The Great Wall: The Hurdles U.S. Brokers Face in China
Gus Delaporte Sept. 3, 2013, 9 a.m.
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, CBRE, Newmark 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].”
One of the chief motivations for investing in the United States is its view as a relative safe haven compared to many other nations. Oftentimes, investing capital in the U.S. is preferable than keeping money in an investor’s home nation. Indeed, the desire to buy property in the U.S. has stretched to the middle class, many of whom have been drawn to residential units in Flushing, Queens, looking to get a footing in the New York market.
Indeed, upper-middle-class buyers have flocked to investments in Flushing, which has long been home to a vibrant East-Asian community. Ten of the 21 units in mixed-use project One Fulton Square—where one-bedroom units start at $550,000—have been sold to Chinese buyers, according to a story published in The Times last month. Ms. Lee said her housekeeper had recently secured a $200,000 residential unit in Queens, paying cash.
“I know a lot of folks think, if they keep wealth in China, the government will not be trustworthy,” Michael Seiler, professor of real estate at William & Mary’s Mason School of Business, said. “They try to invest money in the U.S., because, as much as people try to rag on us, we’re still viewed as a safe haven.”
For those Chinese companies aiming to lease space in New York, and vice versa, some glaring differences can arise. Lease terms, which commonly stretch 10 and 15 years in the New York market, last just five years at most in Shanghai. Concessions such as free rent and build-out costs, common in the United States, are unheard of in China.
“You have to explain [the differences] precisely so that they understand,” Ms. Li said. “The markets are so different.”
Credit, additionally, plays a much smaller role in Chinese deals, with the amount of the down payment taking precedence. “They’re more interested in the deposit,” Ms. Li said.
For U.S. businesses looking to operate in China or in concert with Chinese investors, the language barrier and business practices unique to China can present their own difficulties. From Mandarin to Wu, Yue and Min, the Chinese language group represents dozens of separate varieties and dialects, not all of which are mutually intelligible.
“It is far more typical for the Chinese to have learned English than for Americans to learn Chinese, so you are already at a disadvantage,” noted Dr. Deborah Hewitt, assistant dean at the Mason School, which offers executive MBA students a week-long trip to Fudan University in China to study Chinese business practices.
That language barrier can be a headache when drawing up contracts, especially when words cannot be directly translated from one language to the other. The problem often necessitates two versions of a contract, one in each language.
“There can certainly be disputes about how [a contract] was translated,” Ms. Hewitt suggested. “Does it really mean the same thing?”
There is also often the sense Chinese businesses are working for their country, since so many companies are state-owned. It can create difficulty if American businesses approach transactions with Chinese counterparties in the same way they would another American.
Small gestures, including gift-giving, can both bridge the gap and be a potential stumbling block during transactions. Though gifts do not have to be expensive or elaborate, they should have some significance.
“If you don’t have something, you’re in trouble,” Ms. Hewitt said.
Despite the potential pitfalls, the experience is not always rocky. In fact, some industry participants reject the notion that doing business with Chinese real estate professionals is a difficult process.
“It’s interesting, I have represented Chinese investors, and I’ve also sold assets to Chinese investors, and I don’t have a lot of unusual attributes to describe to you,” Jay Neveloff, partner at Kramer Levin, which specializes in real estate and other commercial transactions, said.
Though some professionals may not know as much about the real estate industry as they purport to, that trait is not unique to the Chinese and rather speaks to the issues encountered when dealing with any foreign buyer, Mr. Neveloff noted.
A successful transaction lies largely in the preparation. The key for both Chinese and American real estate players is to surround themselves with knowledgeable advisers.
“When a company comes here, they don’t come in cold—they hire local people,” Ms. Lee noted.
Being able to bridge the gap between the two countries is an important attribute and one service that companies like Studley are hoping to provide with a presence in Asia.
“I met a potential client, and it was just so comforting for him to speak in his own land, in his own language,” Ms. Li of Studley said. “He also knows, as a global market, that a Chinese business needs to go overseas.”