Chinese offshore investment

China on cautious path to overseas expansion

Unlike the Japanese, mainland investors rely heavily on local expertise when buying properties overseas in order not to overpay

PUBLISHED : Tuesday, 18 November, 2014, 5:23am
UPDATED : Saturday, 18 April, 2015, 5:43pm

More than two decades after Japanese firms met their Waterloo in an ambitious foray into foreign real estate markets, Chinese companies are quickening the pace of their acquisitions of trophy assets in the United States, Europe and Australia, sparking concerns that history will repeat itself.

But global industry advisers said Chinese investors had learned from the mistakes made by Japanese pioneers and engaged strong local expertise from the start, by either building their own teams or relying on local asset managers to source and underwrite deals in order to make sure they did not overpay for properties.

A major difference was that Chinese firms' expansion abroad was spurred by their ambition to become top global players in their own industries, and they were also backed up by strong demand from domestic clients looking overseas for travel, shopping, education, emigration and safer places to store their wealth, they added.

"Chinese have a much more international view of the world, and they are interested in the world," said Philip Feder, a lawyer with Paul Hastings in Los Angeles.

Anbang Insurance Group last month paid US$1.95 billion for New York's Waldorf Astoria hotel, following in the footsteps of better-known peers China Life Insurance and Ping An Insurance. Other world landmark buildings bought by Chinese investors include Chase Manhattan Plaza and the General Motors Building in New York and the Lloyd's building and 10 Upper Bank Street in London.

Chinese buyers have also established a foothold in other cities such as San Francisco, Sydney, Vancouver, Paris and Madrid, and are now moving beyond these gateways as prices hit new records.

That reminds some of a buying spree by cash-rich Japanese firms in the 1980s and 1990s, highlighted by Mitsubishi Estate's US$2 billion acquisition of the Rockefeller Centre in New York. However, six years after the deal, it had to apply for bankruptcy for the centre and sold it to debt holders.

Alan Pomerantz, a vice-chairman of Kimberlite Advisors in New York, said "the possibility does exist" that Chinese would repeat the mistake of Japanese investors as they had paid high prices for assets including the Waldorf Astoria and Chase Manhattan Plaza.

"However, there are many excellent real estate investments available for Chinese companies if they have the right advisers and are smart about their underwriting," Pomerantz said.

Harvey Coe, an EY managing director and real estate advisory leader, said: "China still has a very healthy economy, so investing overseas is only a form of diversification."

Economic growth in China, still relatively fast by global standards, would provide Chinese capital with a buffer as Japanese investors had to sell overseas assets and retreat home after their own property bubble burst and a recession started in the 1990s.

Coe said Chinese developers' ventures abroad were partly driven by a shortage of land supply in big cities in the country, which meant they had to expand abroad for future growth.

China Vanke chief executive Yu Liang once said the country's biggest developer by sales had looked abroad after being told by officials in Shenzhen and Beijing about constraints on land supply.

Vanke teamed up with US developer Tishmen Speyer in San Francisco and RFR Holding in New York. Learning from its partners, the company changed its domestic business strategy to build beyond the residential sector and use more financial innovation and new technology.

Other developers such as Dalian Wanda Group and Shanghai-based Greenland Group invested alone, but they rely heavily on local consultants while also building their own local teams in order not to overpay.

Greenland's US chief executive Chang Ifei told Bloomberg earlier this month that her team had reviewed 40 projects but was concerned about overheated land prices and property markets.

Brian Ward, the president of capital markets at Colliers International in New York, said: "Asian capital in the past tended to be less informed and more reactionary. Today, mainland capital is coming to the United States very well-informed and understanding the nuance in every market they are in."

Coe said deep-pocketed insurers such as China Life and Anbang were buying assets abroad to seek long-term stable income and paying local asset managers to reduce risks.

To end the Japanese misadventure, Mitsubishi Estate last month reported strong operating profits for the six months to September, driven by solid overseas business, including its sale of a building in London amid a flood of global capital into the city. Japan's second-largest developer started to build it in the early 1990s.