Will China Repeat Japan's 1980s Foreign Real Estate Bust?
The recent purchase of the Waldorf Astoria by a Chinese company recalls Japanese companies' buying sprees 30 years ago. And that didn't end well.
BEIJING — Those who study the overseas investments of Chinese enterprises are starting to get jitters. Japanese companies went on a foreign real estate buying spree in the 1980s that ended in serious losses, and the question now is whether China will repeat the same mistake.
Back then, the Mitsubishi Estate's symbolic acquisition of New York's landmark Rockefeller Center was much like Chinese company Anbang Insurance's recent $1.95 billion acquisition of New York's Waldorf-Astoria Hotel, another Manhattan landmark.
Japan's booming 1980s economy, its growing trade surpluses, and the yen's appreciation because of pressure from trade partners led the country to its highest overseas investment. Unfortunately, those acquisitions ended up mostly as huge losses later. During the high growth period, Japanese businesses were simply too optimistic. While real estate values in the United States were generally much lower than in Japan, the Japanese believed that prices would continue to rise.
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Rockefeller Plaza is no longer in Japanese hands. Photo: Jeff Hitchcock
But Japan's economic bubble burst, and real estate prices plummeted. American prices and rental levels turned out to be much lower than expected. At the time, values of high-end office buildings were typically estimated to be worth 100 times their annual operating profit in Tokyo or Osaka, whereas equivalent buildings in the United States were roughly estimated to be worth about 17 times annual operating profit.
History repeating itself?
The dynamic at work then bears a striking resemblance to what's happening now with Chinese investment abroad. Whether in New York, London or Australia, Chinese investors have become the largest foreign real estate buyer. Apart from going international to gain new customers, many Chinese enterprises acquire foreign technologies or brands to promote their Chinese market.
Fosun, one of China's leading privately owned conglomerates, calls this strategy "Chinese momentum with global resources." For instance, Hony Capital's purchase of the UK Pizza Express chain and Bright Food's acquisition of UK cereal brand Weetabix are both examples of this strategy.
Certain investors are also buying low-to-medium-end hotels to attract Chinese tour groups so that they feel at home.
Based on their experience in the Chinese market, they are convinced that real estate prices abroad are too low and are therefore optimistic about appreciation. And for security reasons, many Chinese firms and private investors have a strong need to allocate their assets globally. So investment income is not their first consideration.
Finally, these companies' overseas investments are inseparable from support from Chinese banks. Under China's current conditions, certain companies have been able to obtain government support and large sums of low-cost capital to create the conditions for their overseas expansion.
But because of China's political and market factors, real estate firms in particular are the ones feeling the least safe. It is difficult to foresee a cheerful perspective for Chinese property investments abroad because, compared with local developers, they are unlikely to have a more precise judgment of local real estate trends.
Chinese firms do have the advantage of capital strength, though, which comes from their ability to obtain preferential treatment and support from Chinese authorities. If only they can avoid the pitfalls Japan suffered.
* Li Junjie is deputy director at the International Merger & Acquisition and Investment Institute of Renmin University and a partner of a well-known law firm.