Will China repeat Japan’s mistake in overseas property investment?

Back then, the Mitsubishi Estate Co.’s symbolic acquisition of New York’s landmark Rockefeller Center was much like Chinese company Anbang Insurance Group’s recent US$ 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. Real estate values in the United States were generally much lower than in Japan, leading them to believe that prices would continue to rise.

But Japan’s economic bubble burst, and real estate prices plummeted. American prices and rental levels turned out to be much lower than expected. Meanwhile, the 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.

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, a privately owned conglomerate, 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 British 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 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.

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