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China, Singapore Sling Capital Across Pacific To Buy U.S. Trophy Assets

While Still Cautious, Investment Rule Changes In Asia Encourage Capital Outflows as Overseas Buyers Acquire Choice U.S. Assets
March 13, 2013
A recent spate of high-dollar transaction activity shows the extent to which Asian-Pacific capital is again seeking the safe haven of American shores -- this time with new players such as sovereign wealth, pension funds and insurance companies from Singapore, South Korea and China investing in flashy U.S. commercial real estate assets.

Singapore-based entities, the most active of the Asian cross-border investors over the last 12 months, allocated $2.5 billion toward investment in U.S. property during 2012, including the blockbuster $851 million purchase of 101 California St. in downtown San Francisco by a partnership led by the Government of Singapore Investment Corp. (GIC) sovereign wealth fund.

Making headlines this week is another new entrant in the U.S. market, Overseas Union Enterprise Ltd. (OUE), a Singapore-based developer and real estate investment company, which agreed to acquire the distressed U.S. Bank Tower, the tallest building west of Chicago, from downtown L.A. landlord MPG Office Trust, Inc. (NYSE: MPG) for $367.5 million.

The acquisitions by OUE, and by GIC, which also co-invested in the San Francisco deal with sovereign fund Hong Kong Monetary Authority, illustrate how Asian-Pacific investors are again buying American -- albeit more cautiously than in previous cycles when investors took major stakes in numerous U.S. trophy office properties.

For example, Shenzhen-based Ping An Insurance Co. of China Ltd. received regulatory clearance from the government in 2011 to invest in property and private equity. To date, however, Ping An, one of the world’s largest insurers, hasn’t yet executed a high-profile real estate acquisition.

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“These companies are very methodical about how they approach their [investment] programs,” Richard Stockton, Los Angeles-based president and CEO for Singapore-based OUE for the Americas, tells CoStar. “I don’t think you’ll see a rush by them into real estate. I don’t think that’s how it will play out this time.”

OUE’s core investment strategy will remain mostly in Singapore real estate, but the company, headed by Indonesian billionaire Stephen Riady, is open to more U.S. deals.

“It’s potentially the start of a broader [acquisition] program, but for now [the U.S. Bank Tower] is an individual investment,” Stockton said. “OUE is very much a Singapore-focused company with 95% of its assets there, and that strategy is not going to change."

Will Asian Capital Look Beyond the Coasts?

The U.S. is seeing an increase in cross-border investment activity from throughout the Asia-Pacific, said Marisha Clinton, director of capital markets research for Jones Lang LaSalle. And like other investors, the supply of available core coastal and gateway properties is dwindling.

"In the office sector, there’s been a lot of activity coming out of South Korea and Singapore into the U.S., which is still number one -- we're the largest and most liquid and transparent real estate market," Clinton said. "They’re targeting primarily the trophy properties, but as those opportunities become more limited, we’ll some see a shift by these investors into the secondary markets."

That shift appears to already be under way. U.S.-based Invesco Real Estate recently competed for and won the $412 million deal to buy the 1.4 million-square-foot Williams Tower in Houston, not historically considered a gateway market by Asian funds. But the sale offering of Williams Tower by Hines attracted a lot of overseas investor interest, Clinton noted.

In the U.S warehouse sector, South Korea has been particularly active, led by its National Pension Service fund, which has completed more than $500 million in deals since early 2012. Underscoring the international flavor of much recent activity in a sale involving dealmakers on three continents, the South Korea fund paired with Chicago-based investment manager Heitman to buy a West Coast warehouse portfolio from Dexus Property Group, an Australia-based property trust.

Aside from the San Francisco office buy, the GIC wealth fund is mostly focused on the U.S. hotel sector, making sizeable direct acquisitions of resort properties in Hawaii, Arizona and California, JLL said.

"Going forward, we can expect other Asian capital sources out of China and Taiwan to follow suit; many are now allowed to invest in non-domestic real estate for the first time," she added.

Foreign banks are an active source of funds for institutional-quality sponsors and trophy assets, with Chinese and Hong Kong banks the most competitive capital sources during fourth-quarter 2012, followed by strong activity by banks in Singapore, Canada and Germany, according to JLL.

Asian private equity funds are likely to be the first to enter U.S. secondary markets in search of opportunities and higher returns. Insurance companies in China and Taiwan, now able to invest in overseas real estate following the rule changes, are just beginning to flex their muscles in the U.S., Clinton said.

In the near-term, however, Asian high-net-worth individuals and existing corporates looking to expand real-estate holdings will likely generate most of the activity, and many are still opting for the relative safety of joint ventures and partnerships to hedge against risk and U.S. tax liabilities.

Here Come the Chinese Capitalists and High Rollers

Most recently, China’s largest real estate investors and developers have sought a piece of the action. China Vanke Co., Ltd. the largest residential property developer in the People’s Republic of China, recently partnered with Tishman Speyer to develop a high-rise condominium at 201 Folsom St. in San Francisco. It’s the first North American investment for Shenzhen-based China Vanke, which has built 400,000 residences and managed about 200 residential communities in its home country.

In what would be the largest-dollar transaction of a single U.S. trophy tower, a group led by Soho China, one of China's leading commercial developers, is reportedly "in advanced discussions" to buy a 40% stake in the General Motors Building in Manhattan, a deal that would potentially value the 1.8 million-square-foot building at a mind-blowing $3.4 billion including debt, according to the Wall Street Journal.

New Chinese regulations issued March 1 may be one factor in the recent deals. The rules will increase capital gains taxes, property taxes and down payment requirements in an effort to curb the speculation that many analysts believe has already contributed to a Chinese real estate bubble. The restrictions may prompt more investors to fly to the U.S. in search of condo, apartment and resort investments.

Such capital, combined with the popularity of high-stakes games popular with the Asian market such as baccarat, is already luring Asian-Pacific investors to Las Vegas and other gaming and resort destinations like Florida and New York.

Genting Group, which bills itself as "Malaysia's top corporation," early this month announced plans for a massive development on 87 acres acquired from Boyd Gaming Corp. along the Las Vegas Strip, where little new development has occurred since the Great Recession.

Standing with Nevada Gov. Brian Sandoval and U.S. Senate Majority Leader Harry Reid at a news conference, Genting Chairman K.T. Lim announced a project with investment totaling $2 billion in the first phase alone, including 3,500 rooms, 175,000 square feet of casino space, dining, retail and convention space. The project is aimed at "helping the city attract international business travelers," the company said.

While the Las Vegas project faces stiff competition from established U.S. gaming companies, Fitch Ratings last week warned that the Genting project's massive scale and aggressive timetable could put demand pressure on the Strip, where the supply slowdown and improving convention and visitors business has nursed a gradual recovery.

Combined with SLS Entertainment's $400 million redevelopment of the Sahara, due to open in late 2014, the two projects total out to 3.4% of the entire Glitter Capital's citywide room capacity.

"We believe the property will target high-end Asian customers, which [have] been the principal catalyst for gaming revenue growth on the Strip since 2010 when the strip recovery started, " Fitch said.

But the competitive concern is much broader than that, Fitch said. It's the apparent willingness of the well-capitalized Genting, loaded with $6.8 billion in cash as of year-end, to play in a growing list of U.S. markets.

The conglomerate already operates Resorts World New York, which took in $673 million in gross gaming revenue last year, and owns substantial land in downtown Miami where it hopes to develop a casino resort if approved by the Florida legislature. SLS Entertainment, headed by young Iranian-American entrepreneur Sam Nazarian, is purportedly ready to formally unveil a $300 million project of its own in downtown Miami.

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