Chinese developers eyeing the West for real estate opportunities
Wu Zheng loves the waves and the beaches in Hawaii. He loves the moderate temperatures and its short, relatively speaking, nine-hour flying distance from his home in Shanghai.
But most of all, he loves the 4.5 square kilometres of land his company hopes to help transform into The Villages of ‘Aina Le’a, a new development on the northwestern shore of the Big Island.
For Mr. Wu, the chairman of Shanghai Zhongyou Real Estate Group, the investment in Hawaii is more than buying a chunk of paradise. It’s a step toward bigger foreign markets for a Chinese firm looking to expand away from a country with a slowing economy and shaky property markets.
“Hawaii is a bridge between China and the American continent,” Mr. Wu said in an interview.
“We will soon visit New York for meetings to look at other projects. We also want to look at London.”
China has long been among the most buoyant places on earth to build virtually anything, with a decades-long urbanization project that has planted vast new forests of condominium and office towers.
But a slowing economy has taken a heavy toll on the country’s real estate sector. Housing starts are tumbling at a double-digit rate amid indications that the long-standing property boom is careering. Land sales and land values are all falling fast. (Although home sales were up sharply in August, the sudden gain followed months of declining prices.)
What’s happening with property developers offers a window into the global reverberations of China’s economic slowdown, whose consequences are likely to extend far beyond sinking domestic exports and stock markets. As opportunities shrink at home, a broad new suite of Chinese firms suddenly has a new reason to go elsewhere, armed with expertise and capital accrued over the past years of breakneck growth.
“The high-speed growth of China’s real estate industry has ended,” said OuYang Jie, executive vice-president of Future Land Development Holdings, one of China’s top 20 developers, which this year is expected to sell more than $6-billion in property. In the future, “we will have to fight for our meals in other people’s bowls.”
In other words, it’s a future where growth at home means scrapping it out in a competition of diminishing returns.
That’s why Mr. OuYang’s passport now contains a 10-year visa to the United States, and why his company has of late been travelling the world, stopping in the United Arab Emirates, Egypt, Pakistan, Malaysia, Singapore, Australia, the United States, the U.K., Spain, Germany and Canada. Corporate researchers have studied many other countries, scouring the globe for places to plant money and raise new buildings.
“If a company still wants to grow, what should we do?” Mr. OuYang said. “We have to look for new markets.”
The earliest waves of Chinese foreign investment saw the country’s state-owned goliaths snap up global mines and oil properties, build railways and highways, and acquire farmland.
Now, propelled by diminishing prospects at home, Chinese developers – together, the largest such group on earth – are propelling a new wave that has already made China the fifth-largest global investor in real estate and is likely to escalate in coming years.
Even among the most aggressive Chinese investors, overseas holdings are today “probably not even 5 per cent of their overall business. But they have got aspirations to grow that to 15 to 20 per cent” over the next five to 10 years, said David Green-Morgan, global capital markets research director at Jones Lang LaSalle Property Consultants Pte. Ltd.
“We probably haven’t seen anything like this, in terms of residential development, ever before, in terms of one nationality moving into so many different markets around the world,” he said.
Chinese companies are moving fast. In London, they’re building Europe’s tallest residential tower. In Sydney, it’s Australia’s tallest apartment block.
“They’ve certainly made waves,” Mr. Green-Morgan said. “The plans they have are so much more extravagant than the local residential developers.”
The property rush is set against a larger shift in China’s global financial position. A recent forecast by Ernst & Young suggests 2015 will mark the first year China’s outward investments outspend the money coming in, a significant tilting in the country’s global influence.
At the same time, the shape of that investment is changing quickly. In 2010, more than half of China’s investments in other countries went into the energy sector. Last year, it was 13 per cent. Over the same period, Chinese foreign real estate purchases nearly tripled in value.
According to Jones Lang LaSalle, Chinese firms bought $16.4-billion (U.S.) in overseas property last year, and will likely add more than $20-billion this year.
Major Chinese real estate giants such as Dalian Wanda have bought hotels in Chicago and Madrid; Wanda has started construction on luxury residence towers in London, and said it intends to invest $10-billion in India over the next decade. Chinese developers are racing to make deals in places as far-flung as Cuba and Angola. The crash in Chinese stock markets this summer has further underscored the desirability of moving capital outside the country.
Australia has in many ways been at the forefront of the new wave, with eight of the top 10 Chinese developers now holding land there.
But in Canada, too, Chinese developers are expanding their footprint. In Montreal, Chinese-controlled Tianco Group is building one of the largest condominium projects in the city. Chinese state-backed Greenland Holding Group Co. is planning a hotel, museum and condominium complex in downtown Toronto – and has said it is also looking at Montreal, Calgary and Vancouver. Evergrande Real Estate Group, run by one of China’s richest men, late last year bought the historic Château Montebello golf and ski resort in Quebec.
Canadian developers and landholders have increasingly found phones ringing with would-be Chinese buyers on the line. In some existing Toronto condominiums, ethnic Chinese “are easily 30 per cent, sometimes even 50 per cent of purchasers,” said Maziar Moini, broker of record at Home Leader Realty Inc., a Toronto firm that specializes in condo presales and has a rising business in clients from mainland China. “And the local developers back in China figure, why isn’t that money coming to us?”
But there are more misses than hits. Mr. Moini has recently negotiated with two Chinese groups, both of which failed to come to a deal. The reasons why offer insights into the problems Chinese property investors face abroad. One developer could not transfer the money required – highlighting a paradox that, for all their desire to go abroad, China’s developers are on average leveraged 3 to 1, meaning many are too highly indebted to actually fund projects abroad.
The other wanted to find “something extremely big” for a landmark tower near schools, hospitals and downtown, Mr. Moini said. In a city like Toronto, that kind of land is not easily available.
Further problems also arose: One party wanted to import cheaper materials from China, such as steel beams, glass and toilets, but had not thought about local safety and building standards.
“That didn’t pan out,” Mr. Moini said.
The Chinese real estate model is not particularly easy to export. For developers, success in China has often been “mainly related to quantity rather than to quality,” said David Gianotten, the managing partner-architect for the Office for Metropolitan Architecture in Rotterdam.
“Now they’re suddenly coming into situations where quality is important. And that’s where they are still struggling.”
For some, the problems outside China are just too big.
Zheng Liang Real Estate Group, the Wenzhou, China-based firm that is one of the country’s top 100 developers, has tried its hand at overseas investments, but came away unhappy. “The profits weren’t good,” said Chen Yongfeng, vice-president of business development. He accuses fellow firms of splashing around big money in foreign markets “to boost their reputation.” It’s a questionable business strategy, too, he says, given the already sky-high prices in many of those markets.
Yet Mr. Wu, the man with his sights on Hawaii, argues that there’s nothing wrong with buying a little credibility along the way. Last October, his firm agreed to spend $25-million to buy in to the ‘Aina Le’a project, which has already been started by a local firm, but has encountered legal trouble in securing access to all of the property it wants to develop.
Mr. Wu is unconcerned.
“Businessmen with projects in the U.S. are highly esteemed. No matter whether you’re in real estate or even finance, a person who has invested in the U.S. is dependable,” he said. “It’s about the value of the brand – it doesn’t matter how much you really earn.”
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