After a decade of public hearings, litigation and lobbying, Michael Ghielmetti, a real estate developer in Oakland, was finally ready to build. Together with another local developer he had the rights to 65 acres of waterfront land and a master plan to build 3,100 housing units and 200,000 square feet of commercial and retail space, along with parks and marinas. What he didn’t have was long-term financing for a $1.5-billion (U.S.) project that would take another eight to 10 years to complete. So when he was told that a Chinese developer was coming to town to scout for investments, Mr. Ghielmetti was ready with his pitch.
That was in January. Three months later Mr. Ghielmetti had a new partner: Beijing Zarsion Holdings Group, a small, private developer from Inner Mongolia. The two parties signed a contract in Beijing witnessed by visiting California Governor Jerry Brown, who praised it as a U.S.-Chinese partnership that would create thousands of jobs at home. Compared with the lengthy approval process at home, it was a “whirlwind courtship,” says Mr. Ghielmetti, the 42-year-old president of Signature Development Group.
Zarsion’s chairman, Shan Weixun, says he examined about 20 real estate projects in five U.S. states before zeroing in on the Oakland estuary site. The strength of Signature and its management was a deciding factor. Another was the mantra of real estate: location. “California’s economic development is relatively fast, and San Francisco [ Bay Area] has a large Chinese population. The scale of the project fits our investment plan,” he says.
Other Chinese developers are taking similar steps abroad, building vacation homes in Southeast Asia, resorts in South Korea and high-rise condos in New York and Sydney. China Vanke, the sector’s largest, with revenue of $22.8-billion in 2012, is developing projects in Hong Kong, Singapore and San Francisco, where it plans to invest $175-million with Tishman Speyer in a luxury condo.
Others with an overseas footprint include New York-listed Xinyuan Real Estate, which plans to erect a condo in New York, and Country Garden Holdings of Guangzhou, which recently agreed to acquire 27 acres of waterfront land in southern Malaysia for $329-million, its second project there. Its vice-chairman, Yang Huiyan, is China’s richest woman, worth $5.7-billion.
Foreign projects are still a fraction of the overall portfolio of Chinese developers, who notched up $226-billion in residential and commercial sales in the first quarter of 2013, up 61 per cent on a yearly basis.
“We see it as a hobby for them. It’s not their bread-and-butter business,” says Nicole Wong, a property analyst for CLSA in Hong Kong. But those that do venture overseas could prove more resilient in a domestic downturn. “The problem in China is that every [asset] moves together. … By having offshore activities, particularly for larger companies, they can find some countercyclical business that helps offset their Chinese business,” Ms. Wong says.
As Beijing wrestles with stubborn house inflation, overseas projects offer a hedge for both developers and their wealthy customers, who typically own multiple properties at home and see offshore real estate as a track to a foreign residency. The government has sought to deter speculation in China by raising capital gains taxes, limiting second-home purchases and capping mortgages, but prices are still climbing in most cities.
Du Jingson, head of Asian real estate research at Credit Suisse, says developers are starting to follow their customers into offshore markets. “Most developers that I talk to definitely won’t rule out overseas ventures. But they’re going cautiously,” he says. “This is only the start of the trend [for overseas projects].”
The extent of Chinese offshore real estate holdings is hard to track, given the number of jurisdictions involved and the desire for discretion. Capital controls add another layer of complexity: Chinese nationals are not supposed to remit more than $50,000 a year, a rule that is widely evaded via informal networks (developers also need permission for offshore investments). It certainly hasn’t stopped a surge of Chinese buying in cities such as Sydney and Singapore. In the United States, Chinese ranked second behind Canadians in home purchases in 2012, accounting for 11 per cent of foreign sales, up from per cent in 2007, according to a survey by the National Association of Realtors.
Still, it’s not clear that this demand translates into a home-team advantage for property tycoons going overseas. For every Chinese buyer who trusts a familiar brand or sales agent, many more will figure that a native developer has a better product. Market conditions and government regulations are unfamiliar or possibly discriminatory; labor unions and environmental lobbies also present novel challenges to Chinese firms.
Feng Lun, chairman of Vantone Holdings in Beijing, says Chinese firms need to walk before they run. His company, which builds office and residential real estate in China, drew attention in New York in 2006 when it signed a lease for One World Trade Center, now the city’s tallest building. Vantone is also investing in a mixed hotel-residential property in New York being developed by Durst, a real estate firm that owns a stake in One World Trade Center. In turn Durst invested in a luxury-service apartment complex that Vantone built in Taipei, which has also seen an influx of mainland property buyers.
However, Mr. Feng says Chinese builders may struggle to replicate their model in mature markets like the United States. “If a developer wants to succeed overseas with residential properties only, that will be hard,” he told Forbes Asia. Having a strong customer base in China isn’t enough. “The U.S. real estate industry is highly segmented. If Chinese companies invest by acquiring highly experienced local firms, use their expertise in the local markets and combine this with their domestic customer demand, then they might succeed.”
Mr. Shan, the principal in the Oakland waterfront venture, which has been rebranded as Brooklyn Basin, says that he isn’t expecting to sell units to Chinese buyers. “We’re targeting the general population in the Bay Area,” he says. (Mr. Ghielmetti concurs, but adds: “We’d love to see Chinese folks invest in real estate.”)
Brooklyn Basin is Zarsion’s first overseas project. It’s also its first outside of northern China, where it has completed 645 million square feet in mostly residential real estate. Mr. Shan, a former school headmaster, says he founded the company in 1994 in Tongliao, Inner Mongolia, together with eight teachers and a $16,000 loan. He’s now the majority shareholder. Zarsion had revenues in 2011 of $483-million, he said, and saw growth of 20 per cent to 30 per cent in 2012.
Mr. Shan expects this pace to slow before long, which is one reason why he wants to diversify. That said, he plans to build 12 million more square feet of real estate in 2013, which would be more than last year, and reckons that urbanization has a long way to run. “I think China’s real estate market will have another 30 years of moderate-to-rapid development,” he says.