China’s debt cataclysm threatens US real estate projects

Got cash? Chinese developers would like to hear from you. Now would be good.

Desperate real estate firms across the Pacific are scrambling for funds. To wit:

• Greenland USA, a developer partly owned by the Shanghai government, is looking to sell a chunk of its $1 billion Downtown Los Angeles tower complex.
• The parent company of Chinese developer Oceanwide estimates it will lose $340 million in the second half of this year and is in default on a loan connected to a Manhattan 1,500-foot supertall site that it bought for $390 million in 2016.
• Vanke US, a Shenzhen-based affiliate of China Vanke, is slashing prices at a swanky Midtown condo high-rise.

In China, firms with assets larger than some countries’ GDP are facing bankruptcy thanks to Beijing’s crackdown on excessive borrowing and a residential property crisis. Evergrande, the poster child for beleaguered Chinese developers, has already defaulted on $22.7 billion worth of offshore debt.

These problems in China are spilling over to the U.S.

The Chinese were once the most aggressive foreign buyers of real estate in the U.S., acquiring $17.4 billion in real estate by 2016.

“All these Chinese companies were successful in their own markets and they all had the same mentality: build, build, build, and build big,” said a former employee at Greenland USA. “But they overpaid for assets.”

Chinese investment has since nearly disappeared, falling to less than $1 billion in 2020. The country’s monied interests turned their focus to other sectors, leaving Chinese developers hard-pressed to raise cash for existing projects.

“For a lot of investors linked to state-owned enterprises, it is very difficult to pump additional money into deals,” said Joel Rothstein, chair of the Asia real estate practice at Greenberg Traurig.

The build-up

When Xi Jinping was named China’s paramount leader in 2013, state-owned companies were already pouring into America’s oil, gas and entertainment industries.

But real estate made up a small portion of its foreign investment. Then China loosened domestic policies to allow private companies — which dominated its real estate sector — to invest overseas. They could suddenly lend to foreign subsidiaries without going through rounds of approvals, making it easier to obtain foreign bonds. At the same time, the U.S. property market was recovering from the financial crisis, with buyers writing huge checks for luxury homes in New York and L.A., often before they were built.

Companies unknown to most Americans, such as Greenland USA parent Greenland Group, Oceanwide, Vanke and Anbang Insurance Group, were picking up some of the priciest buildings and development sites in the U.S. In 2014, Greenland acquired a 70 percent stake in Forest City Enterprises’ $5 billion Atlantic Yards project in Brooklyn and planned its $1 billion Metropolis project in L.A.

Oceanwide paid $200 million for the site of its 2-million-square-foot L.A. project. Fosun International shelled out $725 million for One Chase Manhattan Plaza, a 60-story office tower in the Financial District.

These Chinese developers also had an eye for distress. Four of the 15 largest property investments made by Chinese firms in the U.S. from 2012 to 2014 rescued troubled commercial assets, according to data from Real Capital Analytics.

Investing in the U.S. was an opportunity for China to show off its economic muscle. It envisioned building the tallest skyscrapers in New York, the West’s financial and cultural capital and the ultimate symbol of power and wealth.

But pouring concrete and installing drywall was a different matter.

Some had success; Vanke partnered with Tishman Speyer on a 655-unit condo tower in San Francisco. Others failed to grasp the most rudimentary aspects of construction and design, according to industry sources. Oceanwide, a subsidiary of a Chinese conglomerate with $16 billion in assets, was one of the companies that struggled with American methods.

“They did not understand what was really important. I mean, in China, they don’t use architects and engineers like they do here — the design process is different,” said James Albert, a former project manager for Oceanwide’s development in L.A.

He said the Chinese firms’ ignorance went unaddressed by the deferential Americans they worked with.

“They absolutely didn’t understand how to develop in the U.S., but there was this overabundance of caution with respect to culture,” Albert said. “Nobody was willing to say, ‘You don’t understand, you’re not in China.’”

Albert said he left after realizing the firm was in financial trouble.

“I knew the (L.A.) project was going to go under, I knew it,” he said. “The bills were stacked to the ceiling and they missed so many promises. The writing was on the wall.”

Greenland faced similar issues at its L.A. development, according to the former employee. The firm wanted to build all three towers at once, although U.S. developers typically build in phases.

Greenland USA declined to answer specific questions about its Metropolis or Brooklyn developments. “We look forward to continuing to meet our commitments and help build great communities,” a spokesperson said.

Greenland and Oceanwide were also relying on condo buyers coming from China and leasing to luxury retailers like Gucci and Prada to attract Chinese shoppers. But tensions between the U.S. and China started to rise when Donald Trump became president and Xi Jinping placed restrictions on buying in the U.S., crimping Chinese investment.

Then the pandemic hit, stalling construction on both Chinese and U.S. projects and slowing luxury condo purchases. Congress started scrutinizing the EB-5 program, which developers had relied on to attract investment. And demand for homes in China soared, prompting developers to borrow enormous sums to start residential projects that they have been unable to finish — leading buyers to default on their mortgages.

With that scandal dominating the conversation at home, Chinese companies will prioritize domestic bondholders and homebuyers, according to a source familiar with Chinese policy.

“Foreign bondholders and foreign real estate holdings of these developers would be second to these stakeholders,” the source added.

What’s next?

For Chinese developers with domestic issues, figuring out what’s next for their U.S. holdings is tricky. Simply sitting on land as interest rates rise is not ideal. And finding a construction loan right now is a challenge, even for experienced American developers.

In the second quarter, banks issued $20.6 billion of securities backed by real-estate loans, a drop from $29 billion in the previous quarter, according to Trepp, which tracks securitized mortgages. CMBS volume plunged 29 percent overall.

Overleveraged Chinese developers with maturing debt will have an especially tough time borrowing money.

“The critical issue is financing,” said Rothstein of Greenberg Traurig. “The availability of financing is not the same.”

A former Greenland employee echoed the thought, saying Chinese developers “brought capital, and they don’t bring that anymore.”

For some Chinese firms it’s business as usual. Dajia Insurance Group, which inherited a portfolio of hotels from the now defunct Anbang, scored a $1.8 billion refinancing in October from Goldman Sachs and Bank of America. Dajia doesn’t have the same exposure to China’s domestic property market as some of the larger property firms.

But other Chinese developers seem to be giving up completely.

The U.S. affiliate of Beijing-based Hongkun Group recently defaulted on its loan backing a 282-unit luxury condo development in Weehawken, New Jersey, nestled off the Hudson River. The lender, Parkview Financial, initiated a UCC foreclosure for an equity stake in the project.

Unlike many U.S. developers who turn to bankruptcy to delay foreclosures, Chinese developers seem averse to pursuing this avenue. Hongkun Group has yet to file for bankruptcy.

Similar to Hongkun, Oceanwide lost to foreclosure a Financial District site where it planned a 1,500-foot skyscraper that would have had the highest roof in Lower Manhattan.

Oceanwide has also run out of options on its project in L.A. In 2019, the Chinese developer’s effort to refinance $1.1 billion in debt failed. Deep-pocketed U.S. developers such as Brookfield Asset Management and CIM Group looked to buy the site, but couldn’t pencil it out because of rising construction costs, according to a source.

Firms that plan to hold onto their properties will likely need to find a development partner.

Experts say that some Chinese players are waiting to see if the government will offer some sort of capital injection.

The national government in China plans to launch a $44 billion real estate fund to bail out property developers using funds from its central bank, the People’s Bank of China, according to reports. But it’s unclear how far this rescue effort will go.

Many developers, including Greenland USA, are partly owned by municipal governments, meaning it’s up to local officials to bail them out. These governments are running low on cash, as the developers who typically provide most of their revenue are now reporting losses.

If some of these developers were to get an infusion of cash, they would still have to deal with completing their stalled, half-finished projects in the U.S.

“Putting a building at that scale in the freezer, and then thawing it out without freezer burn,” pondered Albert, the former Oceanwide project manager, of the firm’s moribund L.A. development. “I don’t know if contractors know how to do that.”