Chinese capital may be “less sophisticated” than it seems

“You do wonder what the underwriting criteria is with some of these purchases.”

From left: John Liang, Beth Fisher, Kai-yan Lee and Wendy Cai-Lee
From left: John Liang, Beth Fisher, Kai-yan Lee and Wendy Cai-Lee

The Chinese investors buying up swaths of U.S. real estate may not always know what they’re doing, according to some real estate experts.

“I’ve been surprised by the lack of sophistication of some Chinese institutional investors,” John Liang, Xinyuan Real Estate’s managing director of U.S. operations, said Monday during a panel on Chinese real estate investment at the Asia Society.

Some are even missing the “basic finance 101 concept of risk and reward,” he said.

The reason? Real estate in China is basically “a manufacturing business,” he said — one builds, sells, and makes a profit.

“The U.S. is way past that,” he said, referring to the complexity of the trade here, with its myriad of regulations and financial gymnastics. “It’s a little ahead of what the Chinese are used to.”

Liang’s statements come amid complaints by some local players that demand from Chinese investors have pushed New York prices to unrealistic levels. Overall, Chinese investment in U.S. commercial real estate reached $8.5 billion in 2015, a record high and a 70 percent jump from 2010, according to a report by Rosen Consulting Group for the Asia Society published Monday.

And while investment from China is slated to slow somewhat over the next two years, there’s still plenty of capital at hand. Anbang Insurance Group, for example, agreed to pay the Blackstone Group $6.5 billion in March for the Strategic Hotels & Resorts portfolio.

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Some of Liang’s fellow panelists, who included Wendy Cai-Lee of East West Bank, Beth Fisher of Corcoran Sunshine, Kai-yan Lee of Vanke USA Holdings and Arthur Margon of Rosen Consulting Group, agreed with his assessment that there remains a lack of knowledge among even the most active Chinese investors.

“You do wonder what the underwriting criteria is with some of these purchases,” Fisher said. “As a broker, you assume that they see into the future in ways that we sometimes don’t see, but it is a tad concerning on the supply side.”

One of the biggest challenges for Chinese investors is the issue of taxation, Liang, whose firm is building a condominium project at 615 10th Avenue, said.

“Some of the investors could be a little overwhelmed,” he said, referring to ground-up development, which is something Chinese firms have increasingly branched into. “Your long-term business model and financial liabilities should be managed according to the class and model of real estate you invest in. A lot of Chinese companies lack basic understanding of that, including some of the so-called real estate funds and insurance companies.” The Wall Street Journal recently went behind the scenes of Anbang’s failed bid for Starwood Hotels & Resorts, reporting on how unusual its due diligence process was and how it ultimately retreated without enough explanation.

But there may be more benefits to doing deals in the U.S. than simply making money, Vanke’s Lee argued.

“The learning is a very important component of our motivation,” he said of Vanke. “If we could learn from the U.S. market about ways to deal with real estate cycles, balance risks and rewards in investment, and the technology behind building, we can bring it back to China. We shouldn’t overlook that component of it.”

Many Chinese companies are also looking at investing in the U.S. as a branding tool, which, when combined with the desire for cash flow, is a large component of why the Chinese have been buying hotels in recent years. Many firms are also betting they can leverage their connections back home to drive Chinese tourists to their U.S. hotels.

“The simple fact of pointing to a well-known hotel brand and saying, ‘That is my asset,’ is important,” Liang said. “That has a longer lasting impact on brand that building one condo or one office building.”

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