.2bn investment in London property, including plans for “classic south-west London luxury apartments” on the eight-acre Ram Brewery site in Wandsworth, and what could be the tallest apartment building in western Europe at Canary Wharf... critics have raised concerns over the building’s deep, dark floor-plates and the fact that the plans don’t meet London’s Housing Design Guide standards. Only 80 flats will be for social rent, while 80 will be intermediate, again falling short of the borough’s requirements.

2016: The warnings surface

A 3/18/16 Financial Times article headlined China Inc: The quest for cash flow came with a subhed, "Anbang and other companies’ spending sprees on overseas assets come with worries over transparency."

The article focused on the insurance company Anbang, which "[i[n just over a year, it has gone from an international unknown to become one of the most aggressive" among Chinese companies, notably buying the Waldorf Astoria hotel in New York.

From the article:

But within this surge of Chinese deals — which have totalled $102bn since January compared with the record $106bn for all of last year, according to Dealogic — lies a paradox for target companies. While the cash offers can seem too big to refuse, they may also appear to come from the corporate equivalent of deep space, so sparse is the information available on the bidder.

Comparatively speaking, of course, Greenland was a well-established company, at least domestically. The article did briefly cite Greenland:

Many of their investments are linked to the emergence of the global Chinese consumer.
In residential real estate, Shanghai-based Greenland Group bought a majority stake in the Atlantic Yards development in Brooklyn, promising to help sell units to wealthy Chinese immigrants and investors. 

Indeed, many among the first round of buyers of the 550 Vanderbilt condos were from China or had Chinese names; it's unclear how many (and when) other condos will be built, given the loss of the 421-a tax benefit.

A big report takes stock

In May 2016, the Asia Society, with the Rosen Consulting Group, published Breaking Ground: Chinese Investment in U.S. Real Estate, observed that 2013 marked the year when Chinese investment into the United States exceeded investment in the other direction, and that real estate here had drawn by far the most investment:

Currently there is an estimated $200 billion of Chinese investment parked in U.S. real estate bonds, primarily long-term asset-backed securities. Since 2011, direct investments have exploded, particularly in New York and California. Estimates for 2014 peg Chinese investment at up to $10 billion in commercial real estate and more than $28 billion in residential real estate. While news coverage of individual transactions grows with each newly announced deal, particularly large dollar-value investments, few analytical studies offer a macro perspective on this boom, and none have attempted a comprehensive survey of total Chinese investment.

(Emphases added)

As noted in the full report, the change was dramatic:

Chinese direct investment in U.S. real estate was negligible until 2010 but has since grown dramatically and visibly. In 2015, China ranked third in U.S. commercial real estate acquisition volume, trailing only Canada and Singapore and tied with Norway... Chinese investors dominate an immigrant investor program known as EB-5, and in 2015, China overtook Canada as the biggest foreign buyer of U.S. homes....   

[Investment grew to an] aggregate of at least $350 billion in U.S. real estate holdings and investments by the end of 2015.  

Beyond real estate development and EB-5 capital, the report noted, "Chinese investors are also increasing investment in portfolios of U.S. assets through real estate investment trusts and private equity funds," even as China is the leading "holder of mortgage-backed securities issued by U.S. government-sponsored enterprises such as Fannie Mae and Freddie Mac.

Beyond at least $93 billion in residential real estate, especially prime locations in California and New York, and at least $17.1 billion in commercial real-estate--existing office towers, hotels, and other commercial buildings, "by the end of 2015, Chinese-funded [development] projects under construction or planned totaled at least $15 billion."

Of course, if we count Atlantic Yards/Pacific Park at $4 billion-plus (putting aside the arena and 461 Dean), it could count as a significant segment of that.

The report suggested that "Chinese investment in overseas real estate is driven by a combination of policy reform, economic conditions, and opportunities for growth," including concerns about a  weakening yuan, a need to diversify abroad as China's growth subsides, and "to improve their competitiveness, global stature, and brand recognition."

The report warned that "China’s economic turbulence will create a short-term speed bump for real estate investment overseas, including in the United States," with a likely 6-to-24-month temporary period of increased capital controls." Still, the report was optimistic, suggesting "long-term investment drivers" like demand for capital, a deep pool of investors, a global push abroad by Chinese developers and construction companies, an insurance industry with money to spare, and new Chinese investment vehicles like private equity funds.

So the report projected that Chinese real estate investment, excluding new development projects, could total at least $218 billion, cumulatively, from 2016 through 2020, and then could continue to accelerate. In retrospect, at least, that seems overoptimistic.

Its U.S. policy recommendations included rationalization of taxes affecting foreign investment, continuation of the EB-5 program, and continued implementation of existing security policy. It recommended that China continue developing legal and financial rules to encourage private sector investment in overseas property, enhanced transparency in capital ownership, avoidance of capital controls, and development of professional education on U.S. real estate practices.

The reported that the first wave of investment included sovereign wealth funds like China Investment Corporation (CIC), while the second wave was led by estate developers and operating companies like China Vanke, Greenland Group, Dalian Wanda Group, Landsea, Oceanwide, and others. A third wave was driven by insurance companies, which, as of 2012, were permitted to invest directly in real estate abroad.

The warnings continue

A long 5/6/16 article in Institutional Investor, China Gets Real About U.S. Real Estate, pointed to a spate of deals like Anbang's nearly $2 billion purchase in October 2014 of the Waldorf Astoria hotel in New York, or the company's unsuccessful bid for Starwood Hotels & Resorts Worldwide.

Other major deals involved the purchase of  One Chase Manhattan Plaza by the investment firm Fosun International; a huge stake in the General Motors Building, by the developer SOHO China, and the Bank of China's purchase of the 7 Bryant Park office tower--oh, and, the article suggested, Greenland's Metropolis project.

These purchases contrast with more prudent investments after the 2008 recession, when prices had cratered. The pace became dizzying:

Nearly $6 billion of the $8.5 billion that Chinese investors put in U.S. real estate in the decade ended March 2014 was invested between January 2013 and March 2014, according to professional services firm Deloitte Touche Tohmatsu.

“They may be pushing up prices more aggressively than fundamentals dictate in some cases,” Kenneth McCarthy, chief economist at global commercial real estate services firm Cushman & Wakefield, told the publication.

Interestingly enough, that observation likely does not apply to Greenland's stake in Atlantic Yards/Pacific Park. Given the question marks around that project, and parent Forest City's desire to get it off their books, Greenland likely didn't face a fierce bidding war. Also, it may have been willing to accept a relatively low projected return in order to establish itself in New York City.

The article noted slowing growth in China's economy, plus a devaluation of the yuan provoking companies and wealthy investors to look abroad, with encouragement from the government. Moreover, real estate would offer better returns than low-yielding bonds.

But the investment prompted uneasiness, given potential ripple effects from a volatile Chinese economy or prices rising beyond their fundamentals. Some with long memories recall the Japan-fueled investments in the 1980s, which crashed. From the article:

Kyle Bass, founder of Dallas-based hedge fund firm Hayman Capital Management, predicts a credit crisis in China within the next two years. As for the situation in the U.S., he says, “This is eerily reminiscent of the 1980s.”

The article paraphrases Blackstone’s global head of real estate, Jonathan Gray:

When a great deal of money floods a market and much of it is leveraged, as is currently the case in China’s real estate sector, the odds of a correction are strong. There is a lot of capital chasing deals in the U.S., but lenders are being cautious about esoteric financing. The question of cranes, or excessive construction and development, however, may depend on the observer’s view. 

A 5/16/16 article in the Real Deal, headlined Chinese capital may be “less sophisticated” than it seems, began:

“I’ve been surprised by the lack of sophistication of some Chinese institutional investors,” John Liang, Xinyuan Real Estate’s managing director of U.S. operations, said Monday during a panel on Chinese real estate investment at the Asia Society.
Some are even missing the “basic finance 101 concept of risk and reward,” he said.
The reason? Real estate in China is basically “a manufacturing business,” he said — one builds, sells, and makes a profit.

Did that apply to a sophisticated market player like Greenland? Probably not, but Greenland's Chairman, Zhang Yuliang, did in 2013 claim--dubiously at the time, and absurdly in retrospect--that the entire project could be finished in eight years.

 Without mentioning Greenland, the article did point to a potential part of its strategy:

Many Chinese companies are also looking at investing in the U.S. as a branding tool, which, when combined with the desire for cash flow, is a large component of why the Chinese have been buying hotels in recent years. Many firms are also betting they can leverage their connections back home to drive Chinese tourists to their U.S. hotels.

Similarly, a 6/30/16 article in Barron's cited Morgan Stanley economist Ruchir Sharma's warnings about China:

China, these days, is the poster child for such speculative excess, and that is an important signal of coming problems. Academic studies show that nearly two-thirds of recent serious recessions around the globe followed on the heels of busts in national real estate or stocks. “These binges leave little in the way of productive assets behind for future growth,” Sharma opines.

A particularly pointed observer

He Qinglian, a Chinese author and economist now based in the United States, published two particularly tough commentaries in the Epoch Times, published by the Falun Gong movement, which is banned by the Chinese government.

In 6/26/16, What’s Really Driving China’s Overseas Investment Boom, He wrote, "The real reason behind Chinese capital outflows is to evade or minimize substantial losses in the economic downturn back home."

Though most Chinese overseas investment is made by state-owned enterprises, He wrote that "the main purpose for [the growing amount of] private Chinese capital going abroad is for hedging rather than industrial investment." One piece of evidence: a dramatic increase in reported imports from Hong Kong, which He called an example of money laundering.

Despite the risks posed by capital outflows, He suggested that the government still aimed to attract foreign investment and also aimed to reward "Communist Party insiders and their relatives."

By 10/9/16, He targeted China’s Ponzi Real Estate Market, warning that the government-involved market--as "dealer, referee, and big player"--was characterized by an unhealthy ratio between real estate investment and GDP, or Gross Domestic Product:

The real estate investment to GDP ratio is mainly used to evaluate the anticipated future price and whether real estate investment is overheating. China’s real estate investment and GDP ratio has been high: 14.8 percent in 2013 and 14.18 percent in 2015.

Since 1960, real estate bubbles have all burst in countries where real estate investment and GDP ratios were higher than 6 percent . When the Japanese real estate market collapsed, real estate investment accounted for only 9 percent of GDP. At the start of the U.S. subprime mortgage crisis, the ratio reached a local peak of 6.2 percent.

He suggested that "China’s economy is suffering from real estate dependence sickness, primarily because local governments are financially dependent on land," which is, of course, governmentally owned. He warned:

Once there are huge real estate market fluctuations, dozens of industries relying on real estate will suffer incalculable losses and may even cause the collapse of China’s real economy....
Past experience tells us that China’s real estate bubble will burst sooner or later. The only question is how it will collapse.... Since the government is the referee, dealer, and big player, the bubble can become much bigger than the ones in Japan and the United States. And the government has a lot more room to maneuver.

Questions persist

As the Los Angeles Times reported, in an 8/26/16 article focusing on downtown Los Angeles, traditional metrics don't necessarily apply to real estate firms going global:

The building boom is something of a showcase for Chinese real estate companies, which are willing to pay a premium to establish themselves as global brands.....
Chinese developers can afford to outbid the competition in markets like L.A. because they are willing to wait longer than most to reap returns and can rely on both local and Chinese-based home buyers to scoop up their condos. It’s also advantageous to move capital overseas to hedge against inflation and a weakening Chinese renminbi.
But a "dependence on Chinese buyers," the L.A. Times warned, could backfire if Chinese regulators made it tougher for wealthy people to move money overseas.

In an 11/29/16 article headlined online as Chinese Developers Reassess U.S. Projects, the Wall Street Journal reported:

Some Chinese real-estate developers are lowering their profit expectations on U.S. projects or shelving them entirely as frothy prices and rocky partnerships force them to rethink their strategies in the American market.
...The headwinds come at a time when Beijing once again is planning to tighten its rules on Chinese investment capital leaving the country.

The article cited Forest City's late 2016 decision to pause all Atlantic Yards/Pacific Park development, and to take a significant impairment charge. That decision, announced without buy-in from Greenland, led to a long negotiation regarding Greenland buying nearly all of the rest of the project, perhaps at favorable terms.

Slowing things down

The slowdown continued. As Bloomberg reported 1/26/17:

Less than a month after China announced fresh curbs on overseas payments, anecdotal reports from realtors, homeowners and developers suggest the restrictions are already weighing on the world’s biggest real estate buying spree. While no one expects Chinese demand to disappear anytime soon, the clampdown is deterring first-time buyers who lack offshore assets and the expertise to skirt tighter capital controls.

The Real Deal reported, in a 5/1/17 article headlined Building a Great Wall around money from China, that new capital controls beginning in the end of 2016 have been aimed to both stabilize the Chinese yuan but also steer investment within the country.

As National Real Estate Investor reported 8/30/17, the Chinese government had restricted capital outflow, in an effort to preserve the value of the yuan, and that month had set guidelines for types of investments, nixing gaming, encouraging infrastructure, and applying moderate restrictions to investments in sports, films, and real estate.

That slowed things down. Chinese Property Shopping Spree Fades as Beijing Hits the Brakes, the Wall Street Journal reported 10/31/17, noting that the new restrictions and scrutiny had prompted "concerns that deals in certain sectors were disguises for capital flight into havens."

Greenland claimed it's ahead of rivals

Though the article mentioned Greenland's pending plan to sell the South San Francisco site, it quoted the company as defending its strategy: "China's capital controls will have a certain impact on immature companies, but it doesn't mean it will restrict or affect the development path of companies that have international perspective and core competencies."

In other words: we know what we're doing. Maybe, maybe not.

The Real Deal 12/1/17 December reported:

Over the past year, Chinese regulators have tightened their clampdown on foreign investment, detaining several of the country’s most prolific New York real estate buyers, including Anbang Insurance Group’s Wu Xiaohui and Fosun International’s Guo Guangchang. 

Also facing scrutiny were the Dalian Wanda Group and HNA Group. Greenland was not mentioned.

The giant conglomerate Anbang in February 2018 was taken over by the Chinese government, less than three-and-a-half years after it bought the Waldorf-Astoria Hotel in New York City. The Wall Street Journal reported 8/19/18 China's Anbang Puts a $5.5 Billion Luxury Hotel Portfolio on the Block, explaining how the insurance company had changed course, selling the whole 15-hotel portfolio rather than individual buildings--a sign of governmental nudge.

The Journal noted that Chinese companies had sold investments at a profit but more recently have just been trying to break even or cut their losses.

Did Greenland lose money selling three sites to two other developers, TF Cornerstone and the Brodsky Organization? We don't know, since the deal's not public. But the lack of a number suggests someone wants to keep things under wraps. That said, as I suggested, Greenland may have gotten a good deal on Forest City's remaining share.

Bad timing, new conditions

The 10/2/18 Wall Street Journal article suggested:

Chinese investors swept into the New York market when it was "frothy," pushing prices and sales volume to peak levels in 2014 and 2015, said Adelaide Polsinelli, vice chair of the commercial investment sales and leasing division at real-estate services firm Compass.
They wanted to buy, build and sell in a fast four to five-year time frame, she said. Now, they are facing a surge in residential construction, rising interest rates, less favorable U.S. tax laws and tightened restrictions on capital outflows.
"They were overly optimistic, and the market didn't cooperate with their timing," Ms. Polsinelli said. "At the end of the day, we're in a cycle, and we're facing down, not up."

The Hong Kong-based South China Morning Post, in a 10/3/18 article headlined Chinese investments in the US shrink 92 per cent as deals come under greater scrutiny amid trade war, didn't mention real estate, but cited broader trends regarding general Chinese investment:

“China’s economy is slowing, its currency weakening, and the trade regime is faltering,” said Brock Silvers, managing director at Shanghai-based Kaiyuan Capital, explaining the reasons for the decline in Chinese investments. “This doesn’t indicate a broad foundation for aggressive international expansion. Beijing has also made it difficult to finance offshore deals.”
...He added that the US has also adopted a policy of tougher regulatory measures for Chinese acquisitions, while Beijing seems to be encouraging top conglomerates to focus more on domestic investment.