The Firesale Begins: China's HNA Starts Liquidating Billions In US Real Estate

Yesterday we explained  that one of the reasons why Deutsche Bank stock had tumbled to the lowest level since 2016, is because its top shareholder, China's largest and most distressed conglomerate, HNA Group, had reportedly defaulted on a wealth management product sold on Phoenix Finance according to the local press reports. While HNA's critical liquidity troubles have been duly noted here and have been widely known, the fact that the company was on the verge (or beyond) of default, and would be forced to liquidate its assets imminently, is what sparked the selling cascade in Deutsche Bank shares, as investors scrambled to frontrun the selling of the German lender which is one of HNA's biggest investments.

Now, one day later, we find that while Deutsche Bank may be spared for now - if not for long - billions in US real estate will not be, and in a scene right out of the Wall Street movie Margin Call, HNA has decided to be if not smartest, nor cheat, it will be the first, and has begun its firesale of US properties.

According to Bloomberg, HNA is marketing commercial properties in New York, Chicago, San Francisco and Minneapolis valued at a total of $4 billion as the indebted Chinese conglomerate seeks to stave off a liquidity crunch. The marketing document lists six office properties that are 94.1% leased, and one New York hotel, the 165-room Cassa, with a total value of $4 billion.

One of the flagship properties on the block is the landmark office building at 245 Park Ave., according to a marketing document seen by Bloomberg.

HNA bought that skyscraper less than a year ago for $2.21 billion, one of the highest prices ever paid for a New York office building. The company also is looking to sell 850 Third Ave. in Manhattan and 123 Mission St. in San Francisco, according to the document. The properties are being marketed by an affiliate of brokerage HFF.

This is just the beginning as HNA’s massive debtload - which if recent Chinese reports are accurate the company has started defaulting on - is driving the company to sell assets worldwide.

According to Real Capital Analytics estimates, HNA owns more than $14 billion in real estate properties globally. The problem is that the company has a lot more more debt. As of the end of June, HNA had 185.2 billion yuan ($29.3 billion) of short-term debt -- more than its cash and earnings can cover. The company's total debt is nearly 600 billion yuan or just under US$100 billion. Which means that the HNA firesale is just beginning, and once the company sells the liquid real estate, it will move on to everything else, including its stake in all these companies, whose shares it has already pledged as collateral.

So keep a close eye on Deutsche Bank stock: while HNA may have promised John Cryan it won't sell any time soon, companies tend to quickly change their mind when bankruptcy court beckons.

Finally, the far bigger question is whether the launch of HNA's firesale will present a tipping point in the US commercial (or residential) real estate market. After all, when what until recently was one of the biggest marginal buyers becomes a seller, it's usually time to get out and wait for the bottom.

 

Comments

Antifaschistische Quantify Thu, 02/08/2018 - 12:13 Permalink

If you know Chinese (and I know a LOT of them)...I've never met one...not a single one, who did not believe with all their heart that you could EVER lose buying real estate.   You may as well just bow out of the bidding if they want a house, because if they pay 10% over fair-value, then...their property is worth it.  Eventually, 10% + 10% + 10% starts to add up...and they don't care.

In reply to by Quantify

mailll undercover brother Thu, 02/08/2018 - 11:50 Permalink

I thought it was over for now, unless the conspiracy is true for a planned crash...seems like a controlled crash.

Pastor Lindsey Williams, although he is full of it now, used to get good information from his elite butty, Ken Frohm.  And he told Williams that "China is the big one" and they are going to crash everything (Ken was part of this elite group that controls the world finances and oil).  He never elaborated though to Williams as to what he meant.  So maybe China will be blamed for a major crash if it happens.  By the way, Ken Frohm is dead now and Williams is now wrong on everything. When Ken was alive, a lot of the stuff he said actually did happen.

In reply to by undercover brother

Antifaschistische mailll Thu, 02/08/2018 - 12:07 Permalink

I can't wait for the Chinese oligarchs and all their family members, cousins, kids of cousins, kids of kids, etc...to start liquidating their property in Southern California...and how is it, that the National Realtors Association has such influence that we will sell a house to ANYONE regardless of their citizenship status?   I'd be okay with it, if they earned money the old fashioned way.  But since they basically earned their money by monopoly hand outs from the Communist party, who use slave + 10% wages, while their family comes to San Marino to pay cash for 4 multi-million dollar homes....just pisses me off

In reply to by mailll

GunnerySgtHartman undercover brother Thu, 02/08/2018 - 14:20 Permalink

I seem to recall the Japanese doing this back in the late 1980s, paying absolute top dollar for real estate in New York (and other places) with the press going nuts saying "The Japanese are buying us all up!  This has to be stopped!" ... and then the Japanese absolutely losing their shirts on it just a few years later.  Got a feeling that the same thing is going to happen here ...

In reply to by undercover brother

syzygysus Thu, 02/08/2018 - 11:29 Permalink

I have a mansion, forget the price Ain't never been there, they tell me it's nice I live in hotels, tear out the walls I have accountants pay for it all They say I'm crazy but I have a good time I'm just looking for clues at the scene of the crime Life's been good to me so far My Maserati does one-eighty-five I lost my license, now I don't drive I have a limo, ride in the back I lock the doors in case I'm attacked I make hit records, my fans they can't wait They write me letters, tell me I'm great So I got me an office, gold records on the wall Just leave a message, maybe I'll call Lucky I'm sane after all I've been through (Everybody say I'm cool) (He's cool) I can't complain but sometimes I still do Life's been good to me so far I go to parties, sometimes until four It's hard to leave when you can't find the door It's tough to handle this fortune and fame Everybody's so different, I haven't changed They say I'm lazy but it takes all my time (Everybody say oh, yeah) (Oh, yeah) I keep on going, guess I'll never know why Life's been good to me so far Yeah, yeah, yeah "Life's Been Good" Joe Walsh

Rex Andrus syzygysus Thu, 02/08/2018 - 13:31 Permalink

Well, I went home with the waitress You know the way I always do. Well how was I to know She was with the Russians, too? I was gambling in Havana, You know I took a little risk. Send lawyers, guns and money. Daddy, won't you get me out of this? I'm an innocent bystander, Somehow I got stuck Between a rock and a hard place And I'm down on my luck. Oh yea, I'm down on my luck Oh yea, Oh baby, I'm down on my luck. I'm so far down, I don't think I'll ever get up. If it weren't for bad luck I wouldn't have no luck at all. Now I'm stranded in Honduras I'm a desperate man Send lawyers, guns and money The shit has hit the fan. Send lawyers, guns and money, Get me out of this. Send lawyers, guns and money, You know the shit has hit the fan. JW

In reply to by syzygysus

Emergency Ward Thu, 02/08/2018 - 11:30 Permalink

Seems like just yesterday when the new economic Land of the Rising Sun, Japan, was buying up all the US real estate, only to get whipsawed a few years down the line.

ebear Emergency Ward Thu, 02/08/2018 - 16:59 Permalink

"Seems like just yesterday when the new economic Land of the Rising Sun, Japan, was buying up all the US real estate"

I remember it well.  In the early 90's my wife was the agent for a Japanese RE developer that was diversifying into Canada.  We had a great 8 year run until the 1995 Kobe earthquake took them out.  Major damage to their properties, which were under-insured and highly leveraged - result being a liquidation of their Canadian holdings.

I don't know if I would make the same comparison to China though. There are significant differences, and just to be clear, I'm not talking my book.  That was a one-time experience for us, after which we both went into different lines of work, unrelated to RE.

OK, the first difference is the sheer size of the bubble, which is largely a function of population.  Japan's population in 1995 was 125 Million.  China's population today is 1.4 Billion, or roughly 10 times as large.

So, if the amount of per-capita foreign investment flowing from China is approximately the same as Japan in 1995, that's ten times as much.  If only half the amount, that's still five times as much.

So, has the target market (big US and Canadian cities) grown by that amount since 1995?  Looking around my own city of Vancouver, I'd say no.  Doubled?  Probably, but 5 or 10 times?  No way.  So a classic 'too many $'s chasing too few goods' situation, but on a far greater scale than the Japanese bubble.

Next observation: Japan exported manufactured goods and capital, but not people.  Japanese people, by and large, are content living in Japan.  Not so of China, which exports goods, capital and people on a much larger large scale than Japan. 

So the question is this: In a major crisis, will those people return, or will more seek to emigrate?  Will they repatriate capital to China, or simply write off their Chinese exposure and remain in the West, with the capital they have already moved out of China?

In short, which way will the bulk of Chinese capital flow, given that much of it is residential RE, unlike Japanese investment which was largely high-end commercial?

I can envision a scenario where a crisis in China leads to a mass exodus of people who've already established a presence in North America via residences that are either wife/child occupied, or just sitting empty awaiting the mad rush OUT of China.

I live and work among Chinese, many of whom are friends. Not many would consider returning under any circumstances.  Sure, temporarily pursuing business opportunities, but on a permanent basis?  No way.  Why would you return to a place where you can't breath the air or trust the food in normal times, forget about in a crisis?   Add to that the fact that we're now three generations into the exodus and many of the younger Chinese here would be fish out of water, having no knowledge of the local scene, and in many cases unable to read or even speak the language.

There was a joke circulatiing a while ago to the effect that China is taking over Vancouver, one house at a time, to which my response was yes, but we're taking THEM over, one teenager at a time.

I've been in both China and Japan.  I would never consider living in China, but Japan has been on my short list for years.  Except for the climate, I rather like the place.  China?  Pass.  Here's the thing. In China, they spot you as foreign born or raised right away. They even had a category for that called "Overseas Chinese" which included different prices for goods and services on the notion that you had more money, and therefore should pay more!  That was in the 80's, so I don't know if it still applies, but they still see you coming, and that's just one more hassle on top of everything else.

To summarize:  Larger population equals greater investment capital flows.  Larger population plus less desirable living conditions, equals large immigrant flows.  Well established Chinese communities in North America equals more reasons to stay vs return, plus more capital in local economy with no reason to repatriate.

I'm not drawing any conclusions here, just pointing out the differences between Japan and China in the current context.

 

In reply to by Emergency Ward

Give Me Some Truth ebear Tue, 02/13/2018 - 12:17 Permalink

Great comparison of China-Japan.

No Chinese are moving to the towns I know here in Alabama. Well, I take that back. A LOT of Chinese students have moved to my hometown and alma mater, Troy University. About two decades ago, Troy began targetting Chinese students. The real reason was probably to make up for all the Florida and Georgia students the campus lost when those states introduced lottery-funded college scholarships.

At first, 10 or 20 Chinese students on such a small campus was a novelty. Today, there must be at least 600 such students. The University has a "Confucious Center" on campus plus various annexes.

Now these Chinese students aren't staying in little Troy, Alabama after they graduate. But maybe they are moving to Vancouver! Or, more likely, they are heading back home to China, but (to your point) these grads probably are more likely to return to America or Canada in the future.

And, no, there has been no great influx of Japanese students to this college or any other American college as far as I know. I imagine Chinese students are fixtures on the majority of American college campuses these days. 

P.S. I assume they pay out of state tuition. The higher education complex is a thankin' them.

In reply to by ebear

Give Me Some Truth Pandelis Tue, 02/13/2018 - 12:21 Permalink

Re: Trump wishing he was still in real estate

Oh, Trump is still in real estate. His company will be waiting for him when he leaves office. Which is one more reason I'm convinced he will support any policy that enriches the 1 percent and The Establishment. This is the target demo of his business.

If the rich can't afford what he's selling or leasing, he's declaring bankruptcy again.

 

In reply to by Pandelis