Chinese developer DDI bet big on Canadian commercial real estate and failed

Open this photo in gallery:

The path to Crystal City is a muddy all-terrain-vehicle trail that leads away from the ocean and deep into the woods. But Neil Partington, who keeps the key to unlock the chain at the entrance, doesn’t understand why anyone would want to go up there.

In his view, this 2,850-acre plot isn’t good for much; it’s difficult to access, soggy and remote. When Chinese developer DongDu International (DDI) began buying this land on Nova Scotia’s eastern shore in 2014, announcing a grand vision for a resort called Crystal City, he and many other locals wondered why.

Open this photo in gallery:

“It’s just a huge chunk of useless bogland. Who would want to put a resort on that?” said Mr. Partington, whose vegetable farm backs onto the property, which can only be accessed through his family’s land. “They didn’t even bother to build a road to get in there.”

Eight years ago, DDI had big plans to build luxury getaways for Chinese investors in this hard-to-reach corner of rural Nova Scotia. Central to the plans was a proposed vacation resort near the community of Indian Harbour Lake, with 1,000 villas, tennis courts, horse stables, swimming pools and replicas of the Eiffel Tower and Leaning Tower of Pisa.

The company promised billions of dollars in spending, and bought nine properties in Nova Scotia – including more than 3,300 acres in Guysborough County alone – totalling 6,500 acres across the province. DDI’s ideas were as ambitious as they were unusual, including docking two cruise ships in Halifax that would function as floating film studios.

Provincial and local leaders were excited, including then-premier Stephen McNeil and Halifax Mayor Mike Savage. Nearly 300 people – touring DDI executives, politicians, business leaders and more – attended a splashy launch in Halifax in 2014.

The hope was that it was the beginning of a wave of Chinese investment, development, tourism and immigration, and the jobs the wave would create.

Almost none of it happened. Today, most of DDI’s land, including the site for Crystal City, is still undeveloped woodlots. The company owns a golf course outside of Halifax, but apart from that has no public presence in the province.

The DDI saga in Nova Scotia, with the grand promises the company made and then failed to fulfill, was an early warning sign for the problems now facing other large Chinese real estate companies and their holdings around the world.

In 2016, Chinese buyers spent a record $3.9-billion on Canadian commercial property, according to research from the commercial real estate firm CRBE. By last year, that amount had plummeted to $181.5-million, a 95-per-cent drop.

Much of the growth of Chinese real estate companies over the past decade was fuelled by huge amounts of borrowing. But now, that debt, and the push by Beijing to rein it in, is crippling large property developers.

This past week, one of the largest, Evergrande Group , nearly defaulted on interest payments on some of its US$300-billion in loans.

Evergrande’s creditors are beginning bankruptcy proceedings, and the crisis is roiling global markets and has sparked stock selloffs and credit downgrades among other big Chinese property companies trying to raise badly needed cash – including several with large projects in Canada. As those companies try to unwind their debt, at least one major holding in Canada has been sold and the future of ambitious new developments is uncertain.

In the years up to 2016, China had been making it easier for the country’s private sector companies and state-owned enterprises to invest abroad. Firms were allowed to get bank loans for foreign purchases and they no longer needed government approval for overseas acquisitions worth less than US$1-billion.

As a result, companies such as DDI and Anbang Insurance Group made high-profile commercial property purchases in Canada.

In 2016, total Chinese foreign investment around the world reached nearly US$200-billion – a record.

Open this photo in gallery:

But the exodus of money worried Beijing, and the country started to tighten some of its foreign investment rules. This included restricting purchases of overseas commercial real estate, causing companies to re-evaluate their plans and some projects to grind to a halt.

When the Chinese government seized the heavily indebted insurance conglomerate Anbang in 2018, it was another warning sign that debt problems were taking hold – and would have far-flung impacts. To try to get Anbang back on sound financial footing, Beijing started selling the insurer’s overseas properties, including the Bentall Centre office complex in Vancouver in 2019, for an undisclosed price.

“Many companies are used to economic system in China and they are not quite prepared to go into a foreign market,” said Jia Wang, interim director of the China Institute at the University of Alberta, which tracks all Chinese investment in Canada. “It takes time to learn and understand how a foreign market works,” she said.

The known value of all Chinese investment in Canada – not just commercial real estate – also declined after capital controls were put in place. In 2016, it was $7.6-billion; the following year it was $9.9-billion; but then investment dropped to $2.3-billion in 2018. Last year, it was $2-billion, according to the China Institute, though it cautioned this was the sum of known values and underrepresents actual investment amounts.

Today, China’s domestic property market is slowing, and the government is clamping down on developers and requiring them to reduce their debt.

Several major companies are struggling with large debt loads. They include Greenland Holding Group and China Aoyuan Group Ltd., which are both constructing condo skyscrapers in Toronto. Both have suffered multiple credit downgrades and today their debt is considered speculative, which will make it harder for them to raise funds.

DDI’s planned developments in Nova Scotia

PEI

Cape Breton

Island

Northumberland Strait

Truro

Crystal

City

NOVA SCOTIA

Other DDI

land holdings

102

Other DDI

land holdings

Port

Bickerton

Port

Hilford

Granite Springs

Golf Club

Marie

Joseph

Halifax

0

30

Atlantic Ocean

KM

Bayside

THE GLOBE AND MAIL, SOURCE: TILEZEN; OPENSTREETMAP

CONTRIBUTORS

DDI’s planned developments in Nova Scotia

PEI

Cape Breton

Island

Northumberland Strait

Truro

Crystal

City

NOVA SCOTIA

Other DDI

land holdings

102

Other DDI

land holdings

Port

Bickerton

Port

Hilford

Granite Springs

Golf Club

Marie

Joseph

Halifax

0

30

Atlantic Ocean

KM

Bayside

THE GLOBE AND MAIL, SOURCE: TILEZEN; OPENSTREETMAP

CONTRIBUTORS

DDI’s planned developments in Nova Scotia

PEI

Cape Breton

Island

Northumberland Strait

Truro

Crystal

City

NOVA SCOTIA

Other DDI

land holdings

102

Other DDI

land holdings

Port

Bickerton

Port

Hilford

Granite Springs

Golf Club

Marie

Joseph

Halifax

0

30

Atlantic Ocean

KM

Bayside

THE GLOBE AND MAIL, SOURCE: TILEZEN; OPENSTREETMAP CONTRIBUTORS

Greenland is a Shanghai-based real estate giant and, like DDI, it pursued aggressive expansion into North America. But in September, Greenland sold its King Blue Hotel in downtown Toronto. Aoyuan, which has projects in the Vancouver suburbs of Burnaby and Surrey, said in November that one of its divisions is in preliminary talks to sell some of its property management services.

In 2014, DDI was in the middle of a buying spree in Nova Scotia, snapping up huge swaths of cheap land while wining and dining Canadian politicians. In Guysborough County, a three-hour drive east of Halifax, municipal leaders embraced the new Chinese developers. As a rural county where unemployment hovers around 20 per cent, any potential outside investment was considered a good thing.

Among DDI’s Nova Scotia acquisitions was the five-storey Pacific Building in downtown Halifax. But tenant businesses soon complained to local media about neglected repairs, and said DDI allowed the building to deteriorate. The company sold it in June, 2020.

That followed a pattern similar to DDI’s purchase of three iconic downtown buildings in Detroit for US$16.4-million in 2013. The Chinese company left the buildings with unpaid property taxes and in need of significant renovations prior to their sale to Bedrock, the U.S. real estate firm that bought the properties from DDI two and three years later.

Within three years of DDI’s expansion into Nova Scotia, the company’s plans appeared to have stalled. In 2016, DDI told Nova Scotia Business Inc., a government agency with which it had signed a memorandum of understanding, that it would not proceed with Crystal City and other development plans in the province. DDI did not offer an explanation.

The company said it had “decided to hold off on developments in Nova Scotia and was shifting its investment focus to acquiring assets in the USA,” according to a statement from Nova Scotia Business president and chief executive Laurel Broten.

DDI’s Canadian liaison said even he was kept in the dark as the plans abruptly changed and the developments stopped before advancing to the construction phase.

Open this photo in gallery:

“The nature of a lot of these companies and their relationship to the People’s Republic of China is somewhat opaque, and so you never really truly know what’s happening, and you never will,” said Stephen Dempsey, who was DDI’s man on the ground in Nova Scotia. Mr. Dempsey said he is still a consultant for DDI.

He believes DDI’s land holdings around Granite Springs Golf Club, about a half hour’s drive west of Halifax, has potential for future development. The formerly neglected course on Shad Bay has returned to profitability. But Mr. Dempsey concedes it’s unlikely the rest of DDI’s properties, which were acquired during an aggressive period of debt-fuelled growth, will ever be developed by the company.

“I think they misunderstood the market, and they didn’t have enough experience outside of China,” he said. “They know large-scale developments and high-rises in Shanghai, but they had less experience with townhomes in rural Nova Scotia.”

In the Municipality of the District of St. Mary’s, the community of 2,200 people where most of DDI’s developments were planned, some locals still hope the Chinese projects can be revived.

But others say they’re not surprised the plans didn’t materialize.

Open this photo in gallery:

“For the folks who live here, it was so far-fetched, it seemed ridiculous,” said Len Archibald, treasurer for the Port Hilford United Baptist Church, a whitewashed church near the proposed development, where congregants hold lobster suppers to celebrate local fishing crews. “It almost seemed too good to be true, and a little scary, to be honest.”

DDI’s ambitious expansion into Nova Scotia caused a stir in part because Atlantic Canada remains relatively unknown territory for Chinese property buyers.

But across Canada, large state-backed Chinese corporations and institutional investors are no longer pouring capital even into commercial real estate markets they favoured before.

Today, the investors are smaller: high-net-worth families from Hong Kong and mainland China looking for a safe place to park their wealth. They are interested in commercial real estate, but don’t want to do high-profile deals. Nor do they want to draw attention to themselves.

“Institutional capital is few and far between. That tap is shut off now,” said David Ho, a CBRE executive who leads a team in charge of bringing Asian capital to Vancouver, Toronto and other major North American cities. “Now, it’s the average Joe who has a net worth of $5-million. And there are a lot of them.”

It is too early to say whether the influx of smaller investors will offset the loss from the big companies. Many deals today are not captured in any statistics because they are private and too small. CBRE, for example, only keeps track of deals worth more than $10-million.

On the residential side, Toronto has been the top destination for Chinese buyers in Canada for at least seven years, according to Juwai IQI, an international real estate company that caters to Asian clients.

Juwai measures the volume of enquiries each city receives on its website and via its realtors. The firm says the locations with the most enquiries also usually have the most transactions. In addition to Toronto, other cities that are consistently popular with Chinese buyers are Vancouver, Montreal and Ottawa – but never a city in Atlantic Canada.

“The reality is that most Chinese property buyers have very little awareness of Atlantic Canada or its investment potential. They know Toronto, Vancouver and Montreal. But Halifax? Not so much,” said Juwai co-founder Georg Chmiel.

Juwai and Canadian-based realtors say Chinese buyers typically buy real estate so their kids have a place to live while studying in Canada. That has driven the interest in Hamilton, where McMaster University is located, as well as Waterloo, Ont., home to two major universities and a growing tech hub.

After British Columbia imposed a foreign-buyers tax in 2016, Chinese buyers shifted away from Vancouver and made more enquiries and purchases in Montreal, but not Halifax or anywhere else in Atlantic Canada, according to Juwai data.

“For Chinese buyers, Montreal offers the next best combination of affordability, accessibility, investment potential and lifestyle. Montreal is relatively well known in China compared to the cities of Atlantic Canada,” Mr. Chmiel said.

Open this photo in gallery:

One Halifax realtor, however, said she has seen an increase in Chinese buyers over the past five years.

“When they first started coming into the area, they were looking for dwellings for their children to inhabit. Subsequent to that, we are seeing it spread much further outside the city as the moms and dads came,” said Donna Harding, a broker with Engel & Volkers who has sold homes in the Halifax region for nearly two decades.

The average home price in Nova Scotia is up 27 per cent from prepandemic levels, but is still considered affordable at around $366,000.

Ms. Harding credits the low price points in the region as one reason for the demand. “The sustained price appreciation gives Asian investors confidence that if they secure assets here their money is safe,” she said.

She also said sales could be stemming from the Atlantic Immigration Pilot, a program introduced in 2016 to boost immigration levels to Atlantic Canada.

Ms. Harding said her real estate brokerage has helped many Asian buyers purchase multiple rental units for an investment.

But it’s a different story in Guysborough County, where much of DDI’s plans were focused. Realtor Marilyn Sceles said she and other agents in the area have little contact with Hong Kong or mainland Chinese buyers.

“I have not had any interactions whatsoever,” said Ms. Sceles, who has worked in the area for 25 years.

Ms. Sceles lives in Boylston, about an hour’s drive north of DDI’s properties near Indian Harbour Lake. She said she never believed the Chinese company would develop the land.

“We never believed it was a true story. How much checking did they do before they bought it?” she said.

But when DDI first announced its projects in Nova Scotia, there was broad and enthusiastic political support for them.

At the DDI launch event at Halifax’s historic Pier 21 waterfront complex in 2014, the nearly 300 guests included officials from the province’s business development bodies, Nova Scotia Business and the Greater Halifax Partnership.

On a trade mission to China later that year, then-premier Mr. McNeil visited DDI’s elite Shanghai Town & Country Club.

But one Nova Scotia academic says the support for DDI may have been more about making nice with potential Chinese investors for other sectors, notably seafood exports. Jill Grant, a professor of planning at Dalhousie University, says the company’s plans for Crystal City were so out of touch with the realities of rural Nova Scotia they seemed doomed to fail.

“The bigger question is how can politicians be so naive?” Prof. Grant asked. “I’ve never thought this was much more than a pipe dream. The scope of their project, and the location, never made much sense.”

Mr. Partington, the vegetable farmer in Guysborough County, said no one has asked for the key to access the DDI property behind his farm in more than four years. When he thinks about the Chinese company’s failed plans for his rural community, he just shrugs.

“We’ve been promised a lot of things that never came. We’re still waiting on high-speed internet,” he said.

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.