NEW YORK CITY—Seeing the reality TV-like drama from Washington, DC as “ludicrous,” coupled with US anti-globalization policies, from the Chinese perspective this is an opportunity to rise in world leadership. Kai Wang is a partner and the chair of the Greater China practice group in the Honolulu office of Carlsmith Ball. She focuses on real estate and is an expert on Chinese investments. She explains why China's current political and economic plans are not supportive of Chinese investors' love of New York City real estate.

Wang notes the Chinese president, Xi Jinping, has said eliminating wealth disparity in China is the government's top priority and he plans to do that with economic growth. Xi continues to emphasize China's ambitious “One Belt One Road” plan. The far-reaching undertaking aims to recreate and update the ancient Silk Road trading route from Africa, Europe the Middle East and Asia, linking more than 60 countries with infrastructure and technology. The United States and New York City are not part of the route.

Although backing out of the Trans-Pacific Partnership deal, President Trump has expressed support for OBOR, as an economic opportunity for private American construction and technology companies.

This affects CRE because 2016 was a record year for Chinese overseas direct investment. Cushman & Wakefield reported China ranked no. 1 in foreign investments in US CRE, reaching $19.2 billion. The report states 62% of the investments amounting to $11.9 billion were for deals over $1 billion, and that the five largest Chinese investment CRE transactions were among the top 10 largest U.S. transactions last year.

New York City received the lion's share with 46% of these CRE Chinese investments, followed by the San Francisco Bay Area at 15%, and Los Angeles at seven percent.

However, New York real estate professionals have frequently commented on how investments from China have become harder in 2017. Although OBOR launched in 2013, the Chinese government later unveiled even more specific policies that stymied outbound investments.

Outbound Chinese investments must be approved by the country's Ministry of Commerce (MOFCOM); State Administration of Foreign Exchange (SAFE); National Development Reform Commission (NDRC); and State Bank. Plus, investments have requirements at their destination cities. Foreign investments coming into the US, would require approval from the Committee on Foreign Investment in the United States (CFIUS).

Wang says OBOR has made the outbound investment approval process more difficult because China's central government “wanted to dictate who, where, how and when the outbound money can take place.”

On November 29, 2016, the Chinese government rolled out two sets of rules. Any cross-border transactions valued more than $10 billion would have stricter approval requirements, which Wang says basically prohibit them. Plus real estate investments valued more than $1 billion and desired by a state owned enterprise, if outside its core business, would also be denied regulatory approval.

On August 18, 2017, the General Office of China's State Council released to the public new guidance regarding the regulation of outbound investments. Wang explains foreign investments were organized into three categories:

(1) Encouraged investments align with the OBOR initiative. They support the construction of the trade route infrastructure, including high tech, research, energy, mining, agriculture and service industries.

(2) Prohibited investments could be harmful to national interests or security, such as military technology projects, gambling or the sex industry.

(3) Restricted investments include real estate, hotels, film, entertainment, and sports clubs. 2016 set a record year for investments in US real estate, which was not furthering the OBOR agenda. The Chinese government wanted to guide its substantial foreign reserves into areas such as technology and the service industry to compliment domestic growth and demand.

Wang says the government became anxious about a possible credit bubble because the Chinese investors were heavily relying on borrowing. Recent Chinese acquisitions in New York, including Anbang Insurance's $1.95 million acquisition of the Waldorf Astoria; Greenland Holding's $547 million purchase of an interest in Atlantic Yards; and Zhang Xin of SoHo China's 40% equity interest in the GM Building point to the high-profile attention Chinese investments in New York real estate receive.

Although Wang acknowledges the slowdown, she views it as short-term, offering the following tips for CRE professionals:

(1) Ask the buyer where the money to invest in the property is located. If the investor is a large conglomerate and has an offshore presence or subsidiary, and the money is not in China, then no approval from China would be needed.

(2) Find out if the buyer is a state-owned enterprise or has backing of the central government. If so, and the investment is within a core function of the business, the transaction will be easier.

(3) Understand the corporate governance culture of the investor. If it is a privately-held enterprise, often the founder or chairperson is the final decision-maker. Make sure you negotiate with a person who has appropriate authority or an open communications channel with the decision-maker.

(4) Although, of course, all Chinese people cannot be monolithically categorized, in terms of negotiations, Wang notes Chinese investors tend to be relationship driven. They like to get to know you before doing business. “They interact and contextualize, so may not directly tell you to your face what they want,” says Wang, meaning they may be a little less direct than a New Yorker or American negotiator.

However, Wang emphasizes Chinese investors love New York. “Real estate is in Chinese blood,” says Wang. “They buy dirt. They love dirt.”

Carlsmith Ball

Instant Insights /

China Supports OBOR Globalization, Tightening Outbound CRE Investments

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