The Long View: Mitsubishi reloaded? Chinese NYC investment echoes the Japanese in the 80s

Japan's boom and bust is a warning to firms like Anbang

With every billion-dollar check a Chinese institution writes for a Manhattan trophy property, similarities to the Japanese investment boom of the late 1980s become more apparent. That boom was followed by a crash in the early 90s. And there are early warning signs that history could repeat itself.

Last week, The Real Deal first reported that Chinese conglomerate HNA Group signed a deal to buy Brookfield’s 245 Park Avenue for $2.21 billion. If the deal for the office tower closes at that price, it would be one of the most expensive deals for a single Manhattan building ever recorded, behind the 2008 sale of the GM building, the 2015 sale of 11 Madison Avenue and the 2016 sale of 3 Bryant Park. Chinese insurer Anbang Insurance Group, which paid $1.95 billion for the Waldorf Astoria hotel in February 2015, isn’t too far behind.  (Though it was in talks to dwarf both transactions if it had gone through with an audacious plan to convert 666 Fifth Avenue into condos with Kushner Companies, Anbang is now out of that deal.)

Chinese companies are now the dominant foreign investors in Manhattan’s real estate market. Back in the 80s, that title belonged to Japan, whose financial behemoths bought a dozen trophy skyscrapers, often at record prices. In 1987, Dai-Ichi Mutual Life Insurance Company bought 601 Lexington Avenue — at the time assessed as the city’s third-most valuable building — for $670 million. But by far the priciest deal of the era, the 666 Fifth of the 80s if you will, was Mitsubishi Estate’s acquisition of an 80-percent stake in Rockefeller Center in 1989 and 1990 for $1.4 billion (around $2.6 billion in today’s dollars).

Between the early 80s and mid-90s, Japanese firms invested a staggering $78 billion in U.S. real estate. The frenzy peaked in 1988 with $16.7 billion in deals signed that year, or around $34 billion in today’s dollars, according to a study by accounting firm E&Y Kenneth Leventhal. That’s more than double the record $14.3 billion Chinese investors spent on U.S. commercial and residential property in 2016. But the deals signed and reported in early 2017 suggest China is catching up.

It’s not just the scale of Chinese investment that recalls the Japanese fervor of the 80s. Both the countries’ buying sprees occurred under similar circumstances. In the 80s, Japan was a rapidly booming exporting economy with a massive trade surplus that caused anxiety in the U.S. It was also caught up in a property and credit bubble. All of the above arguably applies to China today.

Japanese investors in the 80s were highly leveraged, which contributed to their eventual bust. Though Chinese institutional investors today are said to be cash-rich and much less leveraged in comparison, their finances are murky. Anbang, for example, reportedly gets much of its capital from short-term investment products it sells to Chinese savers – a fickle and risky source of funding.

At the time, U.S. observers pointed to Japan’s frothy property market as an explanation for why Japanese firms were willing to accept a measly 2 or 3 percent return on Manhattan office buildings.

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“I believe Japanese investors look at real estate differently from the way we do,” Goldman Sachs partner Claude Ballard told the New York Times in 1989. “Americans look at it like a typical commodity, but land being so scarce in their country, the Japanese tend to look at it as something you acquire and hold on to.”

That’s the same argument U.S. observers (and sellers) use today when justifying why the Chinese overpay for New York assets: They just love capital preservation.

There are, of course, also plenty of differences. Jim Fetgatter, CEO of the trade group Association of Foreign Investors in Real Estate, said Chinese investors today are less about yield and more about diversification and about moving capital out of China.

“The biggest difference is the backlash [from U.S. politicians] against the Japanese,” he said. “You don’t really see a lot of backlash against the Chinese. It’s never gotten into the political field.”

Though Anbang did take some stick over its Waldorf acquisition, with U.S. politicians expressing concern that the Chinese controlled a property popular with U.S. presidents and foreign heads of state, it was nothing compared to the large-scale opposition here against the “selling of America” to the Japanese.

The Japanese bubble eventually popped. Soon after, so did Manhattan’s property bubble, and those great capital-preserving long-term bets on trophy properties proved short-lived. Mitsubishi handed over Rockefeller Center to its lenders in 1995 after losing $600 million. Over the following decade, Japanese investors all but disappeared from Manhattan, though a new crop of players emerged in the last couple years.

Is China set to repeat all that? Observers have been warning of a crash for years. A crisis seemed imminent in 2015 when stock market turmoil and currency devaluations threatened to topple financial markets in Hong Kong and Shanghai. The country appears more stable now, but risks remain. Last week, the Organization for Economic Cooperation and Development published a report claiming China must “urgently” deal with overvalued real estate and financial markets or face a “disorderly default.” Against that backdrop, New York’s real estate market is edging closer to a cyclical downturn.

China has one thing going for it: the ability to learn from Japan’s errors. A source close to Chinese financial regulators told Reuters last year that their “biggest interest is in Japan’s mistakes.” Tokyo worsened the crash by tightening monetary policy too quickly. Beijing has so far managed to avoid that trap.