(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Robert Cyran
NEW YORK, June 26 (Reuters Breakingviews) - China
Development Bank appears to be toying with a subprime idea. The
Asian firm is considering lending U.S. homebuilder Lennar
(LEN.N) $1.7 billion to construct two housing projects,
according to the Wall Street Journal – one of them on a polluted
man-made island in an earthquake zone. It has all the hallmarks
of globally distorted economic incentives forcing yield-starved
investors to take risky bets they don’t understand.
Real estate investing can be tricky for any bank. And
converting Treasure Island, a former naval base near San
Francisco, into housing isn’t straightforward, due to the
competing governmental, environmental and seismic issues. But a
good rule of thumb holds that the further afield a project, the
greater the danger that the lender is getting out of its depth.
Of course, the projects have potential. The timing looks
promising, as they could be investing at, or near, the bottom
for housing. Average home prices actually rose 1.3 percent in
April, according to the S&P/Case Shiller index. These projects
won’t be finished for a decade or more, by which point markets
could once again be sizzling. San Francisco has few spaces as
well placed geographically as these two for big developments.
And China Development Bank isn’t completely naïve - it has
increasing amounts of experience investing in countries ranging
from Australia to Pakistan.
Yet it’s worthwhile pondering why exactly a financial arm of
the Chinese state is thinking of investing in building U.S.
homes. After all, this foray hardly fits in with the bank's
original goals of building infrastructure in the Middle Kingdom
and promoting strategic industries.
Perhaps the most salient reason stems from China’s policy of
favoring exports. At about 3 percent of GDP, the current account
surplus is a fraction of what it once was. But the country still
has massive amounts of cash to invest overseas. Meanwhile, U.S.
monetary policy has resulted in ultra-low interest rates. With
U.S. 10-year Treasuries at 1.6 percent and set to remain around
that level for some time, bankrolling complex construction
projects starts to look unhealthily tempting by comparison.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- Home builder Lennar is in talks with the China Development
Bank to provide $1.7 billion of financing to develop two real
estate projects in San Francisco, according to a Wall Street
Journal report on June 25. The two projects are: Treasure
Island, an island in San Francisco Bay made from landfill that
was a naval base; and Hunter’s Point, an area near sports
stadium Candlestick Park.
- The state-owned bank is in discussions with Lennar to add
China Railway Construction to the projects, according to the
article. Together, the two projects would build about 20,000
- Separately, average U.S. home prices rose 1.3 percent in
April, according to the S&P/Case Shiller 20-city composite
index. On a monthly basis, prices rose in 19 of the 20 markets
covered by the index, with Detroit being the only city where
prices fell. On a seasonally adjusted basis, the rise was 0.7
- The 20-city composite is 1.9 percent lower on an
unadjusted basis compared to April 2011.
- S&P/Case Shiller index: link.reuters.com/bam98s
- Reuters: Lennar in China Devt Bank talks for $1.7 bln
capital - WSJ [ID:nL3E8HQ34I]
- For previous columns by the author, Reuters customers can
click on [CYRAN/]
(Editing by Antony Currie and Martin Langfield)
Keywords: BREAKINGVIEWS USA/REALESTATE CHINA
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