These seven strategies will help you identify Chinese investors by sector—residential, industrial, commercial, and hotel—and Chinese banks that are refinancing commercial properties and working to make construction loans.

China is aiming its accumulated wealth at the U.S. real estate market. Yet, tracking these activities and identifying the Chinese players is difficult. These transactions are seldom reported outside their localities. Also, many Chinese buyers prefer to make their acquisitions under the radar, investing through relatives and friends living in the United States, through partnerships with U.S. players, or through wholly owned U.S. entities they have created.

 

Residential

Along with a growing and increasingly wealthy middle class, China has 875,000 millionaires, and, according to Forbes, 64 billionaires; other sources put the number as high as 117.

According to the National Association of Realtors, Chinese directly invested over $323 million in U.S. single-family homes during the 12-month period ended in the first quarter of 2010, making them the fourth-largest group of foreign homebuyers. The actual figure is probably much higher.

Most of these purchases were on the West Coast, but other parts of the country are also beginning to see Chinese buyers. In Miami, for example, 11 apartments in the 237-unit Artech condominium were sold to Chinese.

These buyers can be found in four ways:

  • Attend and exhibit at one of many U.S. real estate expos held in China that introduce potential buyers to the U.S. market—especially residential real estate—and attract thousands of Chinese participants.
  • Contact the Chinese companies organizing homebuying trips to the United States and have properties put on the itinerary; these trips have become one of China’s most popular package tours—so popular that many tours are oversubscribed and operators have had to put hundreds on waiting lists.
  • Join one of the delegations of U.S. brokers that go to China to showcase their properties, consistently attracting large audiences.
  • Associate with Chinese real estate agents to list your properties in China.

In multifamily housing, one of the largest buyers this year is a U.S. company named Standard Austin—or perhaps Standard Portfolio; accounts differ, as do details about the owner. What is known is that Standard Austin is owned by a Mr. Liu—no first name given—who was born in China, made his money there in real estate, and is now a naturalized U.S. citizen. He formed Standard Austin in 2009 and engages U.S. attorneys, works with U.S. investment banks, and has at least one U.S. real estate adviser.

In January 2010, Standard Austin bought $360 million in equity in about 5,000 multifamily units in 16 projects in Texas and Maryland previously owned by the bankrupt Bethany Group. Also, as part of the deal, it acquired the existing subordinated debt from lenders, converted that debt to equity through the bankruptcy process, and then assumed the remaining $296 million of outstanding senior commercial mortgage–backed securities (CMBS) debt through a favorable restructuring.

Later last year, Standard Austin bought another seven-property Bethany Group portfolio of 2,759 apartments in Phoenix out of bankruptcy, paying $13 million in cash and assuming $120 million of restructured debt. Also last October, the Wall Street Journal reported that Standard Austin bought an unnamed apartment complex in Florida for an undisclosed price. There is no suitable strategy for locating the next Mr. Liu. He or his professional services providers will find you.

 

Industrial Real Estate

One of the best examples in the industrial real estate sector is the Wanxiang Group, China’s second-largest privately held company and one of the world’s largest auto parts manufacturers. It began U.S. operations in 1995 and grew, in large part, through acquisition of American companies. Today, from its 168,000-square-foot (15,600-sq-m) plant in Elgin, Illinois, it generates $1 billion in U.S. sales and employs about 5,000 people. In August, it diversified into the manufacture of solar panels, opening a $12.5 million, 40,000-square-foot (3,700-sq-m) plant in Rockford, Illinois.

One of the best examples in the industrial real estate sector is the Wanxiang Group, China’s second-largest privately held company and one of the world’s largest auto parts manufacturers. It began U.S. operations in 1995 and grew, in large part, through acquisition of American companies. Today, from its 168,000-square-foot (15,600-sq-m) plant in Elgin, Illinois, it generates $1 billion in U.S. sales and employs about 5,000 people. In August, it diversified into the manufacture of solar panels, opening a $12.5 million, 40,000-square-foot (3,700-sq-m) plant in Rockford, Illinois.

Among the ways to get a jump on competitors in identifying Chinese companies coming to the United States are the following:

  • Contact your state or city economic development agency to determine what, if anything, is being done to attract Chinese companies—and other foreign firms, for that matter—to the area. If the agency has a committee or a task force aimed at attracting Chinese companies, join it. If it does not, create and lead one. If the agency sends delegations to China, join them. When you find a Chinese company interested in coming to your state, contact the company and offer your assistance, and build relationships with the owner and top managers.
  • Determine whether your state or city has an office in China through the Council of American States in China (www.casic.us/index_en.asp). If it does, contact the China office and let the staff know of your interest in helping attract Chinese companies, and check in regularly to find out which Chinese companies are considering locating in your state. Then, contact those Chinese companies and again offer your assistance to establish relationships.
  • Become familiar with the Department of Commerce’s Invest in America program (www.investamerica.gov), then contact program professionals in your state to discuss what you can do to help attract Chinese investment and ask them to alert you about Chinese companies that are considering establishing U.S. facilities.

 

Commercial Real Estate

Like most successful Chinese groups, Wanxiang also has substantial real estate holdings—about $2 billion worldwide. Having established its industrial foothold in the United States, it formed Wanxiang America Real Estate Group LLC in Elgin, Illinois, in 2010 to acquire and develop U.S. commercial real estate.

Like most successful Chinese groups, Wanxiang also has substantial real estate holdings—about $2 billion worldwide. Having established its industrial foothold in the United States, it formed Wanxiang America Real Estate Group LLC in Elgin, Illinois, in 2010 to acquire and develop U.S. commercial real estate.

Wanxiang America Real Estate’s first acquisition was the abandoned, 330,000-square-foot (31,000-sq-m) Lucent Technologies office building in Naperville, Illinois. It paid $9 million cash and plans to completely renovate the four-story structure at a total cost of $47 million, including the purchase price. In making the purchase, Wanxiang formed a venture with two local suburban developers.

The process of finding Chinese investors in commercial properties is very much like that for industrial real estate: identify a Chinese company coming to the area, and build a relationship with the owner and top managers before your competitors do.

 

Hotels

Chinese investment in hotels can be either opportunistic or strategic.

An example of an opportunistic investment is the acquisition of the Los Angeles Marriott Downtown by Shen Zhen New World Investment (USA), an affiliate of Shenzhen New World Group. Shen Zhen bought the hotel out of bankruptcy for $63 million (the previous owner paid $115 million in 2007). Shenzhen plans to spend $13 million to renovate the 27-year-old, 469-room hotel. It also is currently negotiating to acquire a large four-star hotel in southern California and a winery in Napa Valley to produce wines for sale in China.

An example of a strategic investment is the purchase of Interstate Hotels & Resorts for $307 million by a joint venture company owned 50-50 by Thayer Lodging Group and Jin Jiang Hotels, one of China’s leading hotel chains, constituting the largest overseas acquisition in China’s hotel industry.

For Jin Jiang Hotels, the acquisition had a larger purpose than entry into the U.S. market. The day after the deal closed, Jin Jiang announced three agreements: with Interstate to form a Chinese hotel management joint venture; with Thayer to establish a hotel asset management company and an investment fund focused on the Chinese hotel and tourism sector; and with both Interstate and Thayer to create multiyear training programs for Jin Jiang employees.

There are three avenues for finding Chinese investors in U.S. hotels:

  • Contact U.S. law firms, accounting firms, and real estate advisers with offices in China and let them know that your property or properties are for sale.
  • Engage a U.S. broker with offices in China to market the hotel or hotels.
  • Contact leading Chinese hotel chains and investors directly to determine which may have a strategic motive like that of Jin Jiang Hotels, and then build relationships with the chain.

Longstanding relationships count in China. For example, in 2005, well before the acquisition of Interstate Hotels, Thayer and Jin Jiang Hotels established Thayer Jin Jiang InterActive Corporation Ltd., based in Shanghai, to provide travel distribution infrastructure and services to the travel and hotel industries in China. When Jin Jiang decided to make an acquisition in the United States, Thayer was the natural choice for a partner.

 

Winning Chinese Investment in U.S. Funds

Chinese institutions, companies, and wealthy individuals are beginning to invest or explore investment in U.S. real estate funds. Among Chinese government institutions—the China Investment Corporation (CIC) with $300 billion in total assets, the National Social Security Fund with $160 billion, and State Administration of Foreign Exchange with $350 billion—only the CIC is known to have made investments in foreign real estate. The CIC has not yet directly acquired U.S. real estate, but has invested indirectly through funds. With U.S. funds, it has committed $800 million in the Morgan Stanley Real Estate Fund VII Global; $1 billion to Brookfield Asset Management; $1 billion to Cornerstone Real Estate Advisors; and $1 billion to Oaktree Capital Management, reportedly to invest in the Public-Private Investment Program and other distressed debt.

Chinese institutions, companies, and wealthy individuals are beginning to invest or explore investment in U.S. real estate funds. Among Chinese government institutions—the China Investment Corporation (CIC) with $300 billion in total assets, the National Social Security Fund with $160 billion, and State Administration of Foreign Exchange with $350 billion—only the CIC is known to have made investments in foreign real estate. The CIC has not yet directly acquired U.S. real estate, but has invested indirectly through funds. With U.S. funds, it has committed $800 million in the Morgan Stanley Real Estate Fund VII Global; $1 billion to Brookfield Asset Management; $1 billion to Cornerstone Real Estate Advisors; and $1 billion to Oaktree Capital Management, reportedly to invest in the Public-Private Investment Program and other distressed debt.

The CIC also tried but failed to buy from Harvard Management Company, Harvard University’s endowment fund, its limited partner stakes in U.S.-focused real estate funds.

Chinese insurance companies, which have total assets of $590 billion, are not yet permitted to invest in foreign real estate. But that permission could come within two years, and when it does, the insurers will likely invest in funds initially. Other potential Chinese investors include banks, securities companies, corporate pension plans, and provincial plans, each of which is subject to varying restrictions on outbound investment in real estate. Chinese companies are also exploring investment in foreign real estate but are hampered by various regulatory approvals. Some, however, may make investments outside the regulatory process.

Given the size of the potential Chinese investors, competition among foreign fund managers of all types is intense. The most committed have set up offices in China, hired Chinese-speaking staff, provided free services and advice, and undertaken to build relationships with key managers in target Chinese entities. This is by far the best strategy.

If you choose not to go this route, you should focus your resources on identifying a few specific pools of capital that are most likely to be interested in your fund’s sector. From among these, you should target those pools that your competitors are not yet pursuing. Even this strategy requires you to do careful research and make frequent trips to China. But, given the massive allocations that will be seeking investment in U.S. real estate funds over the next few years, your effort should prove worthwhile.

 

Chinese Refinancing of Commercial Properties

Several Chinese banks are among the largest in the world. Most had few losses during the financial crisis, and because of tight Chinese regulation and China’s fast-growing economy, they are awash with cash. With Chinese government encouragement, they are seeking lending opportunities in real estate outside China.

In the United States, two Chinese banks, the Bank of China (BOC) and the Industrial & Commercial Bank of China (ICBC), are seeking to make loans in gateway cities of $100 million to $400 million, although the ICBC, China’s largest bank and 70 percent–owned by the government, has stated that it could consider loans of more than $500 million. They will not lend more than 60 to 65 percent of a property’s value, and they intend to hold the loans on their books for their full term.

In New York City, BOC provided $120 million to refinance the New York Times building, near Times Square, and led a syndicate for the $475 million refinancing of 1515 Broadway. ICBC contributed $150 million to a $355 million loan made to refinance the existing $325 million mortgage on 650 Madison Avenue, a 27-story office and retail tower in midtown Manhattan; Wells Fargo provided the balance.

Currently, only these two Chinese banks are doing refinancings and then only for large, established properties. But, as they become more comfortable with the U.S. real estate market and lending environment, and as they face increasing competition from other foreign banks as well as U.S. banks reentering the market, they are expected to begin making smaller loans in cities across the United States. Other Chinese banks operating in the United States—the Bank of Communications, the China Construction Bank, and the China Merchants—may follow the BOC and ICBC and also begin refinancing commercial real estate.

To secure Chinese banks as a source of refinancing, you should select the bank that will be most amenable to lending on properties of your type and location, either now or later as lending criteria loosen. You should begin a long-term relationship with that bank by making a sizable deposit and running a substantial part of your banking through it. Through this relationship, you should introduce yourself, your company, and your properties to the Chinese bank’s loan officers.

 

Construction Loans

The Chinese Export-Import Bank and possibly other Chinese banks are interested in making construction loans—or, more properly, supplying project finance—to major U.S. development projects. The origin lies in China’s “Go Global” policy, officially announced in 2000. The construction industry was among those encouraged to Go Global long before the policy was announced. Backed by lending from Chinese banks, China’s construction companies undertook numerous infrastructure and real estate projects in developing countries of strategic interest to China.

The Chinese Export-Import Bank and possibly other Chinese banks are interested in making construction loans—or, more properly, supplying project finance—to major U.S. development projects. The origin lies in China’s “Go Global” policy, officially announced in 2000. The construction industry was among those encouraged to Go Global long before the policy was announced. Backed by lending from Chinese banks, China’s construction companies undertook numerous infrastructure and real estate projects in developing countries of strategic interest to China.

The result: today, more than 50 Chinese construction companies are on Engineering News-Record’s 2010 lists of the Top 225 Global Contractors and the Top 225 International Contractors. Now, Chinese construction companies and Chinese banks are using the same model to enter the real estate markets in the United States and elsewhere around the world, as illustrated by two projects—Revel Entertainment and Baha Mar.

In February 2008, Morgan Stanley invested $1.2 billion in Revel Entertainment’s $2.2 billion casino/hotel complex in Atlanta City. In September 2009, Revel awarded a $1.7 billion construction contract to a joint venture company formed by China Construction America and Tishman Construction Company, with China Construction America owning 51 percent. It also entered into a framework agreement with China Eximbank for a $1.2 billion construction loan. Negotiations with China Eximbank on the construction loan collapsed when Morgan Stanley announced in April 2010 that it was pulling out of the project and writing down its investment.

In September 2009, Baha Mar gave China Construction America a $1.9 billion construction contract to act as sole contractor for its $3.2 billion resort project in the Bahamas and signed a framework agreement with the China Eximbank for a construction loan. In March 2010, the China Eximbank committed to a $2.45 construction loan for the project. The Chinese government has approved the construction contract and the loan. The Bahamian government also gave approval, which included visas for 8,000 Chinese workers.

Because Chinese banks are making construction loans to support the international expansion of the Chinese construction industry, the key is to first hire a Chinese construction company for your development project. Be certain that the Chinese construction company has relationships with Chinese banks interested in providing and permitted to provide a construction loan. And, to the extent possible, involve your state government and the U.S. government to support and help close the loan.

 

Common elements

These seven strategies have three common elements:

  • The Chinese government is always indirectly involved. It may be encouraging outbound investment and financing through the Go Global policy, it may be restricting investment, or it may be the reason that Chinese investors have to work around their country’s currency controls to make investments. In any case, you have to understand—and monitor changes in—Chinese government policy on foreign investment in and financing of real estate.
  • You have many resources at hand to help, whether it is the state economic development agency and its China office, the U.S. Department of Commerce, or professional services providers with offices in China or expertise in Chinese business. You should use all who can assist you.
  • The Chinese business environment is more relationship oriented than transaction oriented. You will have to devote much more time to getting to know potential Chinese investors and getting them to trust you than you do to engage with investors from other countries. This means many trips to China and also inviting and hosting Chinese companies to visit your properties. But once you establish and maintain solid Chinese sources of investment, you will have them for many years and many projects.

Obtaining Chinese investment and financing takes commitment and persistence. These seven strategies point the way. The rest is up to you.

 

 

Urban Land Institute (ULI), April 19, 2011