Chinese Have a Trillion Reasons to Invest in New York Real Estate

May 6, 2015 6:00 am Last Updated: December 31, 2015 3:34 pm

For wealthy Chinese, the price doesn’t matter, whether it’s luxury goods or New York real estate.

But, when it comes to real estate, the rich Chinese form insurance companies, like Anbang Insurance Group, which bought the Waldorf Astoria Hotel in New York City for $1.95 billion last October.

Insurance companies are the driving force behind Chinese investment in real estate, which totaled $3.3 billion in 2014. Unlike some of the domestic players, wealthy Chinese are more willing to pay these high prices, ever since China relaxed guidelines on outbound investment for institutional investors in 2012. However, the Chinese total is still less than 10 percent of New York’s 2014 transaction volume of $55.4 billion, the world’s largest.

There has been a fair bit of volatility [in the Chinese market], so they are trying to diversify and smooth that volatility.
— Janice Stanton, Cushman & Wakefield

“The conservative more institutional investors are looking for best-in-class assets. The [yield] is in the 4 percent range, which is the same as what they are getting at home,” said Janice Stanton, managing director at Cushman & Wakefield, a global real estate services firm.

Investors have to look for a tradeoff between risk and return, and if the return is roughly the same in China and the United States, then the United State’s lower risk profile makes it a compelling target for the $1.44 trillion in assets the Chinese insurance industry manages.

“According to the Association of Foreign Investors in Real Estate the U.S. is on the top of the list: Safety, security, and return potential. There is more capital than there are deals,” said Stanton.   

Chinese real estate has recently taken a dive, with prices falling 5.7 percent on average. On the other hand, the biggest markets in the United States like New York have recently retaken their 2007 highs. Although the financial crisis hit real estate pretty hard throughout the country, New York was largely unscathed.

In addition, Chinese insurance companies mostly hold fixed income securities and very little equity in their portfolios. Even after comparing individual markets and finding the best investment, another rule of prudent portfolio management is diversification both in terms of asset class and in terms of geography.

“There has been a fair bit of volatility [in the Chinese market], so they are trying to diversify and smooth that volatility. If you are an institution with tens of billions of dollars to invest, if you look at building a portfolio, people say put 5–10 of that abroad,” said Stanton.

In addition to the insurance companies, Chinese developers are also looking to diversify and start joint ventures with U.S. companies, like Vantone Holdings Co., which is jointly developing two residential real estate properties in New York City.

But even investing in the United States is not without risk.

Everyone has got currency risk. Everyone has political risks because China changes rules a lot,” said Stanton. In terms of currency risks, she perceives Asian investors to be less worried, because the Chinese yuan and the Hong Kong dollar are linked to the dollar.

While this is correct, the recent move by the Swiss central bank to unlink the franc from the euro shows that investors need to be careful nonetheless, especially as China moves toward making its currency more international.  

Historically, economists always believed the yuan would have to go up against the dollar if it floated freely, however, recent evidence suggests it could actually go down, which would favor overseas investment.

Despite record low yields, Amir Korangy of The Real Deal thinks that prices can only move up further. “New York City real estate has become the Swiss bank account of the global economy,” he told CCTV.

In addition, he notes that many Chinese investors have paid with cash rather than take out mortgages, following in the footsteps of billionaire Alexander Rovt, the all-cash buyer of 14 Wall Street.

“I have a mortgage and I must have income of $10 million in order to pay my mortgage. What if I don’t make $10 million and just have $8 million? And $2 million I am falling short. And if I can’t get the $2 million from somewhere else, what will happen? In the end, if you are not able to make this money you can lose the house and you will lose everything what you worked on,” he said.

Even a downturn in the economy and a decline in rental income does not force cash buyers to sell, prices should remain at least stable. “A lot of the core investors are reluctant sellers because they don’t know what they can replace it with,” said Stanton.