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China Developers Chase Wealthy Locals Abroad Amid Curbs at Home

Dec. 6 (Bloomberg) -- Chinese developers are starting to venture overseas, chasing wealthy locals who are buying apartments from New York to Sydney as the government restrains the property market at home.

Xinyuan Real Estate Co. in September took control of a lot slated for more than 200 units of housing near New York’s Brooklyn waterfront for $54.2 million, a deal the Beijing-based company said is the first of its kind by a Chinese firm in the U.S. Country Garden Holdings Co., the developer controlled by China’s richest woman, said this week it will buy waterfront land in Malaysia. China Vanke Co., the country’s biggest builder, set up international units to expand overseas after it acquired a Hong Kong developer in May. Shanghai Greenland Group Co. is spending 8 billion yuan ($1.3 billion) on projects in Australia.

“There are Chinese people who have a lot of money and have soured on China’s real estate market,” said Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management in Beijing. Developers realize “the return on investment going forward is not necessarily going to be the same as in the boom years. They know that the game is changing and they have to change their business model to adapt and to survive.”

The government is maintaining property curbs introduced in the past two years to cool prices, including home-purchase restrictions in about 40 cities and a property tax in Shanghai and Chongqing, as well as studying a nationwide property tax. That’s sent buyers with lots of cash abroad: Chinese were the second-biggest overseas purchasers of U.S. property in the year to March, accounting for 11 percent of sales to international clients, according to the Chicago-based National Association of Realtors. Only Canadians bought more.

Japan Example

China, with $3.3 trillion of reserves, is encouraging companies to spend overseas to secure energy and commodity resources, open factories and buy technology. Businesses will invest an additional $800 billion in other countries by 2016, A Capital, a private-equity fund that invests in European companies with a focus on China, said in a report in June.

China’s developers, in their first tentative steps abroad, have avoided high-profile purchases that attract media attention and local concern over foreign ownership. That contrasts with Japanese buyers in the 1980s and 1990s who snapped up U.S. properties including the Rockefeller Center and California’s Pebble Beach golf course. Many of the purchases were later sold at a fraction of their cost as Japan’s asset bubble burst.

China’s developers are focused on building the capability to undertake projects on foreign turf, either by buying local companies or entering into partnerships.

“China has learnt a lesson from the Japanese experience,” said Michael Klibaner, Shanghai-based head of China research at property broker Jones Lang LaSalle Inc. “Those kind of very high-profile trophy assets the Japanese bought generated a lot of xenophobia. Putting money into platforms rather than buying specific assets has much lower headline risk.”

Chinese Buyers

Xinyuan, the developer whose portfolio is mostly in China’s second- and-third tier cities, purchased a 2-acre (0.8-hectare) parcel of land at 421 Kent Avenue in New York’s Williamsburg area. The city rezoned the Brooklyn waterfront in 2005, creating almost 200 blocks open to residential development in the district and neighboring Greenpoint.

“We find prices attractive and we feel that we can bring Chinese buyers to our projects, thereby improving unit absorption rates and thus profitability,” said Xinyuan’s Chairman Yong Zhang in an e-mailed reply to questions.

Xinyuan plans to redesign the project, originally developed for Hasidic Jews that inhabit the area, to offer larger units, using U.S. contractors and employees, said Zhang. The company will focus on residential properties and won’t rule out entering other countries in the longer term, he said.

Southern Williamsburg has been an enclave for Hasidim since many emigrated from Hungary after World War II.

Going International

Vanke, based in the southern Chinese city of Shenzhen, said in May that it will pay HK$1.08 billion ($139 million) for a 74 percent stake in Hong Kong-traded Winsor Properties Holdings Ltd. to expand overseas.

“Internationalization is one of the directions that Vanke is thinking of for future developments,” a spokeswoman, who can’t be identified because of company policy, said in an e-mail reply to questions from Bloomberg. “We will make some attempts to expand overseas through Winsor as a platform.”

Vanke, whose 61-year-old chairman, Wang Shi, began studying at Harvard University last year as part of the company’s aim to branch out overseas, said the developer planned to partner with local builders to target Chinese in foreign countries.

Their venture in the U.S. will not be on a large scale initially, totaling just a few hundred million yuan and focusing on potential markets such as New York or Boston, according to an Oct. 31 report from Mirae Asset Securities Co. that cited Vanke’s investors relations officer Jinming Wu.

Malaysia Project

Foshan, Guangdong province-based Country Garden, controlled by Yang Huiyan, plans a commercial and residential project with a gross development value of 18 billion ringgit ($5.9 billion) on the 55-acre plot of prime land in Iskandar, in the southern Malaysian state of Johor neighboring Singapore, the company said in an e-mail Dec. 4.

Shanghai Greenland, the developer building China’s second- tallest tower, is constructing high-end apartments at a development with 66,000 square meters (710,400 square feet) of buildable area in Sydney’s city center and at a project with 127,000 square meters of buildable area in Melbourne’s northwest, according to a spokeswoman who asked not to identified because of company policy.

‘Good Opportunities’

China Overseas Land & Investment Ltd., the biggest Chinese developer listed in Hong Kong, said its parent company is studying the feasibility of investing abroad, if “good opportunities” occur.

“We’ll take recurring income into consideration, but we don’t have a timetable or any detailed plan to announce,” said Yang Haisong, head of investors relations at the state-owned developer that is based in Hong Kong.

Until now, China’s developers focused on the home market, where 170 million people have moved to cities in the past decade, the largest such demographic shift in history. The government’s two-year effort to curb prices has helped spur a quest to diversify income as overseas markets now appear more attractive.

“In the past, China has seen such strong growth and most people were just focusing on China, not considering everywhere else because everywhere else had been pretty bad in terms of residential markets at least,” James Macdonald, head of China research at Savills Property Services (Shanghai) Co., said in a phone interview.

Overseas Revenue

The median U.S. home price will probably gain 8 percent this year, the fastest pace of growth since 2005, according to the Mortgage Bankers Association in Washington. Housing starts rose 3.6 percent to a 894,000 annual rate, the fastest since July 2008 and exceeding all estimates in a Bloomberg survey, Commerce Department figures showed Nov. 20 in Washington.

Diversification would bring China’s developers closer in line with Asian peers.

Among the 24 companies in Shanghai Stock Exchange Property Index, only Beijing-based China State Construction Engineering Corp. earns revenue outside of China, and even then it’s just 5.8 percent of total sales, according to data compiled by Bloomberg from company statements. All revenue from the rest came from China, according to their annual filings last year.

The portion of revenue from Hong Kong for seven members in the Hang Seng Property Index ranged from 47 percent to 95 percent last year, company statements show. The share of local revenue of Singapore’s five biggest developers by market value was between 36 percent and 81 percent, filings show.

Higher Returns

Investment growth in homes, office buildings, malls and other real estate slowed to 15 percent in the first 10 months of 2012, from 31 percent in the same period a year earlier, according to Chinese government data. New property construction declined 8.5 percent to 1.47 billion square meters.

“Developers are seeking new areas for growth,” said Zhao Zhenyi, a Shanghai-based property analyst at Industrial Securities Co. “Property investment returns in foreign countries are usually higher than those in China.”

The average profit margin of developers listed on the Shanghai Property Index fell to 14 percent in 2011 from 18 percent the previous year. That was compared with an average 59 percent for the 308 members on Bloomberg World Real Estate Index.

Chinese developers will go through a “steep learning curve” in their overseas investments, Chovanec said.

“People in China don’t always appreciate that the U.S. and European property markets are highly competitive,” said Chovanec. “Even if you know the market and follow the buyers, it’s a whole new ball game.”

Iceland Rejection

Iceland’s government last year rejected Beijing Zhongkun Investment Group Co.’s bid to buy 300 square kilometers (116 square miles) of land, saying it would be “incompatible” with the law amid opposition to foreign ownership of property, and this week it kicked back the company’s alternative proposal to lease the land. Billionaire Huang Nubo, chairman of Beijing Zhongkun, wants to develop a resort and a mountain park in Iceland before investing in neighboring countries including Denmark and Sweden.

With China’s growing wealth, more Chinese developers will seek to expand overseas, according to Savills and Jones Lang LaSalle. China ranked third globally with 1.4 million millionaire households in 2011, following the U.S. and Japan, an increase of 16 percent from a year earlier, according to Boston Consulting Group.

“Chinese developers are playing catch-up with the rest of the world,” said Savills’s MacDonald. “One of the advantages they do have is the network of branding within China as Chinese buyers are increasingly looking overseas.”

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