China’s 7.4% stake in General Growth is a bet on U.S. shoppers

Posted 11/22/10

WASHINGTON - China’s sovereign wealth fund, in a bet that U.S. real estate and retail spending will recover, has acquired a 7.4 percent stake in General Growth Properties Inc., the second-largest U.S. mall owner and the parent company of Providence Place.

China Investment Corp. holds 59.3 million common shares and warrants to buy an additional 14.7 million shares, according to a Form 4 filed on Thursday with the U.S. Securities and Exchange Commission. The Future Fund Board of Guardians, a manager for Australian government pension funds, holds a 6.4 percent stake in Chicago-based General Growth, documents show.

U.S. consumer spending on Chinese-made apparel and consumer electronics helps drive the trade gap between the two countries, which rose 21 percent to $201.2 billion through the first 10 months of this year. China is using foreign direct investments to capture some of the profits from overseas sales of merchandise that its factories churn out for companies such as Apple Inc., said Dan Rosen, principal at Rhodium Group, a New York-based research firm that specializes in China.

“In addition to making goods, China is getting closer to retailing,” Rosen said Friday in a telephone interview. “The margins that the Chinese enjoy for putting goods together are tiny compared to the profit margins of the Wal-Marts of the world.”

General Growth exited the largest real estate bankruptcy in U.S. history on Nov. 9. As part of the restructuring, it spun off Howard Hughes Corp., an owner of master-planned communities and other properties, as a separate publicly traded company.

Brookfield Entities

China Investment and Australia’s Future Fund hold their stakes in General Growth through entities created by Brookfield Asset Management Inc., a Toronto-based company founded by members of Canada’s Bronfman family. Brookfield and its clients invested about $2.31 billion in the mall unit through the bankruptcy reorganization, with an additional $200 million devoted to Howard Hughes Corp.

Hugh Zwieg, a General Growth officer, didn’t return a telephone call seeking comment. Andrew Willis, a spokesman for Brookfield, declined to comment on China Investment’s affiliation with the money-management firm.

China Investment, with about $300 billion under management, was created to generate higher returns from the nation’s foreign-exchange reserves. China ranks as the world’s largest holder of U.S. Treasuries, with $883.5 billion of the securities as of Sept. 30, according to the U.S. Treasury Department.

‘Attractive Alternative’

“High-quality U.S. commercial real estate is an attractive alternative for sovereign wealth funds to invest American dollars,” said Alex Avery, a real estate industry analyst at CIBC World Markets Inc. in Toronto. “You get the safe-haven currency but you don’t have to deal with the low yields of Treasuries.”

China Investment committed about $800 million to the $4.7 billion global property fund that Morgan Stanley announced in June, according to Private Equity Real Estate. The fund had also been negotiating to buy some of Harvard University’s real estate holdings for several hundred million dollars. That transaction fell through, a person briefed on the matter said in September.

Brookfield formed a $5.5 billion turnaround real estate group in August 2009 to invest in distressed commercial real estate, according to Willis. Under the terms of the arrangement, members had the final say over whether their money was invested in various opportunities identified by the Canadian money manager.

Wealth Funds

When a bidding war to invest in General Growth broke out earlier this year, rival suitors sought financial support from wealth funds in the Middle East and Asia, the Financial Times reported in March. At the time, Brookfield said it might seek financing from investors in the turnaround group including China Investment, the Future Fund and Government of Singapore Investment Corp., the newspaper said.

According to filings, Brookfield received 230.9 million General Growth shares, along with 57.5 million warrants in return for its investment. About a quarter of the stake was allocated to China’s sovereign wealth fund, with 64.4 million shares and warrants going to the Future Fund Board of Guardians, which helps oversee about $69 billion of pension assets for the Australian government.

Brookfield was formed by Peter and Edward Bronfman in 1954 after the two brothers cashed out their stake in Seagram Co. Ltd., a Montreal-based spirits company that was ultimately acquired by Vivendi SA in 2000 from other members of the Bronfman family. Brookfield, which specializes in real estate, power and infrastructure investments, has about $113 billion in assets under management, including $20 billion from sovereign wealth and pension funds, Willis said.

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