An analyst report from Cushman & Wakefield reasoned that uncertainties and contractions in the global economy have led to retarded recovery and driven investors to major markets. Since major cities usually provide a more stable return on investment, they are favored by risk-averse investors.

Since 2007, commercial property in New York has proven highly attractive to domestic and international investors alike.

In the wake of the financial crisis, New York housing prices picked up steadily. Statistics from Chandan Economics, a real estate research company, show that office building sales reached US $12 billion in 2011. Although still below the US $40 billion of 2007, it was twice the figure of 2010. Vacancy rates in quality buildings dropped below 10 percent.

Although the number of Chinese enterprises buying New York commercial properties remains limited, it is certainly on the increase.

At 25 Broad Street, near the center of the Financial District, a 50,000 square feet building was recently acquired by a Chinese company. Before that, another building on the same street was purchased by a Chinese firm for US $18 million. HNA Capital, a subsidiary of HNA Group, bought a US $265 million office building in downtown Manhattan.

It’s safe to say that New York’s real estate agents are feeling – and cashing in on – the vigorous demand from Chinese companies and individuals keen on buying into the market.

The Role of Private Equity

Chinese private real estate funds are now actively entering the recovering U.S. housing market.

“Our Atlanta project is almost settled. I am signing some final documents on the ground very soon, including a loan agreement,” said Zhang Mingeng in an interview at the end of last year in New York. Zhang is chairman of Grand China Real Estate Fund.

He revealed that after the current deal, worth US $24 million, another property project in Chicago was on their investment agenda.

In China, private real estate funds have made the jump from physical to equity investment in a very short time – three to five years in most cases. But some have been even quicker in shifting their attention to America, where they hope to get in on the early stages of a housing market recovery.

Wang Neng, professor of finance at Columbia Business School, said that the fundamentals of the U.S. economy were good. As long as investors realize this, he said, the housing market would remain attractive to Chinese investors. Some Chinese private equity firms are already exploring the North American market, and investment from Chinese in real estate financial products is set to increase. But it will take time.

Zhang Mingeng has afforded himself a two-year trial period to adapt to the U.S. housing market. “Chinese used to focus solely on physical investment in the property market. Now, they are beginning to accept equity investment as a potentially lucrative option,” he said.

“We’re planning to explore the market, and within two years to attract potential Chinese investors,” Zhang added. Grand China Fund, where he works, developed from its predecessor Beijing Yinxin Investment Group. Its co-founders include Sunshine 100 Real Estate Group, Shanghai Forte Group, Fuho Capital Management and Xishen Capital Management. Grand China Fund is the first Renminbi-denominated real estate fund approved by the China National Enterprise Development and Reform Commission.

Since the Law of the People’s Republic of China on Partnership Enterprise was revised in August 2006, private real estate investment funds have become a favored investment tool for many money managers. The investment horizon is long, but returns are generally stable. Limited partnerships also allow a management company to run several funds at once in order to improve shareholder returns.

According to Zhang, most of his investors are institutional, and include manufacturers, exporters and mine owners. About a quarter to a third of their assets tend to be in foreign currency, which they used to keep in private banks for stable, low-risk returns. But now, with the financial crisis well behind them, investing in real estate projects through private funds is growing more attractive.

Zhang’s current strategy is to cooperate with American developers and agents to invest in stable projects like condominiums with long-term tenants. He believes annual earning ratios on five-year projects can reach eight to 10 percent after tax and operation/management costs are accounted for. If asset appreciation is factored in, returns may be even higher.

In terms of financing, Grand China Fund and American partners jointly provide 30 percent of the total capital (80 percent of which comes from Grand China). The remaining 70 percent comes from American bank loans. Easy access to credit and low interest rates further reduce the costs of financing.

Wang Neng says that if China’s economy keeps up its momentum, stronger purchasing power and abundant capital will mean more Chinese citizens are able to migrate to, or stay temporarily in, the U.S. And even if China’s growth slows down, capital outflow is unlikely to stop. Either scenario should be good news for the U.S. housing market.

Prospects

Several years ago, many rich Chinese individuals were found “bottom fishing” in the U.S. residential property market. Many were burned in the crash. This time round, Chinese institutional investors seem to be making more long-term considerations as they enter the country’s commercial property market.

“Return on investment ratios can be higher in China, mind you,” Polly Chang pointed out, adding that the ratio for New York commercial real estate falls between six to 12 percent, while it can reach 10 to 30 percent in some Chinese cities.

So why the interest in America?

In a word, stability. “All my Chinese clients want a low-risk, stable environment – and predictable government policies,” said McNeur. When promoting real estate funds to Chinese customers, he assures them of a before-tax Internal Rate of Return (IRR) of 12 percent. If their risk profile is higher, better returns can be expected.

The signs are that there are many more potential than actual Chinese investors in the American real estate market at present. Nonetheless, the housing market recovery in the U.S. is proving to be domestic-driven. This indicates the U.S. economic resurgence has entered a general upswing.

“While increasing numbers of Chinese are set to invest in U.S. commercial properties, their current share of the market is still less than one percent,” said Zhuang Nuo, CEO of Glohouse.net, a real estate website.

Statistics from Marcus & Millichap show that in 2012 foreign investment accounted for only five percent of the value of the U.S. commercial property market. Domestic funds, institutional investors and Real Estate Investment Trusts (REITs) remain dominant.

One real estate agent who requested anonymity tells us that in the long run, the return ratio on commercial properties, especially that on office buildings, will head south as office culture in the U.S. changes. “Open offices” and the increasing prevalence of mobile workers who are not tied to a physical desk will have impact on the demand for office space in general. In short, it’s a changing sector, and the good times – here for the time being – will not necessarily last.

YE HUIJUE is a New York-based reporter at 21st Century Business Herald.