Why are Chinese developers investing outside China?

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Why are Chinese developers investing outside China?

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?

By |February 14, 2014|Categories: Gordon's View|11 Comments

11 Comments

  1. Gary Rice March 6, 2014 at 21:49:25 - Reply

    Hi. From talking with our Chinese clients over in China. Many Chinese are concerned if their money or investment is safe from the Government due to the increasing gap between the rich and poor.

    As the government is the ‘People Republic of China’, the government can easily confiscate money or property as it wishes. So many Chinese think it is safer to invest abroad just incase.

    All the best,
    Gary Rice, Business Director of Go Frontiers (www.gofrontiers.co.uk)

    • Gary Fosburg March 7, 2014 at 03:08:50 - Reply

      And it goes deeper that. I had heard that owners of apartments are given 70 years. Also many smaller town governments were confiscating property for manufacturing. At the same time, farmers are upset because farming land is being confiscated and cities are being built for those farmers. The farmers just want to live on a piece of land and farm. You can’t take the farming out of a farmer. That’s why you hear of cities being built but no one is living there. It’s hard to stop the construction engine driving growth. Represents millions of skilled labor that would have no where to go in the event of a slow down in the construction sector. Gary

  2. Gary Fosburg March 7, 2014 at 03:08:05 - Reply

    And it goes deeper that. I had heard that owners of apartments are given 70 years. Also many smaller town governments were confiscating property for manufacturing. At the same time, farmers are upset because farming land is being confiscated and cities are being built for those farmers. The farmers just want to live on a piece of land and farm. You can’t take the farming out of a farmer. That’s why you hear of cities being built but no one is living there. It’s hard to stop the construction engine driving growth. Represents millions of skilled labor that would have no where to go in the event of a slow down in the construction sector. Gary

  3. Yu Du June 15, 2014 at 15:50:17 - Reply

    The last one, definitely the last one.

  4. Shenghong July 3, 2014 at 17:29:09 - Reply

    I can imagine is that real estate developers are able to say with proud in China that they have worked on major projects abroad, which will give them a competitive edge over its competitors.

    At the same time, some geographical diversification really can’t hurt, especially when China is your home market. Once the real estate market busts, it’s too late to move abroad without knowledge built up upfront.

    Regarding the financing, I don’t think they necessarily have to raise capital in China to do those projects.

  5. Yixiu Zheng July 12, 2014 at 23:17:45 - Reply

    I talked with a friend that worked in one of the Chinese developers that expands to Australia and the US. It seems that even though they build house abroad, their target customers are still Chinese, those Chinese immigrants or Chinese real estate investors. Guess it has something to do with the real estate market bubble and/or the immigration trend.

    • Nathan Ning October 17, 2014 at 15:39:02 - Reply

      Yixiu Zheng has a good point, and I am in it.
      Even for those students abroad, their parents are more willing to buy an apartment/house for them during their study period. Actually some of them will rent rooms to other international students to compensate the cost.They probably will sell the property after graduation.
      Besides that, “Reverse Innovation” is the country strategy which means the government/enterprises want to take advantage of the resource from other countries to develop new technologies/products for the Chinese market. Look at Huawei, YiLi Group etc who are operating several innovation centers overseas.

      Last but not least, is the Chinese real estate market really profitable for developers? Considering the intangible cost, and all operational cost, people become tired of doing that!

  6. kariappa bheemaiah July 21, 2014 at 21:46:28 - Reply

    Cheap credit from formal banks and the ever growing shadow banking sector have led to an upswing in lending within the Chinese economy.
    As a result, the residential real estate market and the construction sector have seen a boom period. However, the initial warning signs of the collapse of this bubble have already begun to emerge. IHS has already simulated a doomsday scenario in case the Chinese real estate collapses.
    As the Chinese economy began to slowdown in 2013, steep price discounts were seen in the residential real estate market. This has been followed by an increasing number of vacant spaces and defaults by small property developers.
    If the bubble were to burst, Chinese banks would reduce credit injections into their economy. This would lead to less investment, followed by reduced household consumption.The deprecating Yuan will also result in reduced imports.
    This could be the reason why Chinese investors are making real estate investments outside of China. By doing so they are radiating their risk and creating a nest egg for the forthcoming threat.

  7. Yili August 22, 2014 at 19:43:16 - Reply

    Is there any regulation abroad to control the standard of quality of the houses? Since the quality of those buildings in China are really wishy-washy, I wonder if I need to check which developer it is before buying any house abroad…sigh

  8. Casey Xiao-Morris December 19, 2015 at 01:43:06 - Reply

    There are many motivations that Chinese developers aim outside China. One of the seasons is simply supply and demand issue. When the demand increases slower than the supplies in China, it drives the companies to look for opportunities outside. I see more and more Chinese companies have ambitions to become a global player. We should not be surprised to see when they show up in your town.

  9. Barreto van Tol May 6, 2016 at 04:34:21 - Reply

    Working for Chinese Developers in Brazil I can assure you it is all about the right to property being restricted in Mainland China.

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