Why Chinese Companies Are Snapping Up U.S. Commercial Property Investments

Forbes - Ellen Sheng -22 AUG 16

Chinese investors put $10.6 billion into U.S. real estate in the first five months of the year, according to a report by Cushman & Wakefield, more than double the $4.37 billion spent in the whole of last year.

Chinese investors had previously spread real estate investments more evenly among several favored destinations such as Hong Kong, Australia, U.K. and the U.S. Increased interest in U.S. property appears to have been bolstered by strong U.S. dollar appreciation, the recovering economy and relatively low financing costs.

In all, Chinese investors spent $17 billion in real estate outside of China in the first five months of the year of which more than half — 62.5% — was invested in the U.S., particularly on the west coast.

Offices were the most popular asset class, making up more than half of all outbound real estate investments. Hotel investments were a close second, making up 42% of all outbound transactions.

Cushman & Wakefield’s senior managing director, Xinyi McKinny said the company has been seeing more and more Chinese companies seeking to invest in and develop real estate projects in California. “We only expect this trend will continue in the years ahead, as Chinese firms seek to diversify their interests out side of China,” she said.

Change is coming to LA’s skyline

The surge in Chinese investments is, quite literally, changing the skyline in west coast cities where several large Chinese developers have partnered with U.S. firms to work on massive landmark development projects. Three of the four largest developments currently in downtown Los Angeles are by Chinese developers. Greenland Holding Group, the Shanghai-based real estate development behemoth, has been rushing to complete Metropolis, which at $1 billion, is the largest mixed-use development on the west coast. Scheduled to be completed in 2018, Metropolis will have three condo towers with 1,500 units in all, an 18-story hotel, ground level shops and restaurants. Greenland has also joined forces with Trammel Crow Co. and the Los Angeles County Metropolitan Transportation Authority to develop 16 acres near the North Hollywood station to include retail shops, offices and more than 1,000 residential units.

In another $1 billion project, Beijing-based developer, Oceanwide, broke ground on Oceanwide Plaza in March. The project, expected to be competed in September 2018, will have 504 condo units, three office towers and 183 hotel rooms.

Investments in life and science research parks

While office, hotel and high rise residential projects have been dominant, Chinese investors are increasingly looking into other types of investments in the U.S. including life and science research parks. In San Francisco, Greenland’s U.S. subsidiary said earlier this month that it was buying a 42-acre property in South San Francisco to develop a 2.25 million square foot office and research center – a project the company estimates will cost $1 billion.

In another deal, Chinese internet giant LeEco (formerly LeTV) struck a deal with Yahoo to buy 48.6 acres of undeveloped land in Santa Clara, California for $250 million to build a new campus. Yahoo had planned to build a research and development facility at the site and had gotten approval to build up to 3 million square feet of office space across 13 buildings.

Interest in the life and science sector also extends beyond real estate as Chinese investors, including some high net worth individuals, have been looking at investments either investing in an institution and supporting research or investing in life and science startups, added McKinny.

Big projects with big price tags

The focus on large, prestige projects – with price tags to match – has been intentional.

“They realize when they are entering the market they need to establish brand recognition so they take on large deals in the beginning. The purchase price seems quite high sometimes,” said McKinny. This has been proven to be a very effective way to build brand awareness for foreign developers entering the U.S. market, she added.

Though interest is expected to continue for the foreseeable future, deals might get smaller soon. Chinese giants such as Greenland and Oceanwide have been leading the charge into U.S. real estate investments thus far, but smaller companies are following – with smaller projects.

The infusion of Chinese investors in U.S. real estate could have some interesting changes. New to the market, Chinese investors are learning the idiosyncrasies of a different market. Chinese developers are accustomed to doing everything themselves from project development, marketing, asset management and construction – which is not common practice in the U.S. Much as they would like to import that model into the U.S., they’re not able to right away because they don’t have the relationships yet nor the scale. For now, companies are teaming up with local firms.

“There’s a huge gap between Chinese and U.S. companies, a different mentality. They’re trying to use their own model and move into the U.S. with some tweaks,” McKinny said.