The Real Deal New York

The Year of the Chinese Investor

Inside the growing wave of investors buying and building in the five boroughs

March 01, 2015
By E.B. Solomont

40TRD0315For more than two decades, China’s most populated city, Shanghai, has experienced a building frenzy unlike any other: Developers have built office buildings in the city of 24 million as far as the eye can see, including skyscrapers like the under-construction Shanghai Tower, one of the tallest in the world.

But increasingly, Chinese developers and investors are looking elsewhere to build. And a fast-growing number are setting their eyes on New York.

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.

“There’s a whole lot of capital in Asia that wants to be invested [here],” said Kevin Swill, chief operating officer of the New York-based Carlton Group, a real estate investment banking firm. “They look to the U.S., even with ups and downs, and it’s still the most stable real estate market in the world.”

It’s been hard to ignore Chinese investors in New York in the last few years.

The Beijing-based Anbang Insurance rocked the industry here with its record-setting, $1.95 billion acquisition of the Waldorf Astoria, a deal that closed last month.

Also last month, Chinese insurer Sunshine Insurance Group struck a deal to buy the 114-room Baccarat Hotel from Barry Sternlicht’s Starwood Hotels & Resorts Worldwide for $230 million, or an unprecedented $2 million per room. In December, Bank of China agreed to buy 7 Bryant Park for $600 million.

7 Bryant Park

7 Bryant Park

And those trades came on the heels of Fosun International shelling out $725 million in December 2013 for One Chase Manhattan Plaza, now known as 28 Liberty, and Greenland Holdings paying $547 million in October 2013 for a 70 percent stake in Forest City Ratner’s Atlantic Yards development in Brooklyn, which was promptly renamed Pacific Park.

In addition, over the past two years, Soho China spent $1.9 billion, including $700 million for a stake in the GM building and $600 million for a stake in Park Avenue Plaza.

But these mega purchases actually represent early, and relatively safe, forays into New York real estate for the Chinese. Many more anxious Chinese investors are waiting in the wings and are likely to be willing to take on even greater risk, said Terence Tang, managing director of Colliers International’s Asia capital markets and investment services team.

“They have no choice,” said Tang, who is based in Singapore. “The returns you can get from real estate investment in Asia have been unattractive.”

Economic strength and the value of the dollar, he said, make the U.S. “the brightest spot you can see in terms of growth.”

‘Unlimited’ demand

For the first time in 2014, wealthy Chinese buyers spent more on New York City real estate than Russian billionaires.

Chinese investors shelled out $3.35 billion on New York City real estate, both residential and commercial, in 2014, a roughly $1 billion jump from the year before, according to research firm Real Capital Analytics. As The Real Deal reported last month, the only country that invested more in the city was Canada, which spent $3.4 billion.

Other foreign investment trails well behind. Singapore, which clocked in at No. 3 on RCA’s list, threw down $1.6 billion. Rounding out the top five were Norway with $1.1 billion, Qatar with $770 million and Japan with $680 million.

“In terms of Chinese investors, I’m not kidding if I say it’s unlimited,” said attorney Min Chan, whose New York City-based Chan Law Associates advises clients participating in the wildly popular EB-5 visa program, which grants visas to foreigners who invest $500,000 in the U.S. economy in exchange for creating at least 10 jobs. More than 80 percent of the 10,000 visas went to Chinese nationals last year.

Chan, who is also a commercial broker at City Connections Realty, said China’s top institutional investors are also looking to make a splash.

“If the Chrysler Building was for sale,” she said, “I’m sure someone in China would pay whatever they’re asking.” (The Chrysler Building sold back in 2008 to an Abu Dhabi sovereign wealth fund for a cool $800 million and does not appear to be back on the block.)

But while the appetite for New York real estate has been strong among Chinese investors for a while, it recently ramped up because of a unique combination of factors, notably a rapidly appreciating Yuan, the slowing Chinese economy, and high property prices and complicated ownership rules in China. In addition, the growing middle class in China is increasing turning to institutional investors (like insurance companies) to manage and invest their newly acquired wealth.

Still, those factors pale in comparison to recent regulatory changes in China — namely looser restrictions governing how much money Chinese companies can invest abroad.

The impact of those new rules, which started taking effect in 2012, are showing up very clearly in the numbers.

Between 2008 and mid-2014, Chinese investors poured $33.7 billion into real estate in the U.S., predominately targeting New York, Los Angeles and Washington, D.C., according to Cushman & Wakefield. Of that total, $5.9 billion went to Manhattan and another $717 million was invested in the outer boroughs.

Ronald Sernau, co-chair of the real estate practice at the law firm Proskauer Rose, said more than half of all transactions valued at $150 million or more that were handled by his team involve a Chinese player. In two of the largest Chinese investment sales to date, Proskauer represented JP Morgan in its sale of 28 Liberty to Fosun, and Anbang in its Waldorf acquisition.

“There haven’t been many times in my career where there’s been such a noticeable influx of capital from a particular group of investors,” Sernau said.

As a result of China’s loosening of restrictions, the pool of Chinese investors in New York is also getting more diverse, sources said.

Joel Rothstein, an attorney at Paul Hastings who splits his time between the U.S. and China, predicted that Chinese private equity will soon start flowing into New York. Until now Chinese regulations have prohibited those players from making investments abroad.

Finding financial freedom


Source: Dollar figures from Real Capital Analytics and TRD research. Includes all known closed and pending purchases of both properties and development sites in the fi ve boroughs between 2013 and last month.

It’s hard to overstate the impact that changing domestic policy in China is having on New York real estate. 

Those institutional investments are only poised to grow. Last year, the Chinese government took steps to streamline the complex set of approvals necessary for all outbound investment.

For example, investments under $300 million can now be registered on a provincial level, rather than with the central government.

“Before this change, [investors] would spend six months just waiting for approval. Now, for some of the investments, it’s one month,” said Ming Liu, research manager at Cushman’s office in Beijing. “It’s quite great.”

Coupled with money traversing the globe at the speed of email, more Chinese players are feeling the pressure to get their money out of their homeland. “It’s hard to make investments domestically,” because of China’s economic slowdown, said Liu. “But [investors] are also full of cash, looking for opportunities.”

Insurance companies, in particular, grew 13 percent between 2008 and 2013 and are now flush with new cash, according to the global commercial brokerage CBRE. That growth is largely the result of China’s expanding middle class. Since 2012, when the Chinese government raised the limit for how insurance companies could invest overseas, the firms have become voracious buyers of real estate.

In the past year, major Asian insurance companies like Anbang and Sunshine made their first forays into real estate in New York.

Looking ahead, Asian insurance funds are projected to increase their real estate investments abroad by $75 billion, to the tune of $205 billion in 2018, according to CBRE.

New York developers and property owners are already gaining in a big way, thanks to the aggressive bids from Chinese buyers that have helped to push up sale prices. “They’ll accept a lower rate of return for being in the New York market, which gives them an advantage. They’ll pay more, for good reason, than a private equity firm or investor will with a five- to 10-year horizon,” said Jay Neveloff, chair of the real estate practice at Kramer Levin Naftalis & Frankel. “It’s a great strategic move that gives them a significant advantage in buying properties.”

In many cases that long-term investment strategy has given them a leg up against competitors in New York, particularly private equity firms and REITs.

For example, Fosun outbid several others in its $725 million acquisition of One Chase Manhattan Plaza, including Scott Rechler’s RXR Realty. Sources said Fosun offered a 10 percent deposit on the deal, a sum that “gets your attention,” according to Proskauer’s Sernau.

While investors are hungry for trophy properties, office buildings and residential development, luxe hotels are particularly desirable.

Gilda Perez-Alvarado, an executive vice president at JLL’s hotel group, said investors recognize that Chinese tourism is growing. “They’re betting on the fact that there will be Chinese demand from the hotels they’re acquiring,” she said.

And lenders are lending

In the U.S, the Chinese-American East West Bank has $28.7 billion in assets under management and last year it issued a stunning $8.6 billion in commercial real estate loans, up a full 20 percent from 2013.

The bank’s East Coast region, which includes New York, represents 10 to 12 percent of the bank’s business.

“Everyone understands commercial real estate,” said Wendy Cai-Lee, the head of East West Bank’s eastern region and Texas. “It transcends the language and culture barrier.”

Chinese investment obviously isn’t limited to Manhattan and Brooklyn. It’s also growing in suburbs like Greenwich, Connecticut, parts of Long Island like Jericho and Great Neck, and in Jersey City, New Jersey, where developer China Overseas America is planning a 760-unit condo tower. Douglas Elliman’s Jennifer Lo, who works on Long Island, said she’s been to open houses where “you can see about 20 people per open house and they’re all Asian faces.”

Chinese buyers have accounted for roughly 25 percent of all buyers for homes $3 million and up in Nassau County between January 2013 and mid-February, she said.

Still, the bulk of investors are more focused on New York City. For example, Lo said one of her Chinese clients, who owns a $4 million home in Great Neck, also paid $18 million for a commercial building at 70 Broad Street. “They want to diversify their investments overseas,” she said.

The feeling is mutual

China’s love affair with New York City real estate isn’t one-sided. All of the major commercial brokerages in New York have offices in Asia, and many have stepped up their efforts in the past two or three years.

Meanwhile, Chinese companies are beefing up their operations in New York.

Since plunking down huge sums for New York properties, both Anbang and Fosun are staffing up in New York. At Fosun, Bo Wei and Erik Horvat are mapping out a U.S. investment strategy.


Baccarat Hotel Residences

“They bought this building not to be a one-off,” said Horvat, of Fosun’s acquisition of 28 Liberty. “No one comes in to spend that kind of money to buy a single asset. … We will be building and expanding our presence here as we build our investment platform further.”

And the list of Chinese companies growing here goes on.

Xin Development, which is developing the 216-unit Oosten condo in Williamsburg, last year opened an office on 52nd Street that contains ample space to grow, John Liang, head of the New York office, told TRD at the time.

Last year, the State Administration of Foreign Exchange, which manages China’s currency reserves, set up shop on Fifth Avenue with the goal of increasing investments in private equity and real estate in the U.S. The exchange reportedly has about a dozen local staffers hunting for New York investment opportunities.

And China Investment Corp., China’s $600 billion sovereign wealth fund, is rumored to be moving its North American headquarters to New York from Toronto, the Wall Street Journal reported.

Still, while institutional investors have boots on the ground in New York, almost everyone reports back to higher-ups in China.

Carlton’s Swill put it this way: “Everything filters up through the chairman.”

Swill, like others, said Chinese investors are operating with a sense of urgency to find deals, even as they are still learning about the local market and grasping key financial lingo, like capitalization rate, which measures a property’s value by calculating the ratio of net operating income to the asking or sale price. “[In general,] they’re willing to invest at any dollar amount if they can get a cap rate above five,” he said. “They don’t know what it means, but they know it’s the going rate.”

Colliers’ Tang said Chinese investors who shied away from condo projects a few years ago because they were considered risky now feel confident enough to invest both in a joint venture partnership and on their own. A big part of that, he said, is that prices are continuing to rise.

In Manhattan, he said Chinese investors are increasingly interested in buying land, even as prices have risen to near-record levels and the competition has grown fierce. In part, that’s because in China, land is government property, and “buying” property there in fact means long-term leases.

Neveloff, who represents Forest City Ratner in its partnership with Greenland, noted that condo projects now can actually offer a “double-edged advantage.” Not only do condos allow Chinese investors to get a piece of U.S. real estate, but they can also turn around and market those condos to potential buyers in China who increasingly want investments here, too. 

“It creates a huge market for potential sales,” he said.