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China Demand for U.S. Property to Boost Investment
Brief:Chinese demand for U.S. property will likely propel the country to become the world’s top recipient of cross-border real estate funds from a single country over the next two years, investors at a conference for private-equity investors in Hong Kong said last week.
Chinese demand for U.S. property will likely propel the country to become the world’s top recipient of cross-border real estate funds from a single country over the next two years, investors at a conference for private-equity investors in Hong Kong said last  week.
 
According to 70% of investors polled on at the annual Private Equity Real Estate conference, PERE Summit: Asia 2014 that ended Thursday, the U.S. will become the world’s top recipient of real estate funds from China between 2014 and 2016.
 
The biggest cross-border investment of real estate money in 2011-2013 was from Singapore into the U.K. Singapore investors put $1.3 billion into the U.K. real estate market, taking the top spot, with Chinese investment into the U.S. in fifth place. But delegates at the PERE Summit think that will change.
 
“Liquidity is really abundant in China, there’s a lot of hidden liquidity in institutions that they need to deploy capital. Cap rates have been compressed to very low levels they need to look for yield and opportunity,” said Hing Yin Lee, senior executive director of the real estate investment department at Ping An Trust, adding that Chinese investors are looking overseas for yield.
 
The U.S. was the top investment destination for Chinese investors in 2013, according to Jones Lang LaSalle. From 2011 to 2013, the average annual transaction volume each Chinese investor put into the U.S. for one deal was US$859 million.
 
Last year, Shanghai conglomerate Fosun International bought Chase Manhattan Plaza in New York for $725 million while state-owned Greenland Holding Group took a 70% stake in the $5 billion Atlantic Yards project, a residential apartment project in Brooklyn, New York. Greenland also paid $1 billion for a piece of land in Los Angeles.
 
Office assets, like that of Chase Manhattan Plaza, are the most popular targets for the Chinese investors, accounting for 85% of the $7.6 billion worth of commercial real estate bought last year, according to Jones Lang LaSalle.
 
“I think (capital from) China is multifaceted–high net worth, insurance companies, sovereign wealth funds, and now developers,” said Goodwin Gaw, managing principal and chairman of Gaw Capital Partners. “They are making big bets in Los Angeles, San Francisco, and New York.”
 
There are challenges, Mr. Gaw said, including different types of rental contracts. In Hong Kong, Mr. Gaw said, office rent is renewed every three years, when the landlord can hike up the rent regardless of what the tenant says. In the U.S., office rent is renewed every ten years and involves a “Tenant Improvement Allowance,” where the landlord and tenant negotiate a sum that the landlord is willing to spend to accommodate the needs of the tenant.
 
Another challenge lies in management styles. “Chinese investors want full control of what they’re investing in, even if they are not the manager. China will have more decision making power than what the westerners will expect,” said Mr. Lee.
 
Another hurdle to investing in the U.S. is tax.
 
In the U.S., foreign investors have to abide by a set of rules called Foreign Investors in Real Property Tax Act, where they must withhold 10% of the sales price, in addition to other tax regulations. Such complicated structures often lead sovereign wealth funds and other investors to prefer markets outside of the U.S., real estate professionals told The Wall Street Journal in the middle of last year.
 
“The U.S. is so unfriendly (for tax). It will be unlikely for people to go there [to invest property] and tax is a reason,” Nicholas Loup, chief executive of Grosvenor Asia Pacific, said.
 

The Wall Street Journal
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