West Realty Advisors, like many other firms are continuing to receive an increasing amount of inquiries from Chinese investors interested in investing in US real estate.
The increased interest by the Chinese in US real estate would have been a surprise in 2007 but no more now. According to the NAR, Chinese buyers now account for over 27% of foreign investments into the US real estate compared to under 5% in 2007 and trail only the Canadians. So why are the Chinese tycoons buying up properties in the US compared to their favourite destinations like Hong Kong, Singapore and Japan earlier? We will explain here the key to understanding Chinese real estate investments in the US.
Investments in US real estate considered safe and profitable: According to the survey by NAR foreign buyers see US real estate investments not only as safe bets but also as extremely profitable. We must remember that post the 2008 housing bubble burst US home prices have fallen drastically and even in 2014 have not recovered anywhere near 2008 levels. The foreclosure rates on housing mortgages had risen since then triggering firesales. Chinese investors have made good of the buying opportunity picking up real estate mostly in California and usually in near densely populated urban centers unlike the Canadians or the Mexicans.
Higher disposable income and increased credit availability: Nearly two decades of high economic growth in China have created multimillionaires. These investors now have significant surplus cash to invest. Further China has also relaxed credit norms which has increased credit availability significantly. According to Bloomberg China’s ratio of household credit to GDP has risen from 105% in 2000 to 187% in 2012 and in a survey of 19 analysts it is predicted that credit loosening is unlikely to stop anytime before 2019 so we maybe looking at a sustained or even a growing rate of Chinese investments in US real estate.
Benefits of the stronger Yuan: Chinese Yuan (RMB) now trades at close to 6.2 against 6.8 in 2009. This appreciation of the Yuan unlike other emerging currencies like the BRL, INR or RUB has made the dollar cheaper and this combined with lower USD denominated property prices have caused the US assets to appear “very cheap” in RMB terms.
Chinese domestic real estate market seems highly “overbought”: Prices in HK and Shanghai have gone through the roof in recent times and there are worries that there could be a potential “housing bubble” in the making. Already there are some indicators that the bubble has started cooling with property prices falling lately. Further the Government in China has increased regulatory oversight on real estate purchases which now makes the domestic market less attractive compared to the US.
Layering and money-laundering: There are strict laws in China on capital flowing out abroad. However there are certain sections of the noveau rich which wants to protect their wealth amid a stinging crackdown in China. According to leading investment banks people are getting over the USD50,000 limit imposed by China by laundering money through Macau casinos and cooking the books of import-export companies. Sometimes these purchases are for investment purposes to overcome the recently bearish outlook on the Chinese economy.
Chinese investments in US real estate are picking up and are here to stay. Moreover unlike Japan in the 1980’s when such a story played out, Chinese investors have significant savings which will allow the economy to run at higher household credit to its GDP compared to similar Emerging Market economies.