Greenland Group’s purchase this week of a development project in Los Angeles with 1.65 million square feet of residential, hotel and retail space provoked the question, “Why are Chinese developers investing increasing amounts outside China?” After all, Greenland is not alone. Other Chinese developers have recently purchased projects in London, New York, Sydney and many other cities.
Do these developers really believe that returns on projects in major cities are going to be superior to those in China over the coming years? What would this imply about the future of China’s property markets? That housing prices may be set for a long period of stagnation at best? That commercial real estate prices really will be hit in the medium term by the emergence of ecommerce?
Do they believe they bring distinctive capabilities to these international projects that will allow them to earn better returns than local developers in these cities? Locals tend to think not as this article from The Australian highlights. Success in navigating development rules and regulations in China is unlikely to prepare one for the local rules and regulations in a London or New York.
Do they have access to cheaper capital from China than local developers can access? With rates remaining at long-term lows in many markets, this is unlikely unless the Chinese developer is assigning almost a 0% cost to its capital.
Do they have so much capital to deploy that they simply can’t find projects to put it against in China? With many developers in China finding that their ability to draw down committed loans is being restricted with a “come back next month” response, this seems unlikely.
Are they sending an indirect message to Chinese rulers, that if you tighten our access to finance too much and restrict our ability to make money too tightly, we will simply stop investing in China? It is quite possible to believe that some developers will be targeted in coming years for acting against the interests of the vocal middle class, for selling substandard property, or for paying inflated prices for development land.
Do they feel overly concentrated in China and are simply creating some financial security through geographic diversification, just in case there is a downturn in China (not because they believe there will be one), or they find their business under investigation, which restricts their ability to move capital abroad? This seems perhaps the most plausible reason of all, although all of the above may well in part be true?
What do you think?