Chinese investors are increasingly choosing to bid on distressed properties such as hotels and office buildings and other commercial properties.
Investors in China have already purchased so-called trophy projects in Manhattan and are busy developing other projects in California, but are now looking towards purchasing properties that have high vacancy rates or which are in default on loans. The article in the Wall Street Journal points out that these deals show that Chinese investors are willing to take on more risk than many US investors and other foreign real estate companies. Apparently this is due to their willingness to hold onto property until values recover.
Recently a Chinese company, Dongdu International, purchased two well-known buildings in Detroit for a total of $13.6 million. One building is the former home of the Detroit Free Press, and this is due to be converted into apartments. The other building is the David Stott building, and this is to remain as office accommodation in spite of the fact that it is less than 25% occupied. Chinese investors have also purchased the property in New York such as the Cassa Hotel, a property that was facing bankruptcy, as well as a large office park in Silicon Valley that was previously the headquarters of the Borland Software Corporation.
The amount of Chinese investment in US real estate has increased substantially this year, as Beijing is encouraging companies to diversify. In 2011 Chinese investors closed deals worth $1.1 billion, but property deals for this year have already reached $1.7 billion.
It is quite unusual for foreign investors to target distressed properties as these usually require detailed local knowledge and often need additional investment. Most foreign investors tend to steer clear of these types of projects because of the extra costs involved in complying with local laws, local politics and the overall costs of renovations. It’s thought they’re willing to take the risks because these properties are being sold at such a substantial discount. An example would be the two buildings in Detroit that would normally each cost between 80 million and 100 million to replace. In addition some Chinese investors like the fact that they are able to preserve architecturally significant buildings as they have a great deal of respect over the role such iconic buildings can play within the local community.
There is still lots of distressed property available for investors to choose from, as according to real estate data tracker Trepp LLC, there are about $44 billion in delinquent loans converted into commercial mortgage-backed securities that are still outstanding. This figure has dropped significantly during the past couple of years but is still substantially above the $2 billion outstanding in early 2007.