China gets a taste for the Big Apple

Buildings Brics: A Chinese loan for New York's Mandarin Oriental is indicative of how big Asian banks are stepping in where the Europeans once trod. They are buying into the city's flagship property market as the American economy picks up.

Investor confidence in US property debt continues to grow as the outlook for the world's biggest economy improves. Andrew Harrer / Bloomberg

There can be few hotels with a location to match that of New York's Mandarin Oriental.

With stunning views over Central Park, its Asiate Restaurant ranks as one of the best places to enjoy a meal while escaping the frenetic streets of the Big Apple, but don't forget your credit card.

Although owned by Istithmar World, a subsidiary of Dubai World, the hotel now has Chinese links. Last month, the Bank of China provided a US$175 million (Dh642.7m) loan to repay a $135m debt dating back five years.

The 2007 financing was arranged by Column Financial, the commercial mortgage lending operation for Credit Suisse, which announced late last year it was scaling back its involvement in commercial mortgages.

Agreements like the one finalised last month are catching the eye of analysts as they represent a trend in which Chinese finance is replacing European money in New York's flagship property market.

It comes as investor confidence in US property debt continues to grow as the outlook for the world's biggest economy improves. A series of European lenders are retreating entirely or reducing their exposure in the face of stricter capital requirements. And it is the Bank of China and other major Asian lenders that are frequently taking their places.

"China, despite the global economic turmoil, is still running a significant surplus and has capital that needs to be put to work around the world," Dan Fasulo, the managing director at Real Capital Analytics, told Bloomberg News.

Chinese and other Asian banks should be kept busy, since according to Bloomberg, during the next two years owners of New York properties must refinance more than $18 billion worth of commercial mortgages bundled into bonds. Analysts say the returns for lenders in commercial property are promising.

A key factor behind the retreat of European banks are the Basel III reforms that compel lenders to be less gung-ho in foreign markets as they insist upon larger reserves as a hedge against more speculative investments. The fear of losses because of Europe's sovereign debt problem is also keeping the ambitions of euro-zone lenders in check.

According to data from Real Capital, Bank of China has during the past year made eight loans worth a total of $1.8bn, three-quarters of them in New York. A major deal, on top of that linked to the Mandarin Oriental, was a five-year $260m loan on a nearby tower, 3 Columbus Circle, owned by SL Green Realty and the Moinian Group.

As well as mainland Chinese lenders, Hong Kong's Bank of East Asia and Singapore's United Overseas Bank are also active in the US property sector. Insurers, such as MetLife, with their lower capital costs, are also providing tough competition for European banks.

Last year, Anglo Irish Bank left the market, selling to JPMorgan Chase nearly $10bn of US property loans. Among the banks scaling back their involvement are Germany's Commerzbank, which is not seeking new business through its Eurohypo property lending arm, and France's Société Générale.

Yet there are exceptions to the trend, with Deutsche Bank providing a $625m loan on the 9 West 57th Street office tower last December, another property with Central Park views, for Sheldon Solow.

Still, the main drivers in the market are the Chinese banks. But analysts say their growing presence in financing New York's property sector is not necessarily going to be replicated in other markets.

Ben Simpfendorfer, the managing director of the financial consultancy Silk Road Associates, based in Hong Kong, and the former chief China economist for the Royal Bank of Scotland, believes New York "is probably the exception".

"It's partly constrained by where the banks have branches," he says. "Most Chinese banks have branches in New York, so that means they will lend in New York. Whether they will lend in Atlanta or Los Angeles, that's a very different story."

He believes that in property markets such as New York's, it will be a long time before the European banks look to regain the market share they once enjoyed.

"Even if they were to return, it won't be for another five or 10 years," says Mr Simpfendorfer. "In that time, Chinese banks will certainly have the capital, the appetite [to make further inroads]."

Analysts insist an expanding international presence, of which the deal concerning the Mandarin Oriental is just one example, is part of Beijing's wider agenda for its big banks.

* with Bloomberg News

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