China still has a treasure chest of overseas real estate to sell

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Chinese Investments

Slowing economic growth and a tight rein on capital outflows could see disposal records smashed again in 2019

CHINA’S biggest-ever overseas property buying spree reversed course in dramatic fashion in 2018. But even after the record unwinding, many lucrative real estate assets remain in Chinese hands.

They include the 245 Park Ave skyscraper in Manhattan, New York’s famed Waldorf Astoria Hotel and Chicago’s Vista Tower, under construction but envisaged as one of the city’s tallest buildings.

With economic growth slowing, keeping a tight rein on capital outflows is expected to remain a key theme for Beijing. That could see disposal records smashed again in 2019.

Beijing put an end to the party in mid 2017, telling the nation’s four largest private conglomerates – HNA Group, Anbang Insurance Group, Fosun International and Dalian Wanda Group – they had borrowed too aggressively.

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A forced liquidation was mandated and a “banned list” produced that dumped offshore property and hotels in the restricted basket, and casinos in the “don’t even think about it” one.

Still, it wasn’t until the end of that year that the spending tapered off. In 2016 and 2017 combined, Chinese companies splashed out an unprecedented US$89 billion on real estate.

In 2018, the deleveraging drive really started to take effect. Real estate asset sales by Chinese companies have surged to US$12.3 billion since January, up from US$5.3 billion the year prior, preliminary data compiled by Real Capital Analytics show.

“While capital controls remain in place, China won’t be the main driver of Asian outbound investment,” said Stephanie Yang, CBRE Group’s senior director of global capital markets.

Buyers from places including Singapore and South Korea are already taking the place of Chinese in markets such as the US and Europe, she said.

The asset sales were “driven in part by the government’s push to reign in the most aggressive buyers, but also by a requirement to reduce debt levels”, said Jeffrey Langbaum, a commercial real estate analyst at Bloomberg Intelligence.

HNA was arguably the worst offender on the trophy collection front, amassing stakes in airlines, catering companies, tech distributors, hotels, asset managers and a currency exchange.

Wanda got into cinemas — it’s now the world’s largest movie-theatre operator – while Fosun, run by Guo Guangchang, a self-styled Chinese Warren Buffett, bought Club Med and stakes in overseas fashion houses.

Anbang’s unfettered spending, meanwhile, saw the authorities seize control of the conglomerate in February and the insurer’s former chairman, Wu Xiaohui, sentenced in May to 18 years in prison after being convicted of fundraising fraud and embezzlement.

HNA has gone some way to making amends, ending 2018 as the top seller among the four and accounting for five of the 10 biggest property disposals.

Even so, affiliate units have been missing loan and bond payments for months, evidence that more cash needs to be brought in the door to overcome HNA’s liquidity challenges.

“The deleveraging trend will continue through the first half of next year,” said James Shepherd, the managing director of Greater China research at Cushman & Wakefield Inc.

He said Chinese investors had often relied upon local banks to back their buying sprees. With that tap turned off, and refinancing pressures mounting, further assets sales are inevitable.

There are willing buyers, too. A consortium including Ping An Real Estate and China Life Insurance sold a 13-storey Boston building for US$450 million in August, setting a record for an office transaction in the city.

“The ongoing uncertainties of the trade conflict will put pressure on foreign reserves and the value of the yuan, so capital controls will most likely continue in 2019,” Tom Moffat, CBRE’s Hong Kong-based head of capital markets Asia, said.

That will mean ongoing “selective disposals from Chinese investors, whether they’re looking to strengthen their balance sheets or realise a decent profit from their early investments”. BLOOMBERG

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