This Hits the Wheezing Commercial Real Estate Bubble at Worst Possible Time, by Wolf Richter

Are the Chinese withdrawing from the US commercial real estate market. If so, that’s not bullish for real estate prices. From Wolf Richter at wolfstreet.com:

The last big enthusiastic buyer, China, is leaving the party.

Commercial real estate, such as office and apartment towers, in trophy cities in the US and Europe has been among the favorite items on the long and eclectic shopping lists of Chinese companies. At the forefront are the vast, immensely indebted, opaquely structured conglomerates HNA, Dalian Wanda, Anbang Insurance, and Fosun International. In terms of commercial real estate, the party kicked off seriously in 2013. Over the two years in the US alone, according to Morgan Stanley, cited by Bloomberg, Chinese firms have acquired $17 billion worth of commercial properties.

In the second quarter in Manhattan, Chinese entities accounted for half of the commercial real estate purchases. This includes the $2.2 billion purchase in May of the 45-story office tower at 245 Park Avenue, the sixth largest transaction ever in Manhattan. At $1,282 per square foot, the price was also among the highest ever paid for this type of property.

Most of HNA’s funding for this deal — one of its 30 major acquisitions since the beginning of 2016 — was borrowed from China’s state-owned banks. But HNA also borrowed $508 million from JPMorgan Chase, Natixis, Deutsche Bank, Barclays, and Societe Generale. This has been the hallmark for all Chinese acquirers: a lot of borrowing from China and some funding from offshore sources.

Similarly, Chinese acquirers accounted for about one-quarter of commercial property transactions in central London in 2016, according to the Morgan Stanley report. In Australia, over the past few years, Chinese firms accounted for 12% to 25% of all office transactions by value.

But now these conglomerates and other Chinese firms engaging in outbound acquisitions have run into a veritable buzz saw of regulatory efforts by Chinese authorities designed to accomplish two things: slow down these capital outflows; and keep the Chinese banks from getting perforated by their exposure to the overleveraged conglomerates.

The authorities put the banks under intense pressure to deleverage. And the banks put the conglomerates under pressure to deleverage. A number of deals have already gotten scuttled.

To continue reading: This Hits the Wheezing Commercial Real Estate Bubble at Worst Possible Time

 

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