Chinese buyers' long march on Manhattan

by Sandy Li, SCMP

Dec 30, 2011

 

With real estate prices in the US souring, Chinese investors are marching to the heart of Manhattan.

HNA Property Holdings, the real estate arm of China's HNA Group, in June paid US$265 million for a prime office building in Manhattan. The group itself - parent of Hainan Airlines and Hong Kong Airlines, with additional investments in shipping and real estate - has declared its intention to buy more property in the US and Europe using a 40 billion yuan (HK$49 billion) line of credit.

Other Chinese companies are scouring New York and other major US cities, where commercial property prices have dropped about 40 per cent during the financial downturn. Among the suitors are Soufun Holdings, which operates the mainland's largest property website, and China Investment Corp (CIC), the country's sovereign wealth fund, which manages US$300 billion.

"No doubt Chinese investors are set to become the biggest buyers in US commercial properties this year, up from second place last year," said Allen Wu, managing partner of law firm Wu & Kao in New York, which is representing HNA in its acquisitions.

Unlike energy and telecommunication companies, which are often deemed strategic assets that carry national security concerns, the US real estate market is open to most foreign investors. So far, foreign investment in US property have not stirred widespread objections from politicians or the industry.

In fact, HNA, which owns China's fourth-largest airline, has been embraced as something of a "white knight" after it saved the owner of a prime office building at 1180 Sixth Avenue in Manhattan from bank foreclosure.

"HNA is a saviour to me," Norman Sturner, president and chief executive of Murray Hill Properties, the co-owner of 1180 Sixth Avenue, told the Post at his New York office.

Under the new arrangement, HNA bought 90 per cent of the 23-storey building. It bought 85 per cent from the Carlyle Group and 5 per cent from Murray Hill, leaving the latter with a 10 per cent stake. Murray Hill will continue to manage the building.

Early this year, Murray Hill and Carlyle had a hard time obtaining refinancing for the tower. The two were required to put up an additional US$60 million or face foreclosure because the loan-to-value ratio had declined from 85 per cent to 65 per cent due to falling prices. Carlyle decided to sell its stake, Sturner said.

The joint venture had bought the prime office building for US$300 million at the top of the market in 2007.

Taking advantage of the slump, HNA set its sights on another property, the Cassa Hotel and Residence - a four-star hotel that was seeking bankruptcy protection as the owner was unable to continue repayments to creditors. HNA bought the hotel, a block from Times Square in the city's Theatre District for US$126 million, its second acquisition in two months.

According to a research firm, Real Capital Analytics, sales of commercial property in the city to foreign buyers rose to US$6.7 billion last year, from US$3.8 billion in 2009. Purchases by Chinese buyers soared to US$127 million last year from US$18 million in 2009. The data, however, does not include purchases through property funds, a route commonly used by Chinese buyers.

"It is the beginning of Chinese large enterprises invading a market that was monopolised by Westerners," said Wu.

Adam Tan, executive director of HNA, said: "It is good time to buy when US commercial property prices drop to such a low level, particularly New York. We think it will provide an enormous upside potential."

Tan, a Harvard Business School graduate, said the group would continue investing selectively in New York's property market.

HNA is not alone. Soufun Holdings bought a 250,000 sq ft office at 72 Wall Street, the former AIG training centre, for US$46 million, three months after its US$124.1 million listing on the New York Stock Exchange in September last year.

In January, CIC, the sovereign wealth fund, reported it had joined forces with Area Real Estate Finance of New York to buy an unspecified preferred equity stake in 650 Madison Avenue. The 27-storey building is headquarters to fashion label Polo Ralph Lauren. The amount of the investment was not revealed.

Lee Wee Liat, regional property head of research at Samsung Securities, said Chinese enterprises, particularly state-owned enterprises (SOEs), were expanding overseas with encouragement from the central government to diversify overseas.

"If they focus on investing domestically, the cashed-up SOEs will bid up asset prices, which is definitely not what the central government wants to see," he said.

The aggressive property acquisitions were helped by the fact buyers from mainland China face fewer restrictions on investment in the sector than in the telecommunications, oil and natural gas sectors, which remain difficult to penetrate due to US national security concerns, he said.

China's acquisition binge in the US real estate market has alarmed some observers. They say it increasingly resembles Japan's painful lesson when it entered the US property market aggressively during the 1980s through high-profile acquisitions such as the Rockefeller Centre in Manhattan and Pebble Beach golf links in California. Japanese investors, who bought at the top of the market, lost billions when prices fell.

"That memory should be cautionary for investors because you really need to understand the [US real estate] market and you need a local partner," said Joseph Rubin, principal of transaction advisory services at Ernest & Young. "The US is a land of opportunities but also a land of risk." As an example, he citied the problems the US real estate market is facing now.

In the US, a typical benchmark is that each office job occupies 250 per square feet space, he said.

"Think about nearly eight million job cuts, which means a loss [of demand] of two billion square feet of office space," he said.

"Although not all jobs lost are office jobs, the message is clear that the loss of jobs has a huge impact on office demand."

But Wu, of law firm Wu & Kao, argues that China is coming into the US on a different acquisition path. "Chinese enterprises are entering US at a time of market slump," he said. "Commercial properties in Manhattan will be more resilient than the other states amid global financial crisis."

In the case of HNA's acquisition of Cassa Residence and Hotel, Wu said HNA not only conducted comprehensive due diligence but also sent several of its staff, who spoke fluent English and had studied abroad, to stay at the hotel for several days to appraise the business.

HNA's purchase comes as a flood of Chinese companies seek listings on the New York Stock exchange and tourist flock to the city.

"One hundred and sixty Chinese companies have listed on US stock exchanges," he said. "There is strong demand for commercial space as these US-listed Chinese firms will need an office in New York. If each firm needs a 5,000 to 15,000 square feet for its operations, HNA's building will be sought after, since most Chinese enterprises prefer to lease space at buildings owned by mainland companies."

He said tales are common of Chinese enterprises and big Chinese banks facing problems securing grade-A office space in the heart of Manhattan and being charged higher rents than US firms.

"Mainland enterprises expanding their presence in Manhattan will provide solutions for these Chinese companies," he said.

Flush with cash, Chinese companies could find a warm welcome in the US real estate market, since many distressed projects need large amounts of capital to keep them afloat, said Sonny Kalsi, a former Morgan Stanley investment banker who cofounded GreenOak Real Estate, a US investment and advisory firm.

"Chinese are very smart investors and I have been working with them for 15 years," he said. "They do due diligence and like to be very hands-on in their property acquisitions."