The Great Wall: The Hurdles U.S. Brokers Face in China
Shortly after a Chinese business tapped Studley’s newly opened Shanghai office to help it expand beyond the city and country and procure space in New York earlier this year, Yin Li, head of the brokerage firm’s China operations, hit a roadblock.
In line with standards in China, Ms. Li’s client was looking to sign a short-term two- or three-year lease, which New York landlords were reluctant to accommodate. Instead, Ms. Li convinced her client to seek out an alternative—a sublease deal.
“The hurdle really is to educate them about the market in general,” Ms. Li said of the challenges of completing cross-border transactions. “Chinese people have a very different concept about real estate.”
As Chinese nationals and businesses seek to diversify investment portfolios and forge a worldwide presence, the litany of business challenges—from language barriers and cultural differences to the relatively lower level of sophistication of the Chinese real estate market—are becoming increasingly apparent for stateside brokers, including those from Cushman & Wakefield (CWK), CBRE (CBRE), Newmark (NMRK) Grubb Knight Frank and others.
And yet despite such murky waters, the limited amount of investment-worthy real estate in Asia all but ensures that Chinese nationals will continue to heavily invest in property overseas. Over the next five years, Asian institutional investors are expected to spend up to $150 billion on global real estate, with the majority of those investments targeted at overseas gateway cities like New York City, according to a CBRE report issued in July.
Although North American investors allocate between 6 percent and 8 percent of assets to real estate annually, Asian investors currently allocate just 1.7 percent of their portfolios to real assets, according to the CBRE report. The limited amount of overseas investments can be attributed to a number of factors, including lack of experience, but investors are slowly beginning to recognize the value of adding real estate to their portfolios.
“[The Chinese] have so much new money, and they want to move part of it to this country,” said Ety Lee, a senior director at Eastern Consolidated, which also deals with Chinese investors, albeit via an office in New York.
Despite the influx of capital, the differences between the Chinese and American real estate markets are profound, brokers said.
For one, some of China’s largest real estate companies remain state-owned enterprises, and, despite the increasing level of development in China, industry standards are still quite different than they are in the United States.
The Chinese economy only began to open up to foreign enterprise 30 years ago, yet a whopping 35 percent of all business done in China is still executed by government-owned companies. Those same businesses earned 43 percent of all profits in 2011.
“It is not a total free market in China,” Ms. Li said. “Chinese businesses always rely on the government, which is not necessarily the case in the United States. Because of the two different systems, those are major challenges for [Chinese investors].”