What’s Behind China’s Worldwide Real Estate Shopping Spree?

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By Philips Chair in Strategy and International Business and Co-Director of CEIBS Centre for Globalisation of Chinese Companies Klaus E. Meyer

In the recent wave of Chinese investors going global, it is remarkable how much goes into real estate and other businesses that have a large element of fixed assets. These investments reveal a lot about the forces driving the spread of Chinese capital.

Take London for example, which claims to attract more Chinese investors than any other city worldwide. A closer look reveals a string of major acquisition deals that are not takeovers of companies but takeovers of commercial property (see chart below). Two major purchases of office complexes were announced in April 2016. The Aldgate Tower building in the City of London was acquired by China Life Insurance together with Brockfield Property Partners for £346 million, while in Canary Wharf the office complex 17 Columbus Courtyard was acquired by the investment arm of Hainan Airlines (HNA) Group. Chinese investors led by the investment fund China Minsheng Investment are also backing the Airport City development project in the Royal Albert Docks. Announced during Xi Jinping’s visit to the UK in October 2015, this project envisages a total investment of £42.6 billion to develop infrastructure and commercial real estate near London’s City Airport.

Elsewhere, Chinese investors have been particularly active in New York. In one of the most talked about deals, Anbang Insurance took over the iconic Waldorf Astoria hotel for $1.95 billion, while business groups like Greenland and Fosun have been investing in residential and commercial real estate projects. Iconic buildings in Chinese hands include the General Motors Building, the Atlantic Yards project in Brooklyn, 717 Fifth Ave, and 1 Chase Manhattan Plaza. Also Canadian and Australian cities Vancouver, Toronto, Sydney, Melbourne and Brisbane have seen a surge of Chinese investment in real estate. In Europe, the Fosun Group acquired the historic Milan headquarters of Unicredito, known as Palazzo Broggi, for €345 million. Meanwhile Wanda paid €265 million for the Edificio Español, an iconic building from the 1950s located in the center of Madrid, and once the tallest building in Spain.

Who are the Chinese investors acquiring real estate abroad?

We can distinguish three types. First, the largest group of acquirers is probably made up of financial investors who look for objects that offer a good return within their portfolio of assets. Second, some are Chinese real estate developers such as Greenland and Wanda that aim to construct commercial or residential buildings with the aim to eventually sell or lease them. Third, business groups such as Fosun or HNA are diversifying abroad with an eye on both investment returns and potential synergies with their other assets. 

Why is foreign real estate an attractive investment for Chinese funds, insurance firms, and even individuals?

Real estate offers a relatively safe place to put your money if you have plenty of it – without the need to become directly involved in the operations of overseas subsidiaries. Moreover, real estate markets move in different cycles in different countries, and so overseas investments provide opportunities for risk diversification. As I recently argued in another blog, one of the key motivations of increasingly wealthy Chinese investors is to diversify their investments out of China. Investments in real estate offer such opportunities. Yet, it is not risk-free. As professional investors know – and even the Chinese are become increasingly aware of this – any real estate market can generate bubbles that eventually pop. With growth opportunities – and hence profit potential – in Chinese domestic real estate slowing down, and concerns of potential bubbles in some second tier cities growing, it makes a lot of sense for Chinese investors to diversify portfolio risk by putting some of their money in other markets. It is unlikely that all real estate markets would have bubbles that burst at the same time.

What business opportunities do Chinese developers seek overseas?

Entrepreneurial businesses that have grown in China with a core business in real estate, like Greenland, Vanke and Wanda, also focus on real estate development when investing overseas. Greenland, for example, is developing premium residential apartment blocks in several cities that are attractive to potential Chinese emigrants, with the aim of eventually selling to such Chinese investors. The architecture of their properties reflects the preferences of Chinese middle classes, including for example their preference for light from multiple directions, and other aspects of feng shui. Other investors invest in the development of commercial real estate, such as in London Chiswick Park or the Royal Albert Docks, where they expect to eventually host Chinese companies spreading their wings abroad. In this way, Chinese developers build future homes and offices for other Chinese entrepreneurs, or people wishing to move abroad. 

Can Chinese developers cope with local authorities abroad?

Developing a building that is dear to the host community creates challenges that Chinese entrepreneurs may not be used to facing. Some investors appear to underestimate the impact of different laws and regulations in other countries. For example, Wanda had ambitious plans for refurbishing the iconic Edificio Español in Madrid, when they acquired it in 2014 for €265 million. Their proposed conversion into a hotel and business center included pulling down part of the building’s historical façade and re-building it. Yet, local planning procedures and the legal protection of historical buildings halted their ambitions: The local authorities failed to approve the plans and rumors emerged that Wanda intended to sell the building again. In Madrid, as in most cities in Europe, changes in planning permissions need to be approved by elected local councils, while changes in historical buildings need to be cleared by historical building commissions or authorities – institutions that tend to be quite conservative when it comes to changing the traditional pattern of a city. In April 2016, Madrid’s local authorities and Wanda eventually agreed on a revised refurbishing plan. Yet, the story contains an important lesson for real estate investors: local authorities work differently in every country, and they need to be handled carefully.

How does real estate fit into the international growth of diversified Chinese business groups?

Fixed assets such as office buildings, hotels, infrastructure and leasing businesses play a prominent role in the overseas investment portfolios of many serial Chinese investors. For example, HNA group, Fosun group and recently Anbang Insurance poured a lot of money into such assets. In their public relations statement, they tend to emphasize the synergies they aim to achieve, for example by serving globally mobile Chinese tourists. However, such synergies usually take time to realize, and do not, in fact, require shared ownership but can be developed through strategic alliances (such as shared loyalty programs). Thus, risk diversification motives certainly contribute their fair share of the reasons behind Chinese business groups’ recent fast-paced international growth: Owning real estate abroad provides a means to protect entrepreneurs from economic or political volatility in their home markets or core industries. 

This article was first published by FORBES.

 

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