‘Everything Is on the Table’ in China Real Estate Sell Off

In June 2017, Beijing singled out HNA Group, Anbang Insurance Group, Fosun International and Dalian Wanda—its four largest private conglomerates—as having borrowed too aggressively for offshore transactions. And in August 2017, China’s State Council formalized restrictions on foreign acquisitions.

“I think those firms that have been identified are trying to aggressively unwind what they did,” the New York-based landlord executive, who’s firm is a potential bidder on major Chinese assets that have hit the market, said on the condition of anonymity. “You’ll see transactions from those companies to recapitalize or release the assets in order to get relief and repatriate capital back into China.

“They’re all acting with a degree of urgency as they’ve been told that they need to manage through these [assets] quickly,” the executive added. “I think Fosun’s purchases were made earlier in the process so they’re in better shape.”

Chinese conglomerates and private companies have been a seemingly unstoppable investment force over the last few years, pouring hundreds of billions of dollars into real estate, sports and entertainment ventures.

“The Chinese view real estate like having gold stashed in your mattress,” said Adams Lee, an international trade lawyer for Seattle-based law firm Harris-Bricken.

But those mattresses are now overstuffed because Chinese dealmakers have overreached, according to Chinese government regulators. The government’s solution was a clampdown on the superabundance of risky, debt-fueled offshore investment and a forced liquidation of assets in order to bring cash back to China and insulate the country’s slowing economy.

And it shows. Chinese investment in U.S. commercial real estate fell roughly 65 percent to $5.5 billion in 2017 from approximately $16.1 billion the previous year, according to a January 2018 report from Los Angeles-based asset manager TCW Group.

This has put some of China’s highest-profile U.S. trophy assets, held by its richest entities, on the market, leaving many local industry players in gateway markets in limbo, waiting on the first sales to take place. Which domino will fall first, however, is unclear.

“We’re looking at the New York-area properties [that could be sold],” the anonymous landlord said. “I think for those [major conglomerates], it’s probably their entire portfolio [is on the table]…Will [Anbang Insurance Group] keep the Waldorf? Is Anbang going to sell the [Strategic Hotels] hotel portfolio? They’re looking closely at these assets, but I don’t think they’ll fire sale them.

“They’re looking for ways to create liquidity and a reduction of debt, and the problem is they overpaid for a bunch of these assets, so that’s going to make it harder,” the landlord added. “What we’ll see is more structured transactions to help them liquidate a substantial portion of the asset but that keeps them in [a deal] so they can play in recovery and long term growth over time.”

HNA Group—which owns roughly $14 billion of real estate across the globe, according to information from Real Capital Analytics—set its target at $16 billion in assets it’s looking to sell in the first half of this year as it deals with a $29 billion debt shortfall over the next few quarters, according to Bloomberg. It has been marketing some of its commercial properties in New York, Chicago, San Francisco and Minneapolis—valued at $4 billion, according to a marketing document seen and reported first by Bloomberg in early February. Its New York assets include 245 Park Avenue, a 1.8-million-square-foot office tower purchased for $2.2 billion in May 2017, 850 Third Avenue and 1180 Avenue of the Americas. The latter was sold to Northwood Investors for $305 million on Feb. 15—HNA nabbed the 327,766-square-foot building for $259 million from the Carlyle Group in May 2011, according to records filed with the New York City Department of Finance.

“The sheer sizes of these transactions will limit the players [who can compete for them], but there will be enough players to create a competitive environment—it just depends on what the deals look like and what they’re willing to do,” the landlord said. “Like 245 Park Avenue, [HNA] paid way above the market, so they’ll have a hard time selling it outright, but if they want to engage in a structured transaction, they may find success where they subordinate some of their position.

“I think right now that’s kind of where things are,” the source added. “They’re definitely out there, trying to transact, so I think you’ll see a flurry of activity over the next few months, and we’ll start to see what the deals look like. The Chinese have had the outlier bid for a few years, and that’s what’s upped bid prices. Now that it’s removed itself from the market, it has to settle itself with price discovery.”

HNA is currently weighed down by $90 billion in debt, Bloomberg reported in late January. That month, the conglomerate told creditors in a meeting in the Hainan province—where it’s based—that it was facing $2.4 billion in maturing debt in the first quarter. HNA said at the meeting that it expects this to be offset as 2018 progresses and as it ramps up the offloading of its assets.

But Chinese regulators are waiting to get a full lay of the land as it relates to potential offers for its trophy assets, one New York-based real estate lawyer close to the dealings told Commercial Observer. “I’d be very surprised to see if there’s an auction,” one official at a Chinese investment bank told CO. “They could be sold off if they like the price, but there’s not any hurry on their part.”

Anbang and Fosun International thrust themselves into the public eye with a couple of high-profile deals a few years ago. Anbang purchased the Waldorf Astoria for a whopping $1.95 billion in February 2015—a record for a single hotel asset—and Fosun helped bolster the initial investment surge with its $725 million purchase of Chase Manhattan Plaza—now 28 Liberty Street—in October 2013, which Deutsche Bank and HSBC refinanced for $800 million in November 2017, as CO first reported.

Anbang didn’t stop there, though. It then bought the Strategic Hotels & Resorts portfolio from Blackstone (BX) Group for $5.4 billion in March 2016, just before abruptly abandoning its $14 billion offer in a bidding war with Marriott International for Starwood Hotels & Resorts at the end of the month. Anbang also scooped up 717 Fifth Avenue—a 26-story, roughly 350,000-square-foot office tower and home to its U.S. headquarters—from Blackstone in February 2015. Anbang and Blackstone have been in talks recently for the private equity giant to reacquire the Waldorf and the 16-property Strategic Hotels & Resorts portfolio, The Real Deal reported. A source close to  the proceedings recently told CO that Blackstone is unlikely to pursue the Waldorf.

“A joke we’ve had here is that Blackstone is going to end up buying back the properties they sold,” the Chinese bank official said. “We’ve been expecting this for a year. We knew about Anbang for a while now. There’s going to be a lot of interest in Anbang’s assets.”

In March 2017, on a high from previous record-setting acquisitions, the insurance giant backed out of discussions to buy a stake in Jared Kushner’s 666 Fifth Avenue office tower, as part of a $7.5 billion plan to redevelop the property into a condo and retail building.

“[The negative press] on 666 Fifth didn’t help [Anbang’s case, leading up to the crackdown,] at all,” the Chinese bank official said. “I think it’s more that the regulators gave warnings to the Anbang chairman, and they felt he wasn’t paying attention. I think [President Xi Jinping] felt [Anbang Chairman Wu Xiaohui] was trying to sneak by with whatever he could while he could.”

In January, Bloomberg reported that Dalian Wanda was looking for a buyer for its stake in a roughly $1 billion project called Vista Tower, a 98-story skyscraper in Chicago. In November 2017, Wanda’s partner in the project, Magellan Development disputed claims that Wanda was looking to sell its stake in the project. Vista Tower is one of two of Wanda’s roughly $5 billion in remaining overseas holdings, including a $1.2 billion hotel and condominium complex in Beverly Hills, Calif.

Wanda’s wave of activity came in the wake of its founder Wang Jianlin’s March 31 deadline to pay $510 million in bank loans used to finance the firm’s decade-long offshore expansion.

“President [Xi Jinping] looks like he’s trying to consolidate power on his side and trying to rein in the big mega-conglomerates in China that have gotten out of control in terms of their acquisitions, which were very random and haphazard,” Lee said. “I guess the question now is, Is it going to happen to Fosun next? Is it Alibaba on the chopping block, or Tencent? It’s not like those companies haven’t been purchasing assets, but it seems those companies have had more of a strategic plan in purchasing, and maybe that’s why they haven’t been targeted. Some of the others [like HNA and Anbang] seem to be buying randomly.”

Some Chinese entities may be safer than others, one executive from a private equity firm who works with Chinese investors said.

“The Chinese government will allow their favorites to go out and do business,” the executive said. “What they don’t like is Anbang’s drawing attention, showing wealth and power. Wealth and power in China is the Communist Party. I’m amazed how we get approval sometimes; they’re scared to take it to their bosses. It has to be perfect. They are sensitive.”

HNA Group Chairman Chen Feng told Reuters in January that a liquidity problem exists because the conglomerate engaged in a number of mergers, even as the external environment became more troublesome and China’s economy “transitioned from rapid to moderate growth,” which impacted the group’s access to new financing.

“Rate hikes by the Federal Reserve and deleveraging in China caused a liquidity shortage at the end of the year for many Chinese enterprises,” Chen told Reuters. And, in a surprise showing of optimism, he added, “we’re confident we’ll move past these difficulties and maintain sustained, healthy and stable development.”

Last month, the Chinese government and President Xi Jinping seized temporary control over the debt-burdened Anbang Insurance Group, after first detaining its founder, Wu Xiaohui, last summer, charging him with fraud and embezzlement in Shanghai, according to Bloomberg. It was the first public sign of the government’s crackdown on its overly aggressive conglomerates. By the end of February, it was reported that Chinese government officials had pivoted their position on HNA and had been encouraging state-owned banks to keep lending to the conglomerate, people familiar with the matter told The Wall Street Journal.

“The window was not going to last forever to invest out of China,” the Chinese bank official said. “[Wu] invested as much as he could. Around this time, Chinese currency was depreciating, and in his currency, he’s got a profit. So, he didn’t care what people were bidding but wanted to get in quickly and in a hurry. As a result people think he overpaid.

“The way to think about it is that in China, [Wu] was drawing attention to himself while all the attention was going to one leader recently,” the Chinese bank official added. “Meanwhile, several of the big private real estate names were being told to stop drawing attention to yourselves. [Wu] was not fitting with the country’s policy, which was that capital was meant to be invested externally, but only if beneficial for the government.”

After the Anbang seizure, the government instituted rules—like a 36-point investment code of conduct for its private companies—significantly restricting some forms of investment, including real estate acquisitions, and outright prohibiting others.

“Commercial real estate is restricted. It’s not prohibited,” said Jerome Sanzo, the head of real estate finance at the Industrial and Commercial Bank of China (BACHF) (ICBC). “It’s not going to completely dry up, so the net effect is that you’re not likely to see another acquisition like the Waldorf or 245 Park. Those days are over, but real estate investment overseas is not completely prohibited. I would say generally, there will still be investment, but it will be a much less speculative play. I don’t think you’ll see the large, splashy investments.”

This may open up a flurry of competition in the near term. The expectation is that high-profile funds and local players in gateway markets will come to the fore now that the Chinese have  been ejected.

“The funds that raised these billions over the last several years, like Blackstone, Blackrock, Apollo, the companies with serious available cash that they can deploy when they see a good opportunity and there’s so much local cash on the sidelines—they’re all just waiting,” one New York-based real estate lawyer who represents Chinese buyers said.

While it remains to be seen how these trophy assets unfold on the market, many industry players expect strong Chinese outbound real estate investment to return to the fold in the very near future, once the country’s economy stabilizes.

“[The Chinese] are still in the mix of things, and they want to know what’s going on,” the New York-based landlord executive said. “They’re still interested in opportunities, shifting into more demographically right areas like assisted living and student housing, and they’re looking for potential opportunities on the retail side.”

The real estate attorney who represents Chinese buyers told CO that Chinese investment arms are planning a purchasing comeback, but that they aren’t expecting to be comfortable until late 2019 at the earliest.