The Real Deal New York

China’s scrutiny of capital flows could crush trophy US deals: ex-China Orient exec

666 Fifth Avenue deal could have been nixed by Chinese government
By Katherine Clarke | April 27, 2017 04:45PM

From left: 666 Fifth Avenue, 1221 Sixth Avenue, 245 Park Avenue and Ludwig Chang

Should Chinese institutional investors eyeing trophy New York properties think twice? One major Chinese executive thinks they will.

Ludwig Chang, the recently retired co-founder of COAMC International, a subsidiary of leading state-owned asset management firm China Orient Asset Management, said the Chinese government is taking a skeptical look at moves to buy major real estate assets in the U.S. – and that clampdown may have already caused some casualties.

Speaking on a panel at the China Institute on Rector Street Wednesday night, Chang appeared to reference Anbang Insurance Group’s abandoned plans to invest in Kushner Companies’ redevelopment of 666 Fifth Avenue.

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“Some insurance companies, who shall remain unnamed, have had two or three failed transactions,” he said. “One Was A Building On Fifth Avenue that was quite well known. I think those are the handiwork of the new insurance regulatory regime.”

Chang said the negative attention on trophy deals will likely curtail such transactions in the short-term.

“There are some high-profile buyers that have met restrictions in purchasing in the U.S.,” he said. “Speaking from experience and from what I hear, some of these more trophy high-profile deals have received negative reaction from the government. Some of the high-profile transactions are going to slow down a little bit. Long-term investment will be more rational and more return-based.”

The China Insurance Regulatory Commission, a Chinese government agency, has been clamping down on the insurance industry in particular in recent months, with Chinese companies facing stricter reporting requirements when they want to convert yuan into foreign currency. The country as a whole has been getting tougher on capital flight to combat a weakening currency.

Among the recent trophy deals in Manhattan, Chinese conglomerate HNA Group is in contract to acquire 245 Park Avenue for $2.21 billion, as The Real Deal first reported. And China Investment Corporation, a Chinese sovereign wealth fund, bought a 45 percent stake in 1221 Sixth Avenue in a $1.03 billion deal.

Chang was careful not to mention names, but said U.S. sellers should be extra cautious in this environment.

“Every investment over $5 million needs to clear the government,” he said. “If you think you have a deal to sell some trophy asset to a Chinese buyer, you may want to ask your lawyer to look a little more closely at who you’re selling to and where the funds are.”

COAMC’s recent deals include the $143 million purchase of a majority stake in four Flatiron office buildings controlled by the Kaufman Organization.

Michael Krupa

Chang’s fellow panelist, Michael Krupa, the president of investment firm Gemdale USA, a subsidiary of major Chinese developer Gemdale Corporation, called the capital controls a “speed bump.”

“At the end of 2014, there were $4 trillion in reserves in China. Last year, there was $3 trillion and a run rate of about $50 billion outflow,” he said. “The government must have realized something has to change to moderate this output. We’re in a period of time where maybe we accelerate a little bit less.”

As for Chinese investment in the U.S. market, Krupa said Gemdale, which has partnered with local developers up to this point, will likely take on solo projects. In West Covina, Los Angeles, it’s getting its feet wet with a $26 million multifamily value-add deal, he said. Its other projects include 45 Broad Street, a condo tower in Lower Manhattan which it’s developing in partnership with Madison Equities.

He and Chang also dished on the current political climate in the U.S.

“So far, there isn’t enough information,” Chang said of President Trump’s performance so far and how it might impact the market. “There’s the building on Fifth Avenue that didn’t get done, but I don’t think that’s his fault.”

Krupa added: “I think he [Trump] is learning his lesson very quickly that we [China and the U.S.] need to work together.”