What Chinese developers and investors can
learn about development risks, capital stack
and how to create a successful deal.
Many Chinese investors seeking opportunities in U.S.
real estate have been successful in other businesses in
their home market. There is a tendency to rely on this
past success, but it is important to first understand the
many differences between the U.S. and China markets.
Understanding the differences between these markets
will allow investors to make smarter choices and find
greater success in the U.S. real estate investment market.
U.S. real estate can be divided into two distinct
markets; residential and commercial. Residential real
estate includes single family homes, town homes and
condominiums. While a residential home may provide
a place in which individuals can invest their money,
in addition to its functional use, it is not traditionally
a place for institutional or quasi-institutional investors
to deploy their capital. The remainder of this article
will discuss differences mainly between commercial
investment markets in the U.S. and China, although
many of these differences can be seen in the residential
markets as well.
This article will focus on key differences when it comes
to market maturity, market cyclicality, “whole asset vs.
condominium-ized” ownerships, the role of institutional
investors, the role of government, risk and return
profiles and the basic development model. This list is
not exhaustive, but it does provide a basic platform for
better understanding.
MARKET MATURITY
All the key differences discussed later in this paper
should be viewed through the lens of market maturity;
the growth and establishment of the respective markets
over an extended term. Fundamentally, the U.S. and
China markets are at different stages in their growth,
and consequently, pose different risks and offer different
opportunities. The U.S. market has seen consistent,
private real estate investment for generations; their legal
structures have evolved to facilitate property ownership
and investment and while new development continues
due to economic and population growth, it represents
a smaller percentage of product compared to existing
real estate stock in the country. Rapid expansion, similar
to China’s present expansion, occurred in the U.S. over
70 years ago, immediately following World War II. Today,
U.S. investors tend to be “demand focused;” they are
most concerned with an investment’s ability to attract
and retain rent paying tenants.
Whether building a new development, or purchasing an
existing asset, the ability to keep the asset leased and
producing a good income return, is a key driver of the
investment decision and a large perceived risk with any
given investment. In a mature market such as the U.S.,
tenants have many occupancy alternatives in existing real
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