How China’s stock chaos could affect New York real estate

Sizing up the dominoes connecting Shanghai to the Big Apple

New York /
Jul.July 10, 2015 06:00 PM
 

This week’s headline-grabbing turmoil in China’s stock markets left New York’s real estate industry wondering how it could impact the market here. According to those who follow China closely, there are two possible scenarios: a good one, and a potentially very bad one.

Nicholas Mastroianni, whose company U.S. Immigration Fund is the market leader in arranging Chinese EB-5 financing for New York real estate projects, is among the optimists. “I don’t think from what I see that it’s going to adversely affect the flow of investment to the U.S. from China,” he said.

Omer Ozden, a managing partner at the Chinese private equity fund Beijing Capital and an advisor to XIN Development, went one step further, arguing that the recent market slide may actually benefit the Big apple. There will be “more flight to safety, which means more investment in New York,” he wrote in an e-mail.

Ozden’s view is a common one among New York’s real estate players, and has been repeated in the wake of virtually every foreign crisis of the past few years. The logic is simple: Many investors see New York real estate as a stable asset, and demand for it will grow the more treacherous alternative investments seem.

“I look at stock market volatility as a thing, whether it’s our stock market or a foreign one, that creates more interest in less volatile assets,” said Mitch Roschelle, leader of PricewaterhouseCoopers’ real estate advisory practice. He added that many of the Chinese investors that own New York real estate are looking to hold assets over decades. “If that’s your time horizon, what happens in a given day isn’t that relevant,” he said.

Still, others were more cautious.

Sam Chandan, head of Chandan Economics, said there are two possible ways in which the Chinese market turmoil could affect New York real estate. The first is the one outlined by Ozden. But the other, he said, “would be such a sudden loss of capital that it would reverse the flow of Chinese capital.”

The logic here is similarly simple: if Chinese investors lose their wealth in the stock market, they no longer have money to buy apartments or buildings in New York and may even be forced to sell them. Both companies and individuals could be affected.

Issuing stocks has become a popular source of funding for major Chinese real estate firms. A weak stock market could make it harder for them to raise capital and, in turn, to invest.

China Vanke, a public company that is co-developing the condo tower 610 Lexington Avenue with Aby Rosen’s RFR Realty, got government approval last month to launch China’s first real estate investment trust. Greenland Group, the country’s largest developer and partner in Forest City Ratner’s Pacific Park project, has part of its company listed on the Hong Kong stock exchange. And in April, it went quasi-public in mainland China by transferring assets to a separate, publicly-listed company.

At least for the near future, that funding avenue appears to be closed. The Chinese government appears to have blocked IPOs for now, while requiring the executives of publicly-listed companies to buy their own stock to prop up share prices. China Vanke’s director Wang Wenjin, for example, is buying $68,000 worth of shares in his own company, according to the South China Morning Post.

“I think New York could be the beneficiary [of the market turmoil] at a certain level, but at the same time that disruption will impact public company valuations of some firms that are investing in New York real estate,” said Scott Robinson, director of NYU Schack’s REIT center and a former vice president at Citigroup. And Ozden added: “Stock valuations can be used as currency and other means, so a deterioration of this can hamper business, not to mention individual net-worths,”

Lurking in the background is a far greater worry: that the stock crisis could morph into something far worse. “Market confidence has collapsed,” Shen Jun, a strategist at BOC International Holdings Ltd., the investment-banking unit of state-owned Bank of China Ltd, told the Wall Street Journal early this week. He added that risks are growing that the slump could “evolve into a financial crisis.”

China’s housing market is weak, and municipal debt is at a level widely considered dangerous. Add in a stock panic, and you could well have the recipe for a financial crisis that drags down the Chinese, and ultimately the world economy. If that were to happen, not even New York real estate would be much of a safe haven.

For now, however, that scenario appears far-fetched. Chinese stock indices rose on Thursday and Friday on the back of swift and strong government intervention. But the Shanghai Composite is still down 35.2 percent since June, according to the Journal, and observers quoted in major business publications are doubtful over whether the market has truly stabilized. For New York’s real estate industry, this means more uncertainty. Or, in the words of NYU’s Robinson: “It’s too early to tell.”


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