Chinese investment in US real estate : potential growth and constraints

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Chinese Investment in US Real Estate: Potential Growth and Constraints by

Mengjing Ni

B.C., Commerce, 2010

University of Toronto

Submitted to the Program in Real Estate Development in Conjunction with the Center for Real Estate in Partial Fulfillment of the Requirements for the Degree of Master of Science in Real Estate

Development

at the

Massachusetts Institute of Technology

September, 2017

The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part in any medium now known or hereafter created.

Signature of Autho Certified by_ r

Signature redacted

Center I Estate uIJuly 28, 0t /

Signature redacted

LIY David Geltner

Professor of Real Estate & Finance/Director of Research, CRE Thesis Supervisor

Accepted by

Signature redacted

rofessor Albert Saiz

Daniel Rose Associate Professor of Urban Economics and Real Estate, Department of Urban Studies and Center for Real Estate

Chapter 1: Overall Introduction of Chinese Outbound Investment in the U.S.

Investments in real estate from Chinese investors caught a lot of attention in the U.S. market. This chapter will describe the economic and political background of Chinese outbound

investment in the U.S. Meanwhile, the political changes from late 2016 to 2017 in both the Chinese and U.S. sides caused concerns in the market. Whether those issues would affect the outbound investments in the U.S. will be addressed in this chapter as well.

I. Economy Slowdown in Chinese

The global financial crisis in late 2000 further awakened the Chinese government to restructure Chinese economy from heavy reliance on manufacturing, export, and investment towards domestic consumption and service. Along with the global economy slow down and the Chinese economy transitioning, the GDP growth started to decline from two digits to one since 2010 (6.7% growth rate in 2016 according to World Bank). That worries numerous of investors to park money out of the country.

Additionally, the stock market meltdown in 2015, and the constant downward pressure on RMB, further reduced the confidence in the market. More and more affluent Chinese families attempt to invest abroad and companies are encouraged by the "Go Out Policy" to

actively explore the new markets.

However, the acquisition sprees around the world led to large capital outflow. As a result, the Chinese government had to spend billions of reserve to prevent further depreciation of the RMB. In January 2017, RMB exchange reserve fell to $2.998 trillion according to

People's Bank of China, the lowest in the past six years (Reuters, 2017). And the reverse of capital outflow also first time surpassed inflow in both 2015 and 2016 as the Chart shown below.

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China 200

150 100 50

FDI Outward and Inward during 2010-2016 ($billion)

0

2010 20112012 2013 2014 2015 2016

U Inward FDI v Outward FDI

2016: net capital outflow was further enlarged

2015: realizing net capital outflow for the first time

2013: exceeding

US$100 billion for the first time

Source: EY, China go abroad (5th Issue), April 2017

II. Political Controls from China

The rush of the capital outflow, depreciation of the currency, and "irrational oversea investments" became headlines around the world. Moreover, some of the outbound investments on trophy projects including real estate, football clubs, entertainment

companies, etc. were doubted on their above market price with massively levered debt. The authorities in China were severely concerned. "Starting from July 2017, banks and other financial institutions in China will have to report all domestic and overseas cash transactions of more than 50,000 yuan ($7,400), compared with 200,000 yuan ($ 29,600) in January

2017. Banks will also need to report any overseas transfer by individuals of $10,000 or

more." reported Xinhua, the Chinese official press (Chen, Cheng, and Glenn, 2017). The central government can no longer tolerate the further debt piling and to anticipate potential financial crisis with extra reserves paying as an exchange.

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The capital control seems working. In Q1 2017, the outbound foreign direct investment dropped by 49% y-o-y, according to commerce ministry data. Consequently, the reserves increased to $3.057 trillion in June 2017 according to People's Bank of China (as shown below in the chart).

China Foreign Exchange Reserves ($Million)

Historical Data API Alerts Forecast

CHINA FOREIGN EXCHANGE RESERVES

3250000 3200000 3150000 3100000 3050000 3000000 2950000

Jul2016 Oct 2016 Jan 2017 Apr 2017

Source: Tradingeconomics.com, People's Bank of China

Ill. Political Changes in the U.S.

On the other hand, with the new administration taking over the Oval Office, the controversy was deeply involved in the proposals of foreign policy, health care, Immigration policy, etc. Nevertheless, "America first" hasn't been seen moving forward much yet. And since most of the proposals are still under process, it is debatable how exactly those policies would affect the U.S. With that said, the proposals on tax reform, infrastructure rebuilding, and job creation are perceived as positive signs to the U.S. business.

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IV. Current Chinese Outbound Investment in the U.S. Real Estate

While the words of "outbound" and "investment" have become sensitive among Chinese conglomerates after the capital control, most of the Chinese companies still believe that oversea investment is a long-term strategy. At the same time, Chinese investors believe that the U.S. economy still needs more foreign investments and infrastructure related projects

despite the uncertainties from the U.S.-China foreign policies.

As the Real Capital Analytics data shows, the amount of real estate investment in the U.S. hasn't decelerated. By the end of first half of 2017, China is the second largest investors in the U.S. among top cross-border transactions right after Canada. Although money stayed in the Mainland China is mostly frozen now, many Chinese companies managed to move their

money overseas years ago.

Cross-Border Real Estate Transactions in the U.S.

($)

Cross-Border Transactions in the U.S. ($)

90,000,000,000 80,000,000,000 70,000,000,000 60,000,000,000 50,000,000,000 40,000,000,000 30,000,000,000 20,000,000,000 10,000,000,000 0 2006 2007 2008 2009 2010

N China E Canada a Germany a Singapore N South Korea

I

2011 2012 2013 2014 2015 2016 2017

* Switzerland E Qatar 0 United Kingdom EJapan E Hong Kong

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Chapter 2: Analysis of Chinese Investment in U.S. Real Estate

This chapter will analyze the transactions of Chinese outbound investment into the U.S. real estate mainly in the past five years. It will describe the growing market demand and trend from Chinese investors. Further, it will demonstrate the property type selection, geographic focus, Investors breakdown and their investment patterns.

I. Transaction Size

As the chart shown below, the investment wave from Chinese investors in the U.S. started from 2013. Ever since then, the transaction volume has soared up until it reached the height in 2015 and 2016, which is almost five times as it was in 2013 and 2014.

As mentioned in the last chapter, the capital control in China does threaten the future transactions in the market, however, the outbound investment trend in the U.S. does not seem to stop (as shown in the chart below).

Chinese Cross-Border Real Estate Transactions in the U.S. ($)

-2013 -2014 -2015 -2016 -2017

J F M A M A S 0 N D

Source: Real Capital Analytics 18.000.000.000 16.000,000,000 14.000,000,000 12.000.000.000 10.000,000.000 8,000,000,000 6,000,000,000 4,000,000,000 2,000,000,000 0 .. ..-... ...

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According to Real Capital Analytics, by the end of the first half of 2017, there were already 211 properties transacted in the U.S. by Chinese investors, resulting in a total investment of 4.9 billion USD. It is not far away from the volume transacted in 2016 y-o-y.

Chinese Cross-Border Real Estate Transactions in the U.S.

($)

Month 2013 2014 2015 2016 2017 J 213,769,388 7,321,688 632,980,782 505,255,250 F 60,847,831 429,435,221 2,388,221,692 729,159,782 754,255,250 M 72,847,831 817,932,721 2,616,761,814 1,815,359,782 1,427,689,374 A 221,638,365 976,753,453 2,846,524,314 2,521,106,032 1,700,489,374 M 1,581,638,365 1,414,393,453 4,299,088,314 5,430,881,832 4,712,630,551 J 1,640,438,365 1,978,612,913 4,546,155,306 5,818,282,193 4,885,630,551 J 1,731,298,365 2,094,780,913 4,695,955,306 6,019,556,651 A 1,752,548,365 2,871,965,913 5,147,455,306 6,696,265,518 S 1,820,043,865 3,044,565,913 5,318,455,306 12,506,735,444 o 1,838,643,865 3,126,885,912 10,145,299,836 14,582,785,398 N 2,116,153,865 3,210,130,912 14,802,666,051 15,481,426,092 D 3,429,535,450 3,509,197,974 15,604,691,341 16,859,030,592

Source: Real Capital Analytics

11. Property Type Breakdown

Chinese Cross-Border Real Estate Transactions in the U.S. by Property Type

($)

Property Type

Vol

($)

# Props Average Price

Office Hotel Industrial Dev Site Apartment Retail 20,811,782,842 12,299,026,611 8,257,289,418 5,332,102,800 1,249,062,202 1,027,756,833 218 309 398 122 40 52 95,466,894 39,802,675 20,746,958 43,705,761 31,226,555 19,764,554

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Regarding the investment transactions among different property types, according to Real Capital Analytics, offices occupied the majority of the total investments, and the hotel was the second. Although Chinese developers are usually interested in the apartment, it is more common to build those through development site rather than buying them directly.

Meanwhile, Industrial is always a sound sector for portfolio diversification, especially when it is with a higher cap rate.

i. Office

As the most transparent and easiest-to-access sector, the office is always the most popular property type to Chinese Investors. The total volume of the investment in the U.S. from China was almost $21 billion with a total 218 properties transacted by the end of first half of 2017. The annual transaction volume of office in the past five years had never been lower than $1 billion. In 2016, it achieved almost $5 billion transactions in office, which was the highest in the history.

Office buildings in the CBD (Central Business District) areas in the major U.S. cities are arguably the most stable and therefore valuable assets in the world. In turn, they occupied more than 80% of the total transactions. The average cap rate transacted in the U.S. market was around 5.2%. Among them, Manhattan and San Francisco achieved the lowest, around 4.0% to 4.3%. In that case, those assets are expecting a stable long-run rental income rather than a short-term turnover.

There were some other situations, however, were looking for non-traditional office buildings. For example, Taikang Life Insurance, as a pioneer in senior housing in China, entered into an agreement with NorthStar Realty Finance to purchase a $1 billion stake in its healthcare portfolio in 2017 (19% stake of the total $6.1 billion healthcare portfolio in

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both U.S. and U.K. markets). 113 out of the 425 properties are Medical offices in the U.S. (Hollis, 2015)

Chinese Cross-Border Real Estate Transactions in the U.S. Office Market

($)

* Rolling 12-mo. Total EQuarterly Vol

6,000,000,000 5,000,000,0004 4,000,000,000 3,000,000,000 2,000,000,000 1,000,000,000 01 '13 Q1 '14 Q1 '15 Q1 '16 Q1'17 NYC Metro SF Metro Minneapolis Seattle LA Metro Honolulu Chicago Houston Austin San Diego 11,134,946,213 991,749,688 335,940,914 183,143,209 304,810,750 12,000,000 1,433,800,000 146,214,242 65,829,793 52,500,000

Source: Real Capital Analytics, 2012-Hi 2017

In all markets, New York City metro area is undoubtedly the most active market. Chicago, the location for most headquarters cover the central U.S. market, is also a popular choice. As a hub for the top tier high-tech companies, San Francisco is always on the top of the list as well. Although Minneapolis is never a typical gateway city to invest, a 15-year Target lease still attracts the Chinese conglomerate HNA Group to step in and made a so far the highest price paid for a single building in Minneapolis ($315 million) in late 2016 (Halter,

2017). Behind that is the Los Angeles Market.

ii. Hotel

Along with the surges of rapid growth in Chinese tourists traveling abroad, Chinese

investors wanted to capture the premium by acquiring hotels and travel businesses around the world. Particularly in the mature market such as U.S., where hospitality has been having a long-term steady growth in return, Chinese investors purchased almost 12.3 billion worth

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of hotels by the end of first half of 2017 with a total 309 properties. The transaction volume of hotel sector in the past five years from China has been the largest among all cross-border investors around the world. In 2016, it achieved nearly $8.5 billion transactions in hotels, which is the highest in the entire history in the U.S.

Chinese Cross-Border Real Estate Transactions in the U.S. Hotel Market

($)

F Rolling 12-mo. Totald *Quarterly Vol

10,000,000,000 9,000,000,000 8,000,000,000 7000,000,000 6,000,000,000 5,000,000,000 4,000,000,000 3,000,000,000 2,000 ,000,000 1,000,000,000 Q1'13 Q1'14 Q1'15 Q1'16 Q1'17 NYC Metro SF Metro LA Metro Chicago Phoenix Miami/So Fla Austin DC Metro Houston Dallas 4,197,107,823 1,723,721,744 1,949,155,209 1,060,023,507 484,152,797 406,183,566 285,545,742 323,668,063 100,700,918 105,442,856

Source: Real Capital Analytics, 2012-Hi 2017

In all markets, New York City metro area is again the most active market thanks to its unstoppable tourist attractions and as one the most mature hospitality markets in the world. Los Angeles is also a familiar city to Chinese people with its Hollywood Sign, Disneyland theme park, and Universal Studios. Besides those, according to Real Capital Analytics, San Francisco and Chicago are also among the most active markets. However,

since the majority of the hotel transactions were through portfolio purchase or equity transfer, the location spread does not adequately represent the market activities.

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Cross-Border Top Transactions in the U.S. Hotel Market ($)

Date Property Name City State Units Price ($) Buyer

Sale Oct-16 Starwood SS US Hotels n/a Consortium of institutional Investors, China Life,

Entity Sep-16 Westin St Francis San Francisco CA 1,195 1,017,531,015 Anbang Insurance Group

Sale Sep-16 Hyatt Regency Honolulu HI 1,230 780,000,000 Mirae Asset

Entity Sep-16 JW Marriott Essex Hou, New York NY 518 705,141,323 Anbang Insurance Group

Entity Sep-16 InterContinental Chicag Chicago IL 792 508,216,663 Anbang Insurance Group

Entity Sep-16 Loews Santa Monica BE Santa Monica CA 342 485,411,773 Anbang Insurance Group

Entity Sep-16 Fairmont Chicago IL 692 444,047,892 Anbang Insurance Group

Entity Sep-16 InterContinental Miami Miami FL 641 406,183,566 Anbang Insurance Group

Sale Apr-17 Pacific Beach Hotel Honolulu HI 839 515,000,000 Commerz Real

Entity Sep-16 Ritz Carlton Laguna Nig Dana Point CA 393 366,105,500 Anbang Insurance Group

Source: Real Capital Analytics, H1 2015- H1 2017

As shown in the table above, the top transactions of the hotel from global outbound investments in the U.S. were mainly among Chinese investors including China Life and Anbang Insurance Group in the past two years.

China Life, the Chinese largest life-insurance company, with sovereign-wealth funds and others, purchased a portfolio of 28 select-service hotels in 40 states with roughly $2 billion in total from private investment firm Starwood Capital Group (Bloomberg, 2017).

Anbang, another insurer, who paid almost $2 billion for the Waldorf Astoria hotel in Manhattan, also involved in the famous bidding war for Starwood Hotels & Resorts

Worldwide Inc., with Marriott (dropped out at the end). In late 2016, instead, it closed the deal of almost $6.5 billion to buy most of the Strategic Hotels & Resorts (15 luxury U.S. hotels, including New York's JW Marriott Essex House and the Westin St. Francis in San Francisco) from Blackstone (Yu, 2017).

HNA originally started as an airline company located in Hainan (China's largest tropical

island) and now became a conglomerate expanded its business into aviation, tourism, hospitality, and finance with more than $100bn-worth of assets around the world. It acquired a 25% stake in America's Hilton Worldwide ($6.5 billion) in 2016 and later bought

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out all of Carlson Hotels, equals to 51.3% stake in Rezidor Hotels Group, based in Brussels. After the closure of the Carlson Hotels deal, HNA Group has made an offer to buy-out the

remaining Rezidor Hotels Group shareholders (Jamerson and Wu, 2016). Both deals from HNA are still under process so that they are not included in the Real Capital Analytics report yet.

iii. Industrial

Industrial has never been an exciting sector for Chinese investors. With the accelerating boom of E-commerce, however, industrial, especially logistics property has become the new hot area in both Chinese and U.S. markets.

According to Real Capital Analytics, by the end of first half of 2017, the total transaction volume of industrial by Chinese investors reached to more than 8.2 billion with 398 properties in total.

Unlike other property types, industrial properties are mainly geographically concentrated in coastal and industrial cities. And similar as Hotel, since the biggest transactions in the market were portfolios, the location distribution is not the most precise representation of the market.

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Chinese Cross-Border Real Estate Transactions in the U.S. Industrial Market ($)

e Rolling 12-mo. Total EQuaterly Vol

10,000,000,000 9,000,000,000 Vol ($) 8,000,000,000 _{NYC Metro} _841,956,350 6,000,000,000 SF Metro 655,121,650 5,000,000,000 Seattle 497,427,622 4,000,000,000 Philly Metro 204,098,782 3,000,000,000 LA Metro 1,427,070,213 2,000,000,000 Miami/So Fla 357,004,118 1,000,000,000 Denver 174,260,451 0 - -Chicago 471,162,449 Q1'13 Q1'14 Q1'15 Q1'16 Q1'17 Honolulu 6,200,000 Atlanta 382,270,377

Among all the transactions, Global Logistic Properties, a world leading logistics developer headquartered in China (a joint venture with Singapore sovereign-wealth fund GIC Pte. Ltd), purchased the largest portfolio of properties in 2015 by acquiring IndCor Properties at $8.1 billion (55% stake) according to GLP's press release. Partnered with Global Logistic

Properties, China Life Insurance Group took about a 30% stake in that warehouse portfolio. In May 2017, China Life again stepped into logistics market by acquiring a 95% stake in a portfolio of $950 million industrial properties (Cole, 2017). This time, China life teamed up with ElmTree, a U.S. private equity real estate firm. The portfolio included 48 single-tenant properties of more than 5.5 million square feet available space scattered throughout the

U.S. (Cole, 2017). These two portfolios added up to a $5.2 billion estimated valuation of

total industrial assets China Life possesses in the U.S.

Rosewood, a U.S. private equity firm (backed with Chinese capital), partnered with the State Administration of Foreign Exchange ("SAFE"), a Chinese Sovereign Wealth Fund, purchased a portfolio of 24 industrial assets valued $548 million in early 2017.

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iv. Development Sites

Development Sites are always the top choice for Chinese developers, builders, and construction companies since they would allow them to utilize their expertise. Some of them already set up US offices to manage ongoing operations. According to Real Capital Analytics, by the end of first half of 2017, the total transaction volume of development site

reached to 5.3 billion, and 122 properties are expected to be or have already been built. The purchase pace for development site is relatively steady with no significant spike in a

particular year. However, it transacted more than 1.8 billion development site in 2016, still the greatest amount up to date.

Chinese Cross-Border Real Estate Transactions in the U.S. Development Sites

($)

t Railing 12-mo. Total

2,500,000,000 EQuarterly Vol Vol

($)

2,000,000,000 1,500,000,000 1,000,000,000 500,000,000j Q1 '13 Q1 '14 Q1 '15 Q1 '16 Q1 '17 NYC Metro Honolulu SF Metro LA Metro Seattle Miami/So Fla Houston Atlanta Denver Charleston 2,710,933,009 680,489,290 1,255,601,812 458,819,388 155,299,999 138,740,000 23,725,000 16,580,000 6,300,000 4,928,900

Since development site allows flexibilities to the developers, the deal selection including geographic and property type choices are more up to the developer's capacity and

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concentration in development in Shanghai, including the most famous Shanghai Tower (the second tallest tower in the world). When it entered the U.S. market, it mainly focuses on the New York Market and has a big appetite for landmark building development. In 2015, Shanghai Municipal partnered with Ceruzzi Properties to purchase 520 Fifth Avenue, a 71-story mixed-use tower. And the deal size for the site is $325 million. In 2016, it partnered with Extell Development Co. to build an estimated $3 billion skyscraper, the Central Park Tower, on Manhattan's Billionaires' Row (Cole, 2016).

China Vanke started their business in China as a residential developer and still prefers to build apartments in the U.S. Unlike Shanghai Municipal, Vanke doesn't merely look for mega-projects; instead, 5 out of 7 projects acquired by Vanke are mid-tier development among different cities, ranging from 15 million to 73 million.

Meanwhile, some developers are exploring other non-typical markets. China Oceanwide Holdings is fond of Hawaii. After two development sites have been acquired in Ko Olina, Hawaii for $280 million and $297 million respectively, it announced another purchase of $103.4 million in Kapolei, located close to the previous two projects. It also signed an agreement with Atlantis brand company in December 2016, so that they would develop a luxury resort with residential condominiums under the name of "Atlantis" according to China Oceanwide's official website.

v. Apartment

Most of the institutional investors and especially developers are not that into investing in individual residential buildings. In turn, the total volume of Chinese investment recorded by Real Capital Analytics in the U.S. was about $1.2 billion by the end of first half of 2017. That included a total transaction of 40 properties and the annual transaction volume of

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$170 million to $580 million. Meanwhile, due to a smaller sample pool, the geographic

location scattered from deal to deal although New York City was still the most popular choice.

Chinese Cross-Border Real Estate Transactions in the U.S. Apartment Market ($)

k Rolling 12-mo. Total MQuarterly Vol

1,200,000,000 1,000,000,000 800,000,000 600,000,000 400,000,000 200,000,000 0 Q1 1-'13 Q1 '14 Q1 '15 Q1 '1 6 Q1 '17 NYC Metro Phoenix Greensboro LA Metro Houston Baltimore Denver Salt Lake City Tampa DC Metro

vi. Retail

With many brick-and-mortar stores closing down, investment in retail becomes more unpredictable than ever. Besides, retail is a less familiar sector to Chinese investors

concerning the market and operating differences between China and the U.S. Therefore, it is normally not the first choice for Chinese investors especially when they start to enter the market. According to Real Capital Analytics, the total transaction volume for retail from Chinese investors was about $1.0 billion.

The largest deal as we can see from the chart below (the spike in Q3 2014) was a $420 million former Robinsons-May department store in Beverly Hills between New World

812,340,618 91,849,999 27,500,000 55,130,000 348,980,000 74,000,000 67,500,000

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Development and Dalian Wanda Group, the biggest commercial group in China. Besides the retail part, Dalian Wanda bought the entire site for $1.2 billion (Chen, 2016). That move reinforced its strategic expansion into the U.S. entertainment market after its acquisition of the U.S. cinema chain AMC Entertainment Holdings in 2012. That also drove Los Angeles market the second active market right after New York City.

Chinese Cross-Border Real Estate Transactions in the U.S. Retail Market ($)

SRolling 12-mo. Total EQuarterly Vol

700,000,000 600,000,000 500,000,000 400,000,000 300,000,000 200,000,000 100,000,000 0 -A W .. Q1 '13 Q1'14 Q1'15 Q1'16 Q1'17

Vol ($) NYC Metro LA Metro Seattle SF Metro Honolulu Columbia Kansas City Austin San Diego 534,488,152 489,620,000 65,458,999 50,900,000 44,490,000 23,476,929 17,600,000 9,797,408 8,072,500

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lil. Geographic Breakdown

Chinese Cross-Border Real Estate Transactions in the U.S. Geographic Breakdown

Vol ($) NYC Metro 20,041,188,496 SF Metro 4,640,401,233 LA Metro 4,569,605,560 Chicago 3,159,485,957 Phoenix 1,097,931,890 Houston 984,019,630 Miami/So Fla 908,678,795 Seattle 769,826,220 Honolulu 743,179,290 All Others 9,012,536,393

Source: Real Capital Analytics, 2012-HI 2017

# Props 122 101 126 64 33 53 32 43 8 999 Average Price 164,272,037 45,944,567 36,266,711 49,366,968 33,270,663 18,566,408 28,396,212 17,902,935 92,897,411 9,021,558

Regarding geographic breakdown, New York City is inevitably the most desired area for all different property sectors. In the past five years, there are more than $20 billion

transactions happened in New York Metro area. Especially for Office, there were more than half of the transactions ($11 billion) took place in Manhattan. For both hotel investment and development site, the transaction volumes in New York City almost doubled the size of the second favorite city, Los Angeles, and San Francisco respectively.

San Francisco is the culture, commercial and financial center of Northern California and also one of the most livable city. Therefore, it attracts tremendous attention from Chinese investors. From the data provided by Real Capital Analytics, from 2012 to H1 2017, the transactions in San Francisco reached up to $4.6 billion, right after New York City. As discussed above, San Francisco is also the second most active market for office, hotel, and development site.

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Similar to San Francisco, Los Angeles is also a popular choice for Chinese investors. From 2012 to Hi 2017, there were almost $4.6 billion transacted in the Los Angeles Metro. At the same time, due to the fame of its world-leading entertainment industry, the hotel and retail sectors stood out slightly more than the other sectors among all the transactions.

Other markets did not perform as active as the above three markets. However, a few of them still drew significant attention with their features. For example, Chicago is the second favorite market for offices since it is a home of multiple headquarters. Honolulu attracts

investment in hospitality real estate, while Houston is a good place for apartment investments due to its low-price housing and up-growing demographics.

IV. Top Player Breakdown

Chinese Cross-Border Real Estate Top Players in the U.S.

Prior 24 Monti

Buyer Location

China Life

Anbang Insurance Group

HNA Grp

China Investment Corp China Orient Asset China Oceanwide Holdings Ping An Insurance Shanghai Municipal

Cindat Capital Management Kuafu Properties

Greenland Group Shanghai Const Grp Taikang Life Insurance China Huarong AM SAFE Beijing, CHN Beijing, CHN Haikou, CHN Beijing, CHN Beijing, CHN Beijing, CHN Shenzhen, CHN Shanghai, CHN Beijing, CHN CHN Shanghai, CHN Shanghai, CHN Beijing, CHN Beijing, CHN Beijing, CHN Company Breakdown Insurance Company Insurance Company Conglomerate

Sovereign Wealth Funds Investment Manager Conglomerate Insurance Company Developer Investment Manager Developer Developer Developer Insurance Company Investment Manager Sovereign Wealth Funds

Acq ($) # Props Avj Price ($

8,647,229,847 5,499,999,926 3,920,461,500 2,710,500,000 1,241,899,967 1,102,989,290 713,750,000 625,000,000 551,627,000 506,277,776 466,950,000 396,918,667 374,000,000 279,382,500 268,559,124

Source: Real Capital Analytics, H1 2015-Hi 2017

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 520 15 9 3 9 5 9 2 11 7 4 2 113 2 24 16,629,288 366,666,662 435,606,833 903,500,000 137,988,885 220,597,858 79,305,556 312,500,000 50,147,909 72,325,397 116,737,500 198,459,333 3,309,735 139,691,250 11,189,964

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There are four typical players in the real estate market: insurance company, conglomerate, sovereign wealth fund/investment manager, and developer.

For insurance companies, we observed that they have a great appetite for portfolio purchases and usually invest in various property types and markets. As mentioned above, China Life took the largest hotel and industrial portfolios in the history. Anbang Insurance also bought a portfolio of 15 luxury hotels. Taikang Life Insurance was more interested in the healthcare market; thus they purchased a portfolio of 425 medical properties. Ping An Insurance purchased 7 FedEx distribution centers in the U.S.

Conglomerates were more focus in specific area or sector according to its own business strategy. For example, HNA was originally an airline company; therefore, it is more interested in hospitality and tourism industry, therefore, they were actively bidding for hotel properties.

Investment managers and sovereign wealth funds are mainly investing in the U.S. real estate market for the purpose of diversification in their overall portfolio; therefore, their investment choices vary from investor to investor. For instance, Cindat Capital Investment, a state-backed private equity firm, invested in basically all different sectors. China Orient Asset, a state-owned investment manager, prefers office buildings mainly in New York City (More details will be described in the next Chapter). SAFE as mentioned before bought a logistics portfolio in the U.S.

Developers prefer development sites, which typically generate the most profit during the whole development period as well as the most risks. There are various ways of how Chinese developers are operating their business in the U.S. market. In the next Chapter, we will discuss them through case studies.

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Chapter 3: Investment Strategy and Partnership - Case Studies

This chapter will be focusing on case studies conducted through interviews and data collected from Real Capital Analytics. The four cases are based on company's current and future

investment strategies and its partnership with the local developers. Each case represents one type of developers and investors: China Orient Asset is an investment manager who does not develop by itself, Gemdale is a developer who typically establishes joint venture with local partners, Greenland is a developer who selectively develops with local partners, and China Construction America is a construction company who does not use a local partner.

1. China Orient Asset Management

Company Background

China Orient Asset Management Co., Ltd. ("COAMC") is a Chinese state-owned investment manager, one of China's four largest asset management companies. The company has been established in 2016, evolved from its predecessor China Orient Asset Management

Corporation, a solely state-owned financial institution originated to deal with distressed and bad debt for Bank of China. Its business covers asset management, insurance, securities, trust, leasing, finance, rating and overseas business. According to China Orient Asset's news

press, by the end of September 301h 2016, COAMC's net assets stood at $9.4 billion.

Investment Scale in the U.S.

China Orient Asset entered U.S. market in 2014 by acquiring the first project 230 Peachtree in Atlanta. According to Real Capital Analytics, by H1 2017 China Orient Asset had in all invested in 9 office buildings, 2 apartments, 1 hotel, and 1 development site in the U.S., with a total estimated property value of $1.5 billion.

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Among the total 13 transactions as shown below, 5 offices are located in New York City, 2 apartments are in Long Island, NY. The rest are in different cities including San Diego, Seattle, Chicago, Charlotte, and Atlanta. Through the interview, China Orient Asset also confirmed that their U.S. investment strategy is to focus on office investment and in New York City Metro.

China Orient Asset Management Transactions in the U.S.

Acq. Acq. Acq. Acq. Refi Acq. Acq. Acq. Acq. Acq. Acq. Acq. Refi 24th Street iLeasehnld

45 West 27th Street (Leasehold) 19 West 24th Street (Leasehold) 13 West 27th Street (Leasehold) Intercontinental Hotel Devonshire Hils 13591 Devonshire Hills (297) 61 Broadway Aon Center 615 S College St Torbati Building 230 Peachtree

Devonshire Hills Apartments

New York, NY

New York, NY USA New York, NY USA New York, NY USA

San Diego, CA usA

Hauppauge, NY USA Hauppauge, NY USA New York, NY USA

Chicago, IL USA

Charlotte, NC usA

San Diego, CA USA

Atlanta, GA USA Hauppauge, NY USA OFF OFF OFF OFF HTL APT APT OFF OFF DEV OFF OFF APT 130,876 65,000 sf 60,000 sf 55,000 6f 400 units 359 units 297 units 786,976 sf 2,700,000 sf 50,094 sf 223,475 sf 415,367 sf 297 units 1913 1912/1963 1910/1989 1908/1988 2018 1971 1968 1916/2008 1972 1927/2005 1965/1998 1968/2001 $64.5 -$26.5 aiwdf $29.6 siioc $224 aiocd n/a est $93.6 approx $77.4 apprna $440.0 confrr'd $712.0 confm-a $14.6 appm $52.5 conim-d $13.6 confm-d $61.0 appni;l $493 $408 $493 $408 $260,787 $260,530 $559 $264 $291 $235 $33 $205,387

Investment Strategy and Partnership

The purpose of the investment in the U.S. market for China Orient Asset is to diversify their investment globally. Following the company strategy of investing in distressed assets, China Orient Asset always has its eye on value-add properties. According to the Real Capital Analytics data, among the 13 transactions, all the properties are either under

redevelopment/renovation condition or partially vacant, which creates the value-add opportunities. Aug '16 Aug '16 Aug '16 Aug '16 Jul '16 Mar '16 Mar'16 Dec 15 Oct '15 Aug '15 Jun '14 Apr '14 May '06

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At the same time, since China Orient Asset is an investment manager, they have always been looking for general partners to take on the property-level operation. To make sure that they have the control of each project, China Orient Asset usually acquires more than

50% of the share with their joint venture partner(s).

A good example is the portfolio of 4 office buildings China Orient Asset bought in August 2016 with a collectively 75% occupancy rate. The total purchase price for the 4 properties is

$143 million with 99-year ground leases. They located at 19 West 24th, 13 West 27th, 45 West 27th and 119-125 West 24th streets in Manhattan, New York City. Due to their prime locations, the further expected lease-up would create value for the properties. And as they

always preferred, they partnered with the current General Partner, Kaufman Organization,

to buy out the former Limited Partner, an Iowa-based Principal Real Estate investors to obtain 90% stake of the equity.

13 West 27th 19 West 24th

45 West 27th

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Policy Influence and Future Strategy

When talking with the investment team in China Orient Asset Management, they explained that the capital for the assets bought from the U.S. market is mainly through their Hong Kong office, so that it wouldn't be influenced much from the Capital Control. On the other hand, since the company is about to diversify into new sectors rather than just real estate in the U.S. market, the change of the U.S. policy towards infrastructures and health care could lead them to some other favorable areas. Therefore, we can foresee a slow down in their real estate acquisition pace in the near future.

II. Gemdale Properties and Investment

Company Background

Gemdale Properties and Investment Corporate Limited was established in 2013, listed on Hong Kong Stock Exchange. It is a subsidiary of Gemdale Corporation, a renowned large-scale Chinese developer listed in Shanghai Stock Exchange in 2001. Gemdale started with

residential development but expanded into commercial, mixed-use development quickly as well as real estate private equity funds management later on. Currently, Gemdale is running

residential and commercial projects over 31 cities in China and 5 cities in America. By the end of 2016, Gemdale reached to a land reserve of 317.5 million square feet and a total net asset of $5.5 billion, mostly in China.

Gemdale entered U.S. market in April 2014, jointly developed two office buildings in the CBD of San Francisco with Lincoln Property, a U.S. based commercial real estate company. According to its official website, Gemdale has so far invested in 7 development sites, 1

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apartment, and 1 office building. Besides the 6 projects shown below from Real Capital Analytics, there are another three projects. They are 121 E 22" d in New York City, a 140-unit residential development project acquired in December 2016, partnered with Toll Brothers; Pinnacle 360, another 212-unit residential development bought in April 2016, partnered with LaTerra Development; and South Station, a 51 story mixed-use project acquired in

2016, partnered with Hines.

Accordingly, Gemdale has been developing office buildings, commercial projects, apartments and R&D buildings concentrated on the west coast in San Francisco, Los

Angeles, and San Jose, but later expanded to the east coast including New York and Boston. Through the interview, Gemdale claimed that they are interested in most gateway cities in

the U.S. and focus on residential and office investment.

Gemdale Properties and Investment Transactions in the U.S.

Date Transaction Property Name City, State / Country Type Size Yr Btt/Reno Price (m) $per sf/un

Oct 16 Acq. South Hills Apartments West Covina, CA usA APT 85 -! 1966/2007 $26.3 $309,412 Jun '16 Acq. 45 Broad Street Condos New York, NY USA DEV 12,500 s $86.0 erox $6,825 Apr '16 Refi 1377 N Serrano Ave Los Angeles, CA USA OFF 138,803 %f 1928 n/a e5

Feb '16 Acq. future MidpointO237 San Jose, CA USA DEV 936,540 st $27.0 confmwci $29 Nov '15 Refi 350 Bush St San Francisco, CA USA DEV 35,284 sf n/a est

Oct '15 Refi 500 Pine St San Francisco, CA USA DEV 13,939 sf n/a aWt

Sep'15 Acq. 1377 North Serrano Avenue Los Angeles, CA USA OFF 138803 1928 $51.3 nfm $369 Apr'14 Acq. 350 Bush St San Francisco, CA USA DEV 35,284 si $546 atoed $1,548 Apr'14 Acq. 500 Pine St San Francisco, CA USA DEV 13,939 st $21.6 3t rd $1,545

As a developer, Gemdale is mainly looking for development sites and occasionally value-add projects. Among most of the development projects, Gemdale usually establishes a joint venture with a local partner as the Co-General Partner as well as the Limited Partner.

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One of the examples is 121 East 2 2nd Street project in Gramercy Park, New York City.

The project consists of a two residential towers of 133 units, designed by Office for

Metropolitan Architecture (OMA), a world renowned architecture firm. 121 East 22nd street launched their sales in early 2017 pricing from $1.55 million to $5.43 million (1-bedroom to 5-bedroom) according to the official project website. The whole project is expected to be completed by 2018. Originally, it was bought by Toll Brothers in 2013 and permitted for the plan of a condominium development in 2015. Gemdale joined in 2016 following the original luxury condominium plan right after Toll Brothers was hesitated to directly compete with the overheated condominium market in Manhattan (The Real Deal New York, 2016). The project fits Gemdale's typically joint venture strategy, sourcing for projects that are

financially tight but already had the land and even completed the whole permitting process. To agree on being an equity partner, Gemdale required involving development to learn through the partnership with local developers.

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Source: 121 East 22nd Street project official website

Gemdale is listed in Hong Kong; therefore, the capital control does not change drastically for their U.S. business, however, it has been slowed down for procedure reasons from the Chinese headquarter. Regarding future investment strategy, the company plans to keep following the current strategy of partnering with local developers as Co-General Partner. In

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l1l. Greenland Group

Company Background

Established in 1992, Greenland Group is a Chinese state-owned publicly traded real estate developer. It is well-known for its developments in ultra-high rise buildings and large-scale mixed-use projects. Besides real estate, Greenland Group started to penetrate into other industries such as finance, hotel operation, public transportation, and energy. Also, they expanded their business into the global market. The Oversea business now covers 9 countries including U.S., Canada, Australia, U.K., France, Germany, Korea, Thailand, and

Malaysia. According to the company's news release, by the end of 2014, it owned about $70.7 billion in assets, mostly in China.

Started from the beginning of 2014, Greenland made major investments in the U.S. market by acquiring the first two sizable projects: Metropolis in Los Angeles, the biggest

development currently under construction in the Los Angeles market; and the Atlantic Yards (now called Pacific Park Brooklyn), also a giant project in Brooklyn, New York. According to Real Capital Analytics, Greenland in total has invested in 5 development sites, plus 3 industrial properties, 1 hotel, and 1 retail project in the U.S. that have an estimated property value of $872 million by H1 2017.

Among the total 10 transactions, 4 projects are development sites in the greater Los Angeles area, 2 are in San Francisco, and another 4 are in New York City. Through the

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well-known cities to attract end-users both from China and the U.S., and as a large-scale developer, mixed-use project was always their top choice.

Greenland Group Transactions in the U.S.

future Metropolis Atlantic Yards (Phases I & 11)

future One Park Lane 776-803 Pacific St

546-550 Vanderbilt Ave Oyster Point Business Park fmr Alejandro Alcondez Mexican Oyster Point Business Park Ground Lease 877 Francisco Street

future Hotel Indigo Los Angeles Downtown Oyster Point Business Park

Oyster Point Business Park Ground Lease

Los Angeles, CA USA Brooayn, NY USA

New York, NY USA

Brooklyn NY USA-Brooklyn, NY USA South San Francisco, CA USA Arcadia, CA USA

South San Francisco, CA USA Los Angeles, CA USA

Los Angeles, CA USA

South San Francisco, CA USA

South San Francisco, CA

The first two projects Greenland purchased when they just entered U.S. have both started construction. They are good examples to show how Greenland incorporates their

development strategy into the projects.

Metropolis in downtown Los Angeles is a mixed-use project with three luxury Condominium towers of more than 1,500 units, an 18-floor Hotel Indigo with 350 rooms, and a retail podium expected to have more than 70,000 square feet in total. The whole Metropolis is a

$1 billion project, which is the biggest and so far the fastest developed project in downtown

Los Angeles. The first phase of the project is one residential tower and the hotel indigo which has been completed and mostly sold out in late 2016. The build-out of the whole project is expected in 2019 (Vincent, 2017). The biggest buyers as Greenland claimed are from local Los Angeles area, and then the international buyers. Despite the worries about

Jan '14 Jun '14 Apr '16 Jun '14 Jun '14 Aug '16 Jul '16 Aug '16 Dec '16 Mar'17 Apr '17 Apr '17 Acq. Acq. Acq. Acq. Acq. Acq. Acq. Acq. Refi Refi Refi Refi DEV DEV HiT. IND IND IND RET DEV DEV DEV IND DEV 275,735 s 968,320 at 606 units 286,120 St 36,080 sa 404,215 sf 7,706 sf 333,670 sf 198,567 sf 98,911 sf 404,215 sf 333,670 1 $525 $248 $248 $372 $1,161 $62 1971/2013 1930 1930 1982 1934/1973 1982 $144.8m I/ est n/a est $71.0 $9.0 airo'd $150.2 epprox $9.0 approx $20.8 nP P n/a esT n/a est n/a est n/a f

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the absorption of the future supply in the market, Greenland is still happy with their pace of the development. Thanks to their 100% ownership of the project, it allows them to develop the whole project in the Chinese way, quick in and quick out. However, the next question is how long would the next 1,250 condominium units take to be occupied. It includes one of the tallest residential towers in California.

Source: Greenland official website

Pacific Park (formerly named Atlantic Yards), on the other hand, is partnered with Forest City, who purchased the site in 2003. After the long struggle with delays for almost a decade, Greenland stepped in in 2014 bought a 70% stake of the total project joint partnered with Forest City. Pacific Park is a 22-acre mixed-use project with 15 towers including residential, office and retail space. It enjoys the connection of 12 subway lines as

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well as Barclays Center, the home of the NBA's Nets and the NHL's Islanders. However, the delay due to the oversupply of the local residential market and the construction hasn't been effectively solved even after Greenland got involved. As estimated, $1 billion loss has been caused by the end of 2016 (Hollis, 2016). Even with the new proposal of another tower to break ground in 2017, the total completion of the project might be again postponed from the original planned 2025 (Putzier, 2017).

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Source: http://www.nylikeanative.com/atlantic-yardspacific-parkbarclays-center.html

With the constant delay and therefore extra costs of construction, Greenland started to balance their construction and design team with more members with Chinese or Asian experiences. However, the transition still takes time, at the same time the chaos caused on site due to prolonged construction already led to conflicts in the neighborhood.

Also listed in Hong Kong, Greenland hasn't been seriously impacted by capital controls in China. Meanwhile, with the experiences learned from the above two projects, Greenland now expects a much longer time in construction and market absorption in the U.S. In that case, since a few projects are still under construction, Greenland is looking for adjusting their investment strategies according to the market demand.

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IV. China Construction America:

Company Background

Established in 1985, China Construction America is a subsidiary of China State Construction Engineering Corp. Ltd., the world's largest construction and real estate conglomerate. Moved to Jersey City from the World Trade Center after 911, China Construction America operates mainly in construction services along coastal cities and Central America, including

New York, New Jersey, Washington DC, South Carolina, North Carolina, Louisiana, Florida, California, the Caribbean, and Panama. Although heavily emphasize on construction, since

2013, China Construction America started to acquire properties and became a developer in

the U.S. market.

After rooted in the U.S. business for almost 30 years, China Construction America finally started investing in real estate properties and development sites in the U.S. market. The first project was an investment in a stabilized office complex in Morris Township, New Jersey in 2013. Further on, China Construction America invested more on development sites to incorporate their expertise as a builder. According to Real Capital Analytics, China

Construction America altogether by H1 2017 has invested in 3 development sites, 1 office, and 1 apartment project in the U.S., with an estimated value of $223 million. Except for that one apartment project is in Houston, the rest of the projects are all located in New Jersey, where they have long-term understanding and connections.

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China Construction America Transactions in the U.S.

Oct '16 Refi 75 Park Ln Jersey City, NJ USA APT 359uwnts 2018 n/a Psi

Jun '15 Acq. 75 Park Ln Jersey City, NJ USA DEV 52,272 s $35.2 ailcd $674

Jun '15 Acq. 2 Shore Dr N Jersey City, NJ usA DEV 29,185 st $19.7 aior $674 May '15 Acq. Broadstone Post Oak Houston, TX USA APT 272 unts 2013 n/a esy

Nov'13 Acq. 99 Hudson St Jersey City, NJ USA DEV 43,560 sf $68.0 enm $1,560 Apr '13 Acq. Advance at South Gate Morristown, NJ USA OFF 320,274 st 1982/2008 $70.1 wa $219

As a state-owned construction company who has both strong financial support and profound experiences in construction, China Construction America acts as not only a developer but also an investor for their current projects.

For the new development of 75 Park Lane and Shore House, China Construction America bought it from Lafrak Organization, one of the biggest private landlords in New York City (Burd, 2017). They finance and develop the buildings all by themselves. According to the project's official website, it consists of two waterfront luxury condominium buildings with supporting amenities. The 75 Park Lane will provide 358 units in a 37-story residential building overlooking the Hudson River and Manhattan skyline. The Shore House is adjacent to 76 Park Lane will feature 71 units residential with modern Industrial style. Both buildings are expected to be completed by 2018.

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Source: Construction China America official website

Policy Influence and Future Strategy

However, China Construction America claimed that although the company is not lacking capital or experience to develop projects from scratch, the next step for them is to act as a local developer, who mainly works as a General Partner and looks for investors (Limited Partners) to bring in much of the financial resources. Also, since China Construction America has been operating profitably for more than 30 years in the U.S., they are not worried so much about capital controls from the Chinese side. However, their Park Shore project involves some financing based on the EB-5 program, and that money trapped in China might take longer than expected to be wired out. Meanwhile, as a construction firm, China

Construction America looks positively on the Trump administration's emphasis on infrastructure.

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Chapter 4: Investment Strategies Comparison and Analysis

Given the transaction data and case studies described in the previous chapters, this Chapter will discuss the issues and trends of Chinese investment after the first wave of investments in the

U.S.

While they are establishing their footprint in the U.S. market, some of the Chinese developers and investors have already created their own platform or office locally in the US. They have started to learn the local practice, seek local partners, and gradually go in quest of higher yield through diversification, such as expanding geographic and property type selections.

I. Local Practice

It all started with the upward learning curve. For all Chinese investors who are new to the market, it takes time and maybe even failures to learn from practice. And the first question

is usually about the right time to invest or develop. Site development, particularly, compared with existing properties takes more time and risks by going through all the

procedures of permitting, due diligence, acquisition, construction, leasing or sales and further the maintenance. The Greenland cases were good examples, showing that market absorption and construction delay can easily cost millions of dollars. As Chinese developers are so used to a much more rapid development pace and a much greater population to absorb the new supply in the market (although nowadays that is not necessarily the case), the U.S. market might surprise them by how complicated it can be, especially when the scale of the project is large. However, this thesis' conversations with various investors and developers have confirmed that although the first wave of investments would tolerate a lot

more mistakes, they are learning from experiences gradually. Still, patience is needed when Chinese developers are picking up their understandings of specific regions from the market

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demand, supply, demographic, economic cycle, major local players, regulatory, permission and procedure requirement, etc.

II. Local Partner

While there are various types of real estate ownership in the market, a joint venture with a local partner is still the most common practice for Chinese investors and developers who have limited experience in the new market or sector.

There are a few patterns we observed from the market between Chinese investors and local

partners. First is about project control. Most of the Chinese companies are not happy with just the returns, but how the money has been invested in the market. It is, after all, a

learning process for them. As the cases shown above, China Orient always invests in the projects that allow them to take the majority of the shares. It is even more of a case for a developer. Gemdale requests to be a Co-General Partner whenever they agreed to invest as a capital partner. Greenland insists to participate into detailed day-to-day construction and design jobs etc.

Second is project premium (the promoted interest in the splitting of profits). Most of the Chinese developers are no longer willing to hand the development premium to the others. They started to switch the role of limited partner to co-general partner and eventually to

become a local developer such as China Construction America. Nevertheless, since some of the developers have been through the hardness of developing projects in the local market, the next question is whether they would still like to bear all the development risks to take the higher yield.

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Ill. Investment Yield

Cash flow was not the only mattered issue that Chinese investors concerned when they intend to diversify their capital worldwide. They would have sacrificed some revenue for entering the market. However, after getting more familiar with the U.S. market, a long-term holding position does not always satisfy the higher yield required from the Chinese

headquarters. Therefore, Chinese developers and investors are actively pursuing value add deals. At the same time, it means that Chinese investors become more rational about their future investment in the U.S. There are in general two ways to seek for a higher return for developers: one is to engage in more development to earn the management fee and extra premium, the other is to find investment options in value-add or even opportunistic properties. Although the choice depends on each company's capacity of accessing and operating in the local market, all the interviews agreed to the answers for a higher yield in the near future.

IV. Diversification

After Chinese investors gained more knowledge in the U.S. real estate market, they are better at tracing the movements to diverse assets for returns. Considering the real estate cycle climbing to the peak, and booming supply in certain regions such as the luxury condominium in the New York market, more and more companies talking about going to middle size markets. The graphic showed below are cities KPMG suggested as the "sweet spot" for higher value investment of CBD offices for Chinese investors who are intentionally expanding to secondary markets. Similar to geographic diversification, Chinese investors and developers are also willing to invest in other sectors, even for most of the developers who would prefer to develop the sector(s) that they are most familiar.

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"Sweet Spot" for Market Diversification in the U.S. C -7o E to 0 12% 10% 8% 6% 4% 2% 0%

)

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0%

Jobs Growth (CAGR Jan 14 - Jan 16)

Source: KPMG. "China Inbound Investing in U.S. Real Estate.', July 2016.

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