Chinese money pours into real estate

Earlier this month, Lotte Tour Development announced that it chose China State Construction Engineering Corporation (CSCEC) as the main contractor for the Dream Tower Casino, a 700 billion won ($617 million) project being built on Jeju Island and scheduled to be completed in March 2019.

The deal worried local contractors, who hardly wanted China’s No. 1 construction company to compete with them in Korea. Industry insiders argued that giving CSCEC the contract had to be recognized as part of investment from China. The project was jointly launched by Lotte and Greenland Holding Group, a Chinese real estate company.

“The Korean construction market isn’t easy for foreigners to penetrate due to its complex environment, and that’s why many contractors from Europe had to abandon their businesses here,” said Kim Min-hyung, a researcher at the Construction Economy Research Institute of Korea. “The bigger picture in this project is that big Chinese companies are making investments in both project planning and construction in the local real estate market. The Chinese have been doing this for years.”

According to a report by NH Investment & Securities, CSCEC was established in 2007, and 78.7 percent of its revenue came from real estate development and investment, while 20.7 percent came from infrastructure construction last year. Industry sources say the Greenland Group is currently considering buying 60,677 square meters (15 acres) of land in Hannam-dong, central Seoul, a neighborhood popular with foreigners. The land currently has apartments for U.S. soldiers stationed in Korea and their families. As troops in Yongsan prepare to move to Pyeongtaek, Gyeonggi, the land’s owner, the Korean state-run LH Corporation, has put that lot up for sale for 613.1 billion won. The state-run company said the highest bidder will get the land. It is zoned for residences in buildings no higher than seven stories.

“There are no better places to invest than Seoul,” said Park Sang-un, head of the real estate agency U&R. “I have heard that the Greenland Group is seriously considering joining the bidding scheduled for May 3, as they are deeply interested in the Korean real estate market, including Seoul and Jeju.”

One of the biggest reasons Chinese are investing in Korea is that real estate prices in China’s major cities, including Beijing and Shanghai, have increased more than fivefold in the past decade. Wealthy Chinese are eyeing real estate overseas that offer relatively higher returns than in the homeland.

“In Nanjing, for instance, an owner of a 132-square-meter apartment can only receive about 500,000 won from a leaser per month, but that amount can be earned by renting out a 45-square-meter studio in Seoul,” said Seo Hyun-sook, head of Seoul Real Estate Agency.

Chinese inflows have been impacting the local real estate market for years. According to the Ministry of Trade, Industry and Energy, Chinese invested $165.6 million in 81 cases of real estate and foreign direct investment transactions last year. That figure hit $833.82 million in 2014, when investment fever was truly hot, particularly in the Seoul metropolitan area and Jeju Island.

The Jeju provincial government says a total of 21 resort and tourist complex developments worth 8.5 trillion won were invested in by foreigners in the past decade, and 19 of them, or 8.2 trillion won, were Chinese. Out of Jeju’s total area of 1,849 square kilometers, 8.95 square kilometers are currently owned by Chinese, which accounts for 1.15 percent.

Chinese investment is spreading around the world. According to the South China Morning Post, Chinese invested $30 billion in foreign real estate markets including New York, London, Vancouver and Sydney last year, nearly double from a year ago. In Canada, Chinese invested 12.7 billion Canadian dollars last year, which accounts for about 33 percent of all of the country’s real estate transactions.

Another reason that Chinese money has headed for Jeju is changes to immigration policy carried out in February 2010 to attract foreign investment. When a foreigner invests 500 million won, the government issues an F-2 visa and will give a green card if the investor maintains ownership of the real estate for five years.

Besides Jeju, Pyeongchang County in Gangwon is popular among Chinese, as the region will host the 2018 Winter Olympics. The Korean government designated three regions - Pyeongchang, Gangneung and Jeongseon - as “special Olympic zones” in 2014 and announced that it will invest 2.1141 trillion won in two stages - one by 2018 and the other by 2032 - to develop the area for luxury residential and resort complexes. As a result, some units of Alpensia Resort in Pyeongchang were purchased by Chinese investors last year.

“Most Chinese investors check whether products are in regions under the investment immigration policy,” said Park Man-soo, director of the Gangwon government’s global investment and trade division.

Those investments were made in rural regions, but Chinese are now eyeing metropolitan areas including Seoul and Gyeonggi recently. Earlier this year, 10 units of a luxury high-rise apartment, the Mecenatpolis, were sold to Chinese. One 122-square-meter unit is worth about 1.4 billion won. The types of investment are different by region. In Gangnam District, Chinese buy buildings and shopping arcades while purchasing residences in western Seoul, including in Mapo, Seodaemun, Geumcheon and Yeongdeungpo districts.

“In Seoul, Yeonnam-dong and Daelim-dong in western Seoul, the area known as the city’s Chinatown, are the most popular areas for Chinese,” said Ji Soon-gyu, head of the Yooseong Real Estate Agency. “Chinese running businesses in the area have been purchasing shopping arcades and small buildings. The area wasn’t popular among Koreans, but real estate prices in the region have been increasing due to the Chinese. They have lived here for years while running businesses like shabu-shabu restaurants, and some of them have become landlords. Chinese invest in land on Jeju for a green card and buy buildings in Daelim-dong to rent out.”

Already, some real estate agencies in Seoul are hiring Chinese translators.

As the Chinese become big investors, Koreans are trying to attract more of their money. Earlier in the month, KEB-Hana Bank held a briefing for Chinese in Jeju and launched a service for managing leased buildings and facilities owned by Chinese. The bank said it is preparing an International Private Banking Center in its Jeju branch to offer asset management, real estate investment, M&A consulting and tax accounting, all available in the Chinese language.

Last year, Posco Engineering & Construction held a China Day event for the newly built Sharp First Park apartment in Songdo International Business District in Incheon.

“As many regulations have been eased in the past few years, the number of real estate investments increased,” said Ahn Joo-won, a researcher for IBK Investment & Securities.

BY SPECIAL REPORTING TEAM [kwon.sangsoo@joongang.co.kr]