Chinese Investors Pour Money Into U.S. Property

[Porker]

Commercial property sales have slowed in the U.S. this year—but Chinese investors are continuing to plow money into the market.

So far in 2016, Chinese companies have purchased or are buying 47 U.S. properties worth $9.3 billion, according to deal tracker Real Capital Analytics. That makes them the most active foreign buyers in the U.S., with more than double Canada’s $4.2 billion worth of deals.

By contrast, for all of last year Chinese investors did 71 U.S. deals worth $6 billion.

Chinese investment abroad has soared as the Chinese economy has slumped over the past year. Investors are looking abroad to protect their wealth against the volatility at home, analysts said.

 

In the most recent high-profile transaction, China Life Insurance Group Co. last week provided an unspecified piece of the equity toward the purchase of the Manhattan office tower at 1285 Sixth Ave. in New York, according to people familiar with the matter. A venture led by developer Scott Rechler including China Life paid $1.65 billion for the 1.8 million-square-foot building, whose tenants include UBS Group AG and the law firm Paul, Weiss, Rifkind, Wharton & Garrison.

Mr. Rechler said his firm, RXR Realty LLC, attracted participation from institutional investors because it was able to convince UBS, which occupies about half of the building’s space, to renew its commitment through 2032. Other investors were wary of buying the building as long as UBS’s status was uncertain, especially with signs cropping up of a market slowdown.

“That chilled other investors,” Mr. Rechler said.

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They’re parking more capital in the safe locations in the West. 

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—Jim Costello

The Chinese are streaming into the U.S. even as overall deal activity slows. In the four months of 2016, all investors purchased $135.9 billion worth of commercial property, compared with $171.4 billion during the same period last year, Real Capital said.

The slowdown comes six years into a bull market for commercial property. Many investors have moved to the sidelines because they believe values, which have risen steadily since 2009, might level off or even begin falling.

Debt financing also has become more difficult to obtain. As of May 10, Wall Street has issued just $28.5 billion in commercial mortgage-backed securities, compared with $44.1 billion during the same time last year, according to Commercial Mortgage Alert, a trade publication.

But buyers from Asia, the Middle East and other parts of the world often are more motivated than domestic U.S. investors. Many are eager to diversity. Others are concerned about risk in their own countries.

Until 2012, the Chinese government prohibited the country’s insurance companies from buying foreign property. With those restrictions lifted they are flexing their muscles throughout the world.

Last year, China Life made its first U.S. investment along with Ping An Insurance Co. They purchased a majority stake in a $500 million Boston development in the city’s popular Seaport District.

Mr. Costello said foreign investors used to focus on buying trophy assets such as New York’s Waldorf Astoria hotel, but lately have been expanding out of downtowns in top cities in a search for higher yields. Last week, the sovereign-wealth fund of Bahrain purchased a 49% stake in a portfolio of seven office buildings between Phoenix and Dallas. The deal valued the 1.2 million-square-foot portfolio at about $250 million.

Mr. Rechler, for his part, has garnered a reputation as a good market timer. He sold his earlier real-estate company for $6.5 billion in early 2007 as storm clouds were forming over the economy and then started buying property just as the market began to recover in mid-2009. His RXR Realty controls 87 commercial properties and had $12.7 billion of assets under management as of the end of last year.

Mr. Rechler initially wasn’t interested in 1285 Sixth Ave. when it was put on the market last year by J.P. Morgan Asset Management and AXA Financial Inc. But he began talks after he came up with a plan to add value to the property by extending UBS’s lease.

To execute that plan, Mr. Rechler first had to deal with UBS’s neighbor, Paul, Weiss, which had an option to take more space in the building. As long as that option hung out there, UBS wouldn’t renew.

Mr. Rechler eliminated that problem by cutting a deal with the law firm to modify its expansion option. He also agreed to sell some Paul, Weiss partners stakes in the building, according to people familiar with the matter.

Besides China Life, Mr. Rechler’s group included New York developerDavid Werner, who at one point was competing against Mr. Rechler for the property. J.P. Morgan and AXA were represented by Doug Harmon and Adam Spies of Eastdil Secured.

Edited May 24, 2016 by Porker