Looking For Chinese Direct Investment? Get a Construction Loan

4/27/2010 - With more than twenty years in advising western real estate organizations on how to secure Chinese investments, Malcolm Riddell, President of RiddellTseng, has seen a recent increase of contruction loans from China-based firms - namely China State Contruction and China Export-Import Bank.  Two specific recipients are Baja Mar and Revel Entertainment.  These two firms have secured millions of US dollars for new construction.  Baha Mar's investment is particular important to increase relations and tourism between China and the Bahamas. Though in general, real estate is a much less political - and therefore much safer to attract Chinese direct investment.

Meet Malcolm Riddell!  He will be presenting at Harvard's Executive Education program "Strategies for Winning Chinese Real Estate Investors: What Developers, Owners, Fund Managers, and Professionals Need to Know" on May 10-11, 2010.  Registration is required.





THE CHINA BUSINESS NETWORK: I’m Sarah Chera, and this is The China Business Network.

Malcolm Riddell is president at RiddellTseng, a boutique investment firm he founded in 1988. RiddellTseng advises western real estate companies on how to successfully attract Chinese investment and financing.

Malcolm, thank you for being with us today.

MALCOLM RIDDELL: Thanks so much, Sarah. I’m happy to be here.

TCBN: If you've looked at the Forbes China Tracker, and the Heritage Foundation data about where China has been investing, it confirms that the USA has really not been a major destination for China's Overseas Direct Investment - or, their ODI. Their major USA deals were in financial - Blackstone and Morgan Stanley - and didn't really end well for the Chinese. So what's going to happen now, particularly in real estate, which is your area?

RIDDELL: Well Sarah, China has long invested overseas, but they’ve been investing in natural resources and in projects that help them to secure political advantage. Now we’re beginning to see transactions that are done more for straight business purposes.

In real estate, we’ve seen a couple of things. If you just look at residential real estate, you know that China has about 400 millionaires, according to the Boston Consulting Group, and an increasingly well-to-do middle class. What we’ve found is China organizes home-buying trips to the US, and these have become some of the most popular package tours – so popular they’re oversubscribed and there’s hundreds on waiting lists. There’s been expos in China. There’s been an America For Sale Expo to introduce Chinese buyers to US, especially residential, property. And there’s delegations of US residential brokers going to China. So this is all under the radar. I think there’s a good bit of residential activity going on, but it’s hard to track.

So far as commercial real estate, now that international markets are open to Chinese investors to pick commercial properties in prime locations, those that have a good history of performance, famous addresses, and some at once-in-a-lifetime prices. The Chinese can diversify their portfolios overnight.

What motivates the Chinese real estate investor, besides stability in the investment environment, is pricing and the currency play. Chinese can see an opportunity in New York, for example, because prices have fallen and the currency has weakened. We haven’t seen a lot of those deals taking place. We’ve seen Sayre Lodging taking up with Jinjiang Hotels to acquire interstate hotels and a few other transactions the Chinese have been around, but not a great deal in commercial.

What we have seen, however, is Chinese, especially Chinese government, entities putting money into funds, like the Morgan Stanley real estate fund. Some of that money will find its way here to the US. I think where the real action is right now, where the biggest transactions have come from, are actually in construction lending. Let me give two examples here in the western hemisphere. What I want to talk about are two projects that are especially interesting.

The first is the Revel Entertainment casino project in Atlantic City. In 2008, Morgan Stanley invested $1.2 billion in a $2.2 billion project. But the project, with the downturn, ran out of construction financing. So Revel let a $1.7 billion construction contract to a joint venture company, China State Construction & Engineering Corps and Tishman, a major construction company in the US. And then they entered a framework agreement with China ExIm Bank for $1.2 billion construction loan. This was all perking along well until just this month when Morgan Stanley decided to sell its 95% ownership and most of its $1.2 billion investment. Today the negotiations with the ExIm bank are a little uncertain.

But to take it to a success story is the Baha Mar project in the Bahamas. This is a project that’s being done by a US company – Baha Mar. In 2008 Baha Mar began discussions with the China State Construction & Engineering Corps and the China ExIm Bank about its $3.2 million project. And in the same way as Revel, Baha Mar signs a formal agreement with China State Construction to do the construction work and then began negotiations with the ExIm Bank for a construction loan. Now this has some political overtones because China is very interested in strengthening its relationship with the Bahamas. There have been some top-level meetings that have taken place in the Bahamas and in Beijing.

But to cut to the end of the story, in March 2010 the China ExIm Bank signed a $2.6 billion construction loan for Baha Mar. We’re beginning to see this kind of interest from a number of companies – a number of Chinese construction companies as well as banks. In fact, to give you one point (it’s not investment, but is sort of interesting) is the Bank of China, for example, is in New York, and it is lending for US real estate.

TCBN. If Americans with real estate assets or projects are open to working with Chinese investors, what do they need to do?

RIDDELL: Well, this is a problem. And of course it depends on the size of your investment. I would say the biggest obstacle is it’s hard to put Chinese investors and US real estate companies together. Chinese investors, when they do come on buying trips, unless you happen to know about it you aren’t going to know about them.

I would say the best way is probably the difficult way. And that is: depending on what kinds of projects and investments you have to show to the Chinese, you really need to identify the potential investors, or in this case financing sources for constructions loans, and go to China. You’ve got to meet with people there, and in the Chinese way build a relationship, build some confidence, and begin to go forward. This requires a pretty sustained effort that most real estate companies may not want to do, but it’s fairly difficult otherwise.

TCBN: Malcolm, you are going to be presenting at an upcoming Executive Program at Harvard called “Strategies for Winning Chinese Real Estate Investors.” When is that, and can you tell us a bit about that?

RIDDELL: Sure. This goes right to the heart of what we’re talking about. It is called “Strategies for Winning Chinese Real Estate Investors: What Developers, Owners, Fund Managers, and Professionals Need to Know.” It will be held May 10-11 on the Harvard Campus. Essentially what we want to do is to be able to show US or western developers, owners, fund managers, the like, to give them a toolbox to be able to find, attract, and ultimately to do deals with Chinese investors and financing sources.

We’re doing this in conjunction with the Center for Real Estate Law at Peking University, with a very outstanding group of instructors, both from Harvard faculty and also leading industry experts. It’s a very practical course. Ultimately, at the end of the program, the participants will be able to plan step by step how to, as I say, find, approach, and close a deal with a Chinese real estate investor.

TCBN. Okay, and here’s my final question: Chinese firms have been foiled in their attempts to acquire manufacturing assets - congress and public opinion killed Haier's plan to inject millions into Maytag, CNOOC's offer to shore up Unocal, and Huawei's bid for 3Com. Do you see real estate as less "political" somehow, and therefore a better sector for the USA to attract Chinese investment?

RIDDELL: Yes. I would say generally speaking, there’s no political context to real estate. I’ll add a caveat: if you recall in the 1980s when the Japanese were buying US real estate, when they bought the Rockefeller Center and Pebble Beach golf course, there was sort of a backlash. But in the Chinese case they’re unlikely to go after such premium spaces because they’re looking for good deals. As the Japanese demonstrated, those were not particularly good deals.

And of course as China does succeed in making less dramatic and well-known acquisitions in US corporations they’re going to need office space, housing, warehouses, and these sorts of things. A lot of the investment in real estate may very well be related to Chinese ODI in other businesses.

TCBN: I’ve been speaking with Malcolm Riddell, president of RiddellTseng and Charter Member of The China Business Network. To find out more about what Malcolm is up to and how you can contact him, visit his profile on thechinabusinessnetwork.com.

It’s been a pleasure, Malcolm.

RIDDELL: Thank you so much, Sarah. I’ve enjoyed it.



Malcolm Riddell is president of RiddellTseng, a boutique investment bank he established in 1988. At RiddellTseng, he advises leading international financial services, insurance, and real estate companies on China business and on foreign direct investment in China.  Find out more on his profile.