From SoCal Real Estate’s July 2018 issue
Objectives and strategies vary between each group for these reasons.
By Carrie Rossenfeld
While the Chinese real estate market continues to heat up with diminishing yields and returns, Brexit uncertainty, and other global markets appearing priced in, Hong Kong investors are increasingly looking to invest in U.S. commercial real estate, says Terry Wong, chairman of Great China International Holdings | ATA China Holdings Group. The Hong Kong–based firm holds interests in real estate and the health and green industries.
Wong tells SoCal Real Estate Hong Kong investors have different priorities in the U.S. real estate market than Chinese investors — who tend to get a lot of press here. "While Chinese investors are rebalancing their portfolios with China maintaining capital controls, Hong Kong investors are increasingly deploying capital to diversify abroad."
He adds that years of steady job growth and the strengthening economy — albeit at a moderate rate — make Southern California commercial real estate a safe bet for Hong Kong investors looking to diversify their portfolios and generate returns outside Hong Kong.
Additionally, Hong Kong capital differs from Chinese capital in terms of how and where it is placed in Southern California. Wong says Hong Kong capital flowing into the U.S. commercial real estate market is dominated by Hong Kong family offices and are mostly family monies. "That is why they tend to be more cautious and affluent risk-taking: they are looking for income-producing properties with upside, ranging from $30 to $500 million (U.S.), and they are seeking a more long-term span for their investments."
These investors are mostly second-generation members of the Hong Kong Chinese families that have substantial, long-term experience in real estate investing, Wong says. For Chinese capital, the dominant players are state-owned enterprises (SOEs) and super-high-net-worth investors (HNWs), who are all subjected to governmental capital-control measures, but they are more aggressive with their investments, which are mainly placed in offices, logistics properties, and/or trophy assets priced at $150 million and above.
"Currently, [these investors] are particularly susceptible to political pressure to reduce speculative real estate investments in commercial properties [e.g., Chinese companies such as Anbang, HNA, etc.]," Wong says.
Over the next several years, he sees Chinese investors' appetite for large trophy assets continuing to slow down, whereas new entrants from other parts of Asia, including investors from Hong Kong and Singapore, are expected to continue taking China's place. Chinese investors' activity is expected to slow down due to Chinese government policies on capital control, but the acceleration of the U.S. economy is expected to continue to provide investors from other parts of Asia, such as Hong Kong and Singapore, with excellent investment opportunities in the SoCal commercial real estate market. And while there might continue to be some isolated Chinese investors' dispositions this year for political reasons, the demand will be replaced by other global players from Hong Kong and/or Singapore since SoCal is still expected to be one of the top destinations for global capital.
"It seems likely that investors from Hong Kong and/or Singapore will also continue to target San Francisco and L.A. for some of their major U.S. investments," Wong says. "However, in the long term, Chinese investors will likely to continue to be major movers of capital into SoCal commercial real estate due to Chinese investors' desire to diversify and manage risk amid the slowing domestic economic growth in China."
Almost all Chinese and Hong Kong investors in this market need reliable, trustworthy, local U.S. partners with good working relationships and/or years of experience of working together with them, but they tend to avoid overpriced properties, Wong adds. "Given that they focus on relationships, not transactions, they will avoid the mistakes of teaming up with unreliable U.S. partners. Asian investors value relationships before deals, and therefore it is imperative for Asian investors to find suitable partners in U.S. markets before committing their investments into those markets. Firms seeking Asian capital need to build those relationships first, and then they will find that the capital for good deals will flow more easily."
Commercial real estate investments play a large role in Asian family offices' asset allocation, and when it comes to financing, some family offices are so closely knit that they are able to join forces to behave jointly — more and more like pension funds or insurance companies — and compete on some assets with institutional investors without the need to borrow from lenders, says Wong. "With cost of capital at historical lows, some Hong Kong family offices are able to lock in extremely cheap funding conditions and enhance their returns significantly. A number of them managed to reach double-digit cash-on-cash returns."
In a low — even negative — interest-rate environment, wealthy families look at ways to generate yield by either accepting a longer investment horizon or fewer liquid investments (and sometimes even both) when it comes to commercial real estate investments. "Their objectives are very much similar to those of pension funds; that is, preservation of capital for their ‘pensioneers,' which, in this case, the next generation is called," Wong says. "Their intention is simply to find a secure place to park their funds for their next generation. That is why some family offices always pay cash for their commercial-property purchases, which helps to ensure they get some of the best deals around the world.
Many of these deals are at institutional-level prices, which means Hong Kong investors are often competing with some of the world's biggest sovereign-wealth funds and pension groups to acquire the best of prime commercial property in the most expensive cities — such as London and New York — around the world."
Chinese capital flows in 2018 will probably be subject to a stronger emphasis on so-called Belt and Road countries — part of the Silk Road Economic Belt and the 21st-Century Maritime Silk Road, also known as the Belt and Road Initiative, a development strategy proposed by the Chinese government that focuses on connectivity and cooperation between Eurasian countries, primarily the People's Republic of China, the land-based Silk Road Economic Belt, and the ocean-going Maritime Silk Road — and industry-related asset classes such as logistics/warehouses, which are supported by more preferential Chinese regulatory treatments. However, Wong says, as long as SoCal commercial real estate continues to provide stable returns, it will still be perceived as a less-volatile type of investment by investors from other parts of Asia, such as Hong Kong and Singapore, and will continue to be strengthening such investors' appetite for SoCal commercial real estate. "For U.S. commercial real estate players, international interest is not a new thing. However, it is important for U.S. property owners to understand Hong Kong investors in order to build up long-term and mutually beneficial relationships."