Prudence may be the greatest virtue when it comes to Chinese investments in 2016.
Despite volatility in Chinese markets and concerns about over-saturation in U.S. commercial real estate, bigwigs at the recent Asian Financial Society China-U.S. real estate investment forum argued that Chinese money won’t be exiting the American arena anytime soon.
“There are both opportunities and challenges in the U.S. real estate market today,” said keynote speaker Shanqing Zhou, who works as a commercial counselor for the Chinese consulate in New York. “The Gilded Age has just begun — but we should bear the risks in mind.”
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In 2015, Chinese money accounted for $14 billion in American real estate deals, CCP Holdings partner Michael Pralle cited in the opening remarks. And according to Real Capital Analytics, 2016 could see as much as $21 billion from Chinese investors if the current pace continues. Zhou attributed the recent surge to the loosening of Chinese regulations in the past few years as well as President Obama’s December move to waive taxes imposed on foreign pension funds under FIRPTA.
As luxury absorption has slowed and a surplus of residential units now accumulates in New York, however, projects and such international partnerships may be harder to pursue.
“There are certainly a lot of new hotels, new condo plans — they will not all get done,” said panelist Jerome Sanzo, the head of real estate finance for the Industrial and Commercial Bank of China in New York. His suggestion for prospective Chinese investors? “Don’t feel like you have to rush it and don’t overpay.”
On the other side of the transaction, American developers have a lot to ruminate as well. For starters, not every Chinese investor is well-versed in the legalities of American finance.
“One of the first terms Chinese investors learn when they come here is ‘nonrecourse lending.’” Sanzo said. “It’s very difficult to get a guarantee from a Chinese company. There’s some arbitration but not actually enforceable guarantee.”
Panelist Frederick Cooper, SVP of Toll Brothers, made it clear that his company isn’t keen on these “wide-eyed” investors.
“Ideally we’d prefer not to be the first [American development] for them,” he said. “Obviously we have to be careful about the quality of our partner.” Cooper added that his firm has never participated in EB-5, which grants foreign investors a green card if they invest a minimum of a $500,000 in the U.S. economy, but called it a “great program.”
Then there’s Chinese market instability and volatility. Not to mention, the necessary reconciliation of currency exchange and clashing interest rates.
“It’s the impossible trinity,” said panelist Catherine Liang, head of New York commercial real estate for China Construction Bank. Maintaining robust capital flows in the face of fixed exchange rates and differing interest rate policies is “a puzzle that no government before has solved.”
The panel barely mentioned the EB-5 investor program, Anbang’s play for Starwood Hotels or Greenland Group taking a 41-percent stake in the Witkoff Group’s Park Lane Hotel (which could again be condos).
Perhaps the most resounding advice for both investors and their American counterparts from the Tuesday’s forum participants is the call for partnership — to be in it for the long haul instead of seeking high rates of return.
“You really need to have some synergy of culture and compatibility,” Cooper said, likening the investor-developer relationship to a marriage.
“Real estate seems like a physical asset but it’s really an operational business. So I will suggest to not focus on specific projects with 25 percent RR, 50 percent RR, and instead on strategic planning,” he said. “You need to build a platform, hire people. Do that first, instead of aiming for physical assets.”