In January 2015 during an event at Harvard Business School,
Wu Xiaohui, CEO of Anbang Insurance Group, explained his
firms expansion plans with an unusual analogy: Why
can a substance like water cover 70 percent of the surface of
the earth and exist in perpetuity? he asked. A
company is a living organization. Could it exist as water
does? The answer to the second question, Wu hopes, is
yes. He was in Cambridge, Massachusetts, alongside business
partner, friend and HBS alum
Stephen Schwarzman, chairman and CEO of
alternative-investment giant Blackstone Group, to recruit new
employees for Anbangs growing empire. Wus business,
which began operations in Beijing in 2004 as a small automobile
insurer, has expanded in the past decade to become a $123
billion holding company with assets on four continents. But
before Anbang poured nearly $2 billion into the New York City
real estate market with its October 2014 purchase of the iconic
Waldorf Astoria hotel from Blackstone-controlled Hilton Hotels
& Resorts, most U.S. real estate investors had never heard
of the company. Now many see Anbang as a harbinger of a tougher
competitive environment and shrinking opportunities.
In the months since the Waldorf deal, Wu has embraced the
rushing and spreading qualities of water a core value of
Anbangs internal culture, he says and jumped into
two other major real estate transactions. In March the Chinese
insurer agreed to buy Strategic Hotels & Resorts and its 16
luxury hotels from Blackstone for $6.5 billion. At about the
same time, Starwood Hotels & Resorts Worldwide announced
that Anbang was the leader of a mysterious consortium that had
bid $12.8 billion in cash for its portfolio, attempting to
squeeze hospitality company Marriott International out of the
deal. Marriott ultimately prevailed in the battle for Starwood,
but with a bid that included $3 billion more in cash than its
original offer. The outcome has some U.S. real estate investors
nervous, because Anbang isnt alone. The recent rush of
cash-flush Chinese investors is affecting the tenor of
negotiations for deals around the country.
They may be pushing up prices more aggressively than
fundamentals dictate in some cases, says Kenneth
McCarthy, New Yorkbased chief economist at global
commercial real estate services firm Cushman & Wakefield.
If you dont bid aggressively, you dont get
Many of the most recent trophy property deals in the U.S.
have involved a Chinese buyer or partner. In 2013, Shanghai
investment firm Fosun International bought One Chase Manhattan
Plaza; SOHO China, one of Chinas largest developers,
purchased a more than $700 million stake in Manhattans
General Motors Building; and state-owned Greenland Holding
Group Co. invested $1 billion in a residential and
entertainment project in downtown Los Angeles. Last year
Chinas Sunshine Insurance Group Co. paid a record $2
million per room for New Yorks Baccarat Hotel, and Bank
of China bought a nearby office tower at 7 Bryant Park for $600
The loudest voice warning about the influx of Chinese
investment in U.S. real estate and other parts of the economy
may belong to Republican presidential candidate
Donald Trump. He has argued that Chinese companies get an
unfair advantage in the U.S. and that their country is a
currency manipulator. America fully opened its markets to
China, but China has not reciprocated, Trump contends on
campaign website. As with much of what the Republican
front-runner says, this rhetoric has an air of hyperbole. But
when it comes to concerns about U.S. investors competing with
China in their home market, Trump may have a point. Chinese
individuals push into the residential real estate market
spending $28.6 billion in the past year alone has
garnered headlines, but less attention has been paid to the
influx of Chinese investment in U.S. commercial real estate.
The wave of new money, which is coming from a variety of
sources, including sovereign funds and private development
groups, has provided opportunities for some domestic
developers, but many U.S. investors have been forced out,
especially in major metropolitan areas.
Some analysts have suggested that Anbangs decision to
walk away from the Starwood deal is a sign of a slowdown in
Chinese money coming into the U.S. But if recent statistics are
any guide, the momentum will be hard to reverse. Chinese
companies spent $21.4 billion on commercial real estate outside
their home country last year, 41 percent more than in 2014,
according to Cushman & Wakefield. These investments were
spread between development sites and existing properties around
the world, with the U.S. receiving the biggest piece of the
pie: $4.4 billion. China is now the second-largest foreign
investor in the U.S., after Canada. Although its share of the
market is still tiny a total of $530 billion changed
hands for commercial real estate in the U.S. in 2015
China is drawing attention for purchasing iconic properties at
After buying the Waldorf, Anbang acquired the office tower
at Manhattans 717 Fifth Avenue from Blackstone in 2015,
paying $415 million. Sunshine Insurance made its own headlines
last year when it bought the Baccarat from Greenwich,
Connecticutbased Starwood Capital Group (which founded
Starwood Hotels) for more than $230 million.
These deals have happened against a backdrop of slowing
growth and increasing volatility in the Chinese economy. After
averaging double-digit annual GDP growth from 2001 to
2011, China is expected to see only a 6 to 7 percent increase
in 2016. This slowdown, and the governments opaqueness
when it comes to explaining whats behind the economic
numbers, have made some market observers nervous. Many predict
further currency devaluation. Meanwhile, Chinas equity
markets are still feeling the effects of last Augusts
devaluation and the subsequent stock slump. This has led to
capital flight by wealthy individuals, state-owned enterprises
and large private companies alike. For its part, the Chinese
government has encouraged some state-connected investors to put
money in outside markets. Insurance companies are allowed to
invest as much as 15 percent of total assets under management
overseas. Currently, they invest only about 1.4 percent.
According to Chicago-based property consulting firm JLL,
if every Chinese insurer reached that 15 percent maximum, the
total investment would be $240 billion.
Historically low U.S. interest rates have sent Chinese
investors that previously flocked to Treasuries looking for
better yields. The jump to real estate is not a big one.
Investors of all stripes have long seen owning U.S. real estate
as a great way to diversify and ensure long-term returns. In
December, President Barack Obama signed a law that made it
easier for certain foreign parties to invest in publicly traded
real estate investment trusts one indirect way that many
Chinese investors are entering the market.
Properties and portfolios in gateway markets such as New
York, Los Angeles and San Francisco typically offer solid
capitalization rates (expected rates of return based on
property value and net operating income from leases),
especially in the office, multifamily and hospitality sectors.
Owning a property in one of these locations also provides
access to high-caliber tenants, good infrastructure and often a
bit of a buffer from economic downturns. It takes a city like
New York a few years to bounce back from a financial crisis,
but it can take years longer in less developed markets.
Ying Geneve DuBois, a partner at law firm Holland &
Knight who represented Sunshine Insurance in the Baccarat deal,
says pent-up demand and the desire of many Chinese investors to
set down roots in gateway markets will likely outlast any
potential slowdown caused by economic uncertainty at home or
yield compression in the U.S. I think this is only the
beginning, DuBois says.
For high-net-worth individuals buying U.S. homes, a major
impetus is access to an American education for their children.
Large companies have a different educational goal as they
prepare to face a growing consumer economy back home.
They invest here and want to help certain brands or
businesses to expand here, but its a global world and the
long-term plan is not to isolate development in China and
development in the U.S., says DuBois. Its
only natural that if a brand and business is doing well in the
U.S., its something they can bring to China as
Some experts worry that the current market presents a
muddled set of motivations on the part of Chinese investors and
raises questions about their intentions for the buildings and
companies they purchase. Others are concerned about the
potential for catastrophe in the U.S. should Chinas
economy falter. For U.S. investors, though, the primary problem
is the shrinking pool of opportunities as cash-rich Chinese
buyers push prices ever higher.
The phenomenon is worrisome for another reason: The last
time a major Asian nation focused this many resources on U.S.
real estate, it didnt end well. In the 1980s, Japanese
investors snapped up trophy properties at sky-high prices only
to run for the exits a few years later as their home economy
slumped and the U.S. real estate market began to crash.
There are no perfect correlations in economics, of course.
The China of 2016 is different in many ways from 1980s Japan,
and the U.S. real estate market is thought to have a few years
of upside left. But cycles can provide a historical guide, and
some experts point to the fact that asset bubbles tend to
correlate with credit expansion; China is experiencing rapid
expansion at this time.