China developers chase rich buyers abroad amid curbs at home

, Bloomberg

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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 $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.

Trophy Assets

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."

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.

'Prices Attractive'

"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 emailed reply to questions.

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