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January 30, 2015

How Chinese investors are banking on Bay Area real estate

San Francisco Business Times

Cory Weinberg

Chinese developers and investors have muscled their way into the Bay Area in a big way, most recently with Oceanwide Holdings' $296 million buy of the First and Mission Streets site, which will hold San Francisco's second-tallest office building.

Eleven properties in San Francisco have attracted big dollars from Chinese firms in the last three years, according to Real Capital Analytics, and market watchers know much more is on the way. As a result, Bay Area and Chinese developers are learning to work together for the first time.

For both sides, the learning curve is sometimes steeper than just language or cultural differences.

"Something we always preach is that business done in China is totally different than how real estate is done in the U.S.," said Darlene Chiu Bryant, executive director of China SF, a nonprofit that works with the city's Office of Economic and Workforce Development to promote economic links between the city and China. "If you're new to the system and don't understand how entitlement works, you'll fail. The more sophisticated ones, like China Vanke, will work with a local partner." Developers from both sides of the world have teamed up for joint ventures on some of the region's most significant developments in recent years.

China Vanke took a 70 percent interest in the condo development Lumina, but is working with New York-based Tishman Speyer to develop the high-end towers. Zarsion came aboard in 2013 as the joint venture partner for the East Bay's Signature Development for the $1.5 billion Brooklyn Basin. TMG is in talks with Oceanwide Holdings to stay on as the local developer on First and Mission, which will hold the second-tallest tower in the city, Chiu Bryant said.

Those Chinese builders, of course, are some of the best in the world at building tall towers and developing complex sites. Vanke, for instance, has $81.8 billion in total assets, according to research by Knight Frank.

But joint ventures are a way to get a foothold into the U.S. market without tripping up on cultural aspects, tax burdens and processes that firms here might take for granted. It also allows Chinese firms to start with a light operational presence in the U.S., as few have opened up large offices, said Jeremy Agraz, development director of Woods Bagot, an architecture and consulting firm increasing its focus on China.

"(Chinese developers) are all capable of doing it by themselves, but they're learning quickly from their competitors that particularly in places like the Bay Area, just getting something through entitlements isn't an easy task," Agraz said. "They need to have a local development partner to grease the skids and help them understand the political winds."

Other Chinese developers have opted to grow U.S. offices with their own local teams. Landsea, which develops residential properties in China, Hong Kong and Germany, announced last year that it would invest $1 billion in the U.S. market. In the Bay Area, it is working on a $90 million residential development in Dublin.

John Ho, managing director of Landsea U.S., joined the Chinese developer after leadership positions in U.S.-based brokerages like JLL. The company also set up a U.S. board of directors in the past year.

"Every company has a different approach to how they see them growing their business, " he said. "Our strategy is not to be the capital partner of anyone. We'd rather be the developer. But we are talking about doing joint ventures with U.S. domestic developers."

Chinese investors have set their sights toward the western world mostly because their own residential market has cooled significantly, according to a report by Knight Frank. As a result, the value of Chinese investments in U.S. real estate grew from $600 million in 2009 to $12 billion in 2013.

San Francisco attracted $807 million worth of Chinese capital over the last three years, though numbers are difficult to track because some money is filtered in through other private equity firms, according to Real Capital Analytics. That's the fourth-most of any U.S. market, behind New York, Chicago and Los Angeles, but there's plenty of room to grow.

"Every (U.S. developer) is trying to do a China deal, but there's only a handful of people who have been successful in a sustainable business model," said Skip Whitney, executive vice president at Kidder Mathews who advises Chinese clients on U.S real estate acquisitions. At the same time, Chinese developers have to "compete with domestic investors and their dollars. The domestic sellers are more comfortable doing business with domestic buyers than Chinese investors because they understand who the buyer is."

The developers that have done big deals with Chinese firms, however, say that business really isn't much different. Greg Flynn, chairman and CEO of Flynn Holdings, is working with the Chinese developer Kylli Inc. to run the office building 225 Bush St. in San Francisco. He said while communicating with his partners can be "challenging and amusing," the arrangement has been working smoothly.

"These guys really build things to last a thousand years," he said. "They're bolder in their architecture and willing to spend for interesting architecture." The U.S. firms that can make those kinds of relationships work have succeeded in finding those Chinese partners. Rob Speyer, who runs New York-based Tishman Speyer, told the Wall Street Journal in 2013 that he struck a deal with the China Vanke chairman after the two "bonded" over breakfast at Rockefeller Center.

Michael Ghielmetti, president of Signature Development Group, said he linked up with Zarsion from a connection with former Oakland Mayor Jean Quan. As a joint venture partner, "they're not functioning any differently than our American investors," Ghielmetti said. "Chinese capital is no different than anyone else. They're looking for better risk-adjusted return."

The big difference, he said, is that "they're very relationship-oriented in China rather than deal-by-deal or quarter-by-quarter, which is very refreshing for us."

Major Chinese real estate investments in the Bay Area

Oceanwide Holdings at First and Mission streets in San Francisco Beijing-based Oceanwide Holdings has an agreement to purchase the site for $296 million, with plans to build the 2 million-square-foot mixed-use development next to the future Transbay Transit Center.

Zarsion Holdings at Brooklyn Basin in Oakland The $1.5 billion, 64-acre, mixed-use Brooklyn Basin project on the Oakland waterfront will have 3,100 homes, 200,000 square feet of commercial space, 3,500 structured parking spaces and approximately 27 acres of public open space.

China Vanke at Lumina in San Francisco China Vanke contributed $175 million to the $620 million Lumina luxury condo project, with developer Tishman Speyer putting in $75 million. Lumina is still under construction, but Tishman has seen strong sales activity.

China Harbour Engineering Co. at West Oakland BART station China Harbour Engineering Co. earned the BART committee's endorsement in December to build on the 5.5-acre West Oakland station property.

Kylli Inc. at 225 Bush St. in San Francisco Kylli Inc., a Chinese development firm that's backed by Genzon Group, bought a majority stake in the former Standard Oil building at 225 Bush St. in May in a deal that valued the tower at $350 million or $600 a square foot.

Ge mdale Corp. at 350 Bush St. in San Francisco Dallas-based Lincoln Property and partner Gemdale Corp., a publicly-traded, Chinese real estate development and investment firm broke ground on the 428,000-square-foot Class A office project a few months ago.

Great Eagle Holdings at 123 Mission St. in San Francisco In November 2013, Hong Kong-based Great Eagle Holdings bought the 29-story 123 Mission St. for $179 million.

For the full story, go to San Francisco Business Times.

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