Chinese overseas selling practices will deter lower risk buyers

The sale of the Oceanwide Center in San Francisco has put the spotlight on how Chinese investors are offloading their overseas real estate holdings.

Another deal has been struck for a high-profile, Chinese-owned property to change hands stateside. Shenzhen-listed conglomerate China Oceanwide Holdings last week agreed to sell the Oceanwide Center, one of San Francisco’s largest development projects, to an entity associated with the Beijing-based asset manager SPF Group, for an estimated $1 billion. The ambitious scheme included plans to develop the city’s second-tallest tower in addition to another tower that would house a Waldorf Astoria hotel.

From being prolific buyers of overseas real estate, Chinese investors have switched to be active sellers around the world. Some groups are willingly offloading assets to pare ballooning debt; others are forced to trim holdings amid intense regulatory scrutiny around credit risk, capital controls and, latterly, trade friction between the US and China.

From January to September 2019, Chinese companies agreed to sell around $40 billion in overseas assets, up from $32 billion for full-year 2018, according to press reports quoting financial data provider Dealogic. In the US alone, Chinese investors were net sellers in Q2 and Q3 2019, making dispositions totaling $1.06 billion and $490.3 million respectively, according to Real Capital Analytics.

These numbers indicate the scale of Chinese-owned assets – many of them of Grade A quality in prime gateway locations such as London, New York and Toronto – available to be lapped up by private real estate investors.

However, PERE’s conversations with Chinese firms and the broker community in New York suggest there are cultural and strategic factors underpinning some of the offloading exercises that are likely to favor a compatriot buyer.

Notably, while there are strict controls prohibiting Chinese investors’ cross-border real estate investments, state-backed Chinese private investment management firms are actually being encouraged to buy from overseas Chinese sellers in the hope of keeping assets in Chinese hands, according to PERE’s conversations.

One New York-based advisor says she saw her Chinese clients adopt the buying and selling behaviors that are market standard in China,  though differ from conventional US practices. These include opaque price negotiating tactics, especially in instances where Chinese firms are under financial pressure to sell assets within a specified timeframe but not willing to accept a significant haircut or loss.

One method involves Chinese sellers being paid in installments instead of a single transaction. This method often includes ‘hope certificates’, which allow the initial installment to be significantly lower than an asset’s initial asking price. Deals like this enable sellers to realize further gains conditional on improved performance and are commonplace in China. They also enable sellers not to crystalize losses as future potential gains are included in performance numbers.

In the Oceanwide Center deal, SPF reportedly agreed to a $20 million security deposit and payments for the project in two subsequent installments, the first being for $630 million. It is unclear whether any hope certificate was given as part of this deal.

To be sure, there are instances of Chinese assets exited to international entities, HNA Group’s $422 million sale of 850 Third Avenue to New York developer Chetrit Group in January 2019 is one example.

But the degree to which other Chinese assets are sold to other non-Chinese buyers will depend, at least in part, to the methods and biases at play. International capital competing with Chinese state-owned buyers for core deals will surely think twice if they feel the playing field is not level. Should those deals take on a more opportunistic complexion, on the other hand? Well, that is what private equity real estate is all about. The world’s opportunistic investors pride themselves in gleaning results from complicated structures.

 

Email the author, Arshiya Khullar akhullar@peimedia.com