Chinese firms' global property ambitions

China's real estate heavyweight Greenland Group is preparing to invest in a high-profile Atlantic Yards apartment project in Brooklyn, New York. With a total investment of $5 billion, the project, the biggest property project in the city for the past two decades, will be the biggest investment from a Chinese developer in the United States if finalized.

On Oct 3, Greenland signed a memorandum of understanding with Brooklyn-based Forest City Ratner Companies for a proposed joint venture to develop the Atlantic Yards project. Under the proposed joint venture, Greenland Group would acquire 70 percent of the project.

The Atlantic Yards project is a 64,500-square-meter residential and commercial urban complex comprised of 15 high-rise buildings. Construction on the project started five years ago, but local developers have struggled with delays and higher-than-expected costs after the financial crisis caused market turmoil.

Zhang Yuliang, chairman and president of Greenland Group, said his company participated in the project for a foreseeable promising US real estate market. "The US economy is recovering, with sufficient liquidity, stable return and upbeat prospects for the country's property market," he said.

Established in 1992, Greenland is a Shanghai-based State-owned conglomerate. In 2012, Greenland Group ranked 359th among Fortune magazine's list of the Top 500 global enterprises, 73rd among Top 500 Chinese companies, and number one among Chinese real estate enterprises. With 235 billion yuan ($38.56 billion) in total assets, the company achieved revenues of 245 billion yuan ($40.2 billion) and a total profit of approximately 24 billion yuan ($3.94 billion) in 2012. Having raked in exorbitant profits by real estate development in China, Greenland branched out since 2012 into countries that include South Korea, Australia and Germany.

Greenland Chairman Zhang attributed the company's faster-than-expected global expansion to China's growing economic power and global influence, which has created a good environment for companies that have an eye on the global property market. "On the flip side, many countries and regions have yet to recover from the financial crisis; therefore they strongly welcome Chinese investment. The past several years have been the best time for Chinese companies to go global," he said.

To date, Greenland is negotiating on nearly 10 projects located in the United States, Australia, Thailand and Europe. The company's overseas investment is estimated to be over 10 billion yuan ($1.64 billion) in 2013 and their accumulated overseas investment has reached 20 billion yuan ($3.29 billion). According to a company blueprint, more is yet to be spent on overseas projects in the next two years.

Eyeing foreign markets

Chinese developers view investing in foreign markets as a way of diversifying their portfolios, particularly at a time when concerns of a slowing Chinese economy are high. China's real estate market took off in 1998 after the government privatized home ownership. Over the past 15 years, most Chinese developers have been focused on the domestic market.

The Chinese government, however, worries that an overheated property sector will deal a heavy blow to the national economy amid already runaway housing prices and implemented curbs to cool the explosive growth. These curbs have spurred domestic property companies to seek investment opportunities abroad. Domestic developers are trying to diversify their businesses to reach new territories, such as the mature US or European markets. After the outburst of 2008 global financial crisis, Chinese companies are even more attracted to sluggish and cash-strapped foreign property markets, driven by ambitions to scoop up real estate at fire sale prices.

The Beijing-based Xinyuan (China) Real Estate is the first domestic developer to dig for gold in New York. At the end of September 2012, Xinyuan made its entry into the US real estate market with the $54.2 million acquisition of a development site located in Williamsburg, Brooklyn. Xinyuan plans to build over 200 units of residential apartments. The transaction marks the first time that a Chinese mainland developer has purchased land for a major residential project in the United States.

In 2012, China Vanke Co, the largest listed developer in China, signed a contract with Tishman Speyer Properties to co-develop two condominium towers in San Francisco.

Over the past year, a dozen Chinese developers announced their overseas property development plans, with a total investment of tens of billions of dollars. Most projects are situated in developed markets, and residential and tourist property accounts for the highest percentage. The United States has become a top investment destination for Chinese developers. Before the Atlantic Yards project, Greenland announced its first US investment in July: a $1 billion hotel and residential complex in downtown Los Angeles.

Domestic developers used to have a propensity for major cities in the United States, such as New York, Los Angeles and San Francisco Since 2013, some of them have turned to the likes of Huston, Boston and Seattle.

Guarding against risks

What triggered the financial crisis in 2008 was a sluggish real estate market in the United States, something Chinese companies should be mindful of during their overseas foray. Most Chinese developers partner with local developers when exploring foreign markets. This has to a certain extent averted risks. Problematic issues, however, may occur when those developers further expand their market share.

The US model has developers highly dependent on financial institutions, a model that Chinese developers may find hard to adapt to. Besides, facing a volatile global market, Chinese developers must have a strong cash flow to weather risks. Other potential risks include exchange rate fluctuations and a different taxation system.

The sales of foreign real estate are more complicated. How to factor in the characteristics and development cycles of foreign markets is a major issue for domestic developers. As tempting as it seems, the yield of foreign markets for Chinese developers remains to be seen.

To that end, Greenland Chairman Zhang said his global strategy involves gaining the right level of competency to "go global."

"What makes the company a multinational in a real sense is its ability to weather global risks and handle global management."