chinese capital emerging in canadian real estate

Accelerating success.

How Canadian commercial real estate owners can benefit from Chinese development companies’ growing appetite for large-scale real estate investment opportunities.

Chinese Capital Emerging in Canadian Real Estate

“Notwithstanding weakened energy markets in Canada, which are forecast to dampen GDP in 2016, there are many green shoots sprouting as a result of our weaker dollar.”

2 Spark Report: Chinese Captial Emerging in Canadian Real Estate | Colliers International Canada2

Accessing Emerging Chinese CapitalBackdropCanadian property owners have traditionally been the incumbent buyers of real estate assets, but a growing mix of international property investors, specifically Chinese developers, are seeking to park their capital in stable markets like Canada.

Chinese developer activity has had 15 years of double-digit growth, due largely to this group supplying housing to an emerging middle class created by the industrialization and urbanization of China. With strong balance sheets and close relationships with state-owned banks, the top tier of

Chinese development companies, backed by insurance and pension fund capital, have gotten the go-ahead from the Chinese government to pursue opportunities globally.

Why Canada?The Canadian economy is perceived as safe and stable, and is largely resource based compared to the domestic mainland Chinese economy, which is in the midst of an economic slowdown. Notwithstanding weakened energy markets in Canada, which are forecast to dampen GDP in 2016, there are many green shoots sprouting as a result of our weaker dollar. For starters, U.S. demand for Canadian exports is rising, which should help elevate demand for goods such as machinery, vehicles, aerospace equipment and other commodities such as metals and lumber. Increased consumer spending is also expected due to falling gasoline prices, as are heightened investments in non-energy industries, such as the technology sector.


Chinese Outbound Capital Investments2014

Chinese Global Investment Capital by Volume

0 5 10 15 20

20142010

4.0

$18.3B

$2.3B

Key Drivers for Global InvestmentChinese restrictions on investing outside of the Mainland have eased in recent years. That, coupled with the growing risk of overheating in the Chinese property market and a lack of investable stock, is causing investors to look beyond their borders for stable yields. As a result, a record amount of capital has been outflowing globally, approaching US$18.3 billion in 2014, growing from just $2.3 billion in 2010, according to Real Capital Analytics. Approximately 45% of 2014’s outbound capital was directed to just three gateway markets: Manhattan, London and Sydney. The key factor in the massive amount of capital flowing outside the country has been quality as evidenced by the recent announcement of the $2 billion sale of the Waldorf-Astoria in New York City to Beijing-based Anbang Insurance Group.

Chinese developers have also focused their attention on Australia and large financial centres in Europe and the United States. However, there has been ample evidence of Chinese investors piling into Canadian residential real estate for some time. In this case, the activity has been largely concentrated in Metro Vancouver; although, we are starting to witness a significant wave of Asian investors underwriting commercial real estate deals across the country. Several recent transactions have transpired where traditional

“Several recent transactions have transpired where traditional domestic players were outbid by Chinese investment groups who put their best foot forward to secure trophy investments, as well as land and development sites across the country.”

45%Manhattan

Sydney

London

domestic players were outbid by Chinese investment groups who put their best foot forward to secure trophy investments, as well as land and development sites across the country. Knowing what these firms are looking for may stimulate more offers for Canadian property owners who meet these specific investment criteria.

20142010

Case StudiesNotable Recent Transactions: Chinese Capital In Canada

Fairmont Le Chateau Montebello & Development Lands Montebello, Quebec

Residential Development Site – King Blue Condos Downtown Toronto, Ontario

70 York Street - Office Tower Downtown Toronto, Ontario

Purchaser: Evergrande Group

Corporate Headquarters: Guangzhou, China

Acquisition Date: December 2014

Purchaser: Greenland Group

Corporate Headquarters: Shanghai, China

Acquisition Date: September 2014

Purchaser: Anbang Insurance Group

Corporate Headquarters: Chaoyang District, Beijing

Acquisition Date: September 2015

Asset: 211-key, Fairmont-managed resort with world-class hospitality amenities, 18-hole championship golf course and ±700 acres of development lands.

Asset: 0.96-acre development site planned for two high-rise, mixed-use towers including residential, hotel and retail space.

Asset*: 17 storey, multi-tenant office building. There is a total of 194,083 SF of net rentable area including approximately 6,192 SF of ground floor retail space and a typical floor plate of approximately 13,200 SF. *Source: RealNet

Opportunity/Motivation: The purchaser has existing hospitality real estate holdings and was eager to place capital in an institutional quality asset within a strong and steady lodging market. The property had been well-maintained over the years and provided Evergrande with an opportunity to enter Canada with a prestigious asset.

Opportunity/Motivation: Greenland had identified Toronto as a target market for new investment and the King Blue site provided a prime Entertainment District location for their first Canadian project. The residential sales process has begun on one of the high-rise towers, with the purchaser likely to submit a revised site plan on the second tower.

Opportunity/Motivation*: Anbang Insurance Group had been looking to acquire commercial real estate assets within Canada, specifically within Toronto which is seen as a stable market. Anbang Insurance purchased a land lease to control the HSBC building, a quality office asset in Toronto’s financial district. *Source: Financial Post

4 Spark Report: Chinese Captial Emerging in Canadian Real Estate | Colliers International Canada


As the previous case studies clearly demonstrate, large Chinese real estate players are now dipping their toes into the Canadian property market. The common denominators for these cross-border purchasers are development opportunities with a high residential component in major cities or recognized destinations. Land that is ready for development is a fundamental motivation, and the evidence suggests that these companies prefer large projects.

While Canada does not offer the profile of gateway European and U.S. markets, these firms are actively seeking sizeable opportunities in multiple locations in many parts of the world. Australia, for example, attracted $4.5 billion in Chinese direct investment in real estate in 2014, in a property market that is comparable in size to Canada.

Transparency is KeyChinese development companies are not as familiar with acquiring property using the blind bidding “call for offers” process of their North American counterparts. As a result, Canadian owners wishing to attract interest from this buyer segment should put extra effort into explaining the sales process, and present the sales process along with a timeline of key milestones. Although somewhat dependent on the nature of the sale, pricing guidance or an asking price is preferable. Providing local market intelligence and comparable sales of similar properties will offer comfort, as will access to a virtual secure data site populated with all material property diligence necessary to properly assess the investment opportunity.

Qualifying Potential GroupsThere are many intermediaries who will claim to represent Chinese development companies. As such, it is helpful for Canadian real estate owners to engage advisors who have China-based operations to facilitate direct introductions or confirm mandated relationships. Outside of the top tier firms, currency restrictions in China can delay getting funds out of the country and Canadian owners must ensure they are acting reasonably by seeking confirmation that offshore funds are available.

Your advisor can also help you determine the interest level of the buyer pool, monitor the level of due diligence completed and gain insights on the internal buy-in within each potential buyer’s group. While these tasks are standard operating procedure in any transaction, an advisor with colleagues in China who have relationships with Chinese decision-makers can greatly aid in interpreting foreign interest and facilitating deal activity.

Ensuring DistributionReaching emerging capital sources is obviously a fundamental component; thus, deep distribution to international locations is necessary. Preparing detailed and professional offering documents will help expedite appreciation of the investment opportunity and value-enhancing opportunities available to a new investor. These materials should include clear visuals, a detailed explanation of the property and a description of local market drivers. This information usually comes in the form of a detailed Confidential Information Memorandum distributed via a secure virtual data site and made available in hard copy. Another consideration is translating a portion of your marketing collateral (i.e. investment overview) in the local language.

Understanding International Buyers from a Domestic Owner’s Perspective

Final ThoughtThe current wave of foreign investment from Chinese capital sources is experimental in nature. But given the number and capabilities of Chinese development firms, there is a high likelihood that more will come in 2016. Colliers has 27 offices in China and has been involved in property transactions in Australia, the UK, the USA and Canada where the buyer has been a Chinese development company. In China, Colliers advisors work with these firms daily on their domestic portfolios, and have initial information on their priorities inside and outside China. Colliers has the infrastructure and experience to customize sales materials to offshore markets, distribute to qualified potential buyers in multiple countries, and manage the transaction across distances and cultures for a positive outcome.

Copyright © 2016 Colliers International.

The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

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Primary Authors:Sarah GouldingMarket Intelligence Analyst | Canada+1 604 [email protected]

Russell BeaudrySenior Manager | Hotels+1 416 643 [email protected] Colliers International | Canada200 Granville Street, 19th FloorVancouver, BC V6C 2R6 | Canada

TEL +1 604 681 4111