What China’s Great Leap Backward Means for the US Housing Market
- Mar 10, 2016
As the U.S. economy continues to improve, volatility is banging on China’s door, with a cast of characters that resemble those seen leading the U.S. into the deep financial crisis of 2008. Despite market woes worldwide, the U.S. real estate sector is performing well and continues to attract Chinese buyers in search of not only safe monetary harbors but also better educational opportunities for their children.
How will this affect Americans and the U.S. single-family and multifamily markets? Commercial Property Executive talked to industry expert and Teles Properties co-president Peter Hernandez and some of the real estate firm’s staff, including agents Stephany Chen, Amy Hsueh and Michele Chiu.
CPE: How do China’s market woes impact the U.S. housing market?
Peter Hernandez: We are expecting increased Chinese investment as the flight of capital is to the quality and stability found in the U.S. real estate markets.
Stephany Chen: As China’s economy continues to slow down, it will impact capital flow, which will force China to look at other asset classes of investment, including U.S real estate, which will become even more attractive to Chinese investors.
Amy Hsueh: With the recent drops in China’s stock market, Chinese clients are more determined than ever to diversify their assets out of China. Most Chinese clients of mine are expecting further depreciation in RMB, therefore they’re urgently trying to transport their money out of China. Since real estate investment has always been considered a safer and stable choice against all other forms of investment, purchasing a home in the United States seems like a perfect choice for the Chinese investors at the moment.
Michele Chiu: For the last two years, the Southern California region, among other large U.S. metropolitan areas, has experienced a surge in all-cash buyers in their residential market sectors. Although China’s financial marketplace has always been known to be extremely volatile, the latest slump of the Shanghai stock market came unexpectedly for many. Chances are, the rich in China are probably a little less rich now compared to just a few months ago due to the recent downturn. This may not translate into a shift in lifestyle but for many investors, it will play a huge role in the amount of liquid cash they have to invest in sectors such as the U.S. real estate market. As a result, Chinese investors will do one of two things; hold on to what they have; or learn their lesson and invest their money in a less risky environment such as the U.S. housing market. Generally speaking, this means less cash flowing into the housing market and a likely adjustment period for the next two years.
In the midst of this adjustment, many of the areas with heavy cash flow from China will experience something wonderful and rare: A great time to both buy and sell in this low-inventory seller’s market. Less cash investors means buyers will enjoy less competition on that awesome home they’ve been eyeing, while still taking advantage of some of the lowest interest rates in the last 30 years. Sellers have now accumulated a good cushion of equity and can experience selling their homes at an all-time high since 2006, benefiting the low inventory and high demands of the current market.
CPE: How do China’s market woes impact the multifamily sector?
Peter Hernandez: For those Chinese investors looking for high-quality investments, the multifamily sector is huge. Traditionally though they like mixed-use projects and hotels and for the super wealthy, it must be iconic and prestigious.
Stephany Chen: Investors’ cash flow follows the capital market. By developing more multifamily, the rental market will become more affordable.
Michele Chiu: In comparison with the residential sector, the multifamily sector will experience less impact due to China’s economy on both the investment side and tenant occupancy from China. More recently, Chinese investors have graduated from investing in the residential market, moving towards multifamily or commercial property acquisitions. However, in addition to less cash flowing from China to the U.S., many new and ever-changing financial regulations between the two countries make it more and more difficult for the Chinese to leverage the cash needed to purchase large multifamily commercial assets. Overall, Chinese investors do not hold enough shares in any specific area of the multifamily sector prior to their market collapse to make a huge impact in this specific marketplace.
CPE: Why do Chinese investors see the U.S. market as attractive?
Peter Hernandez: They are looking for four key attributes in the US market: investment opportunities; education opportunities for their children; luxury lifestyle and recreation; and immigration benefits (EB 5 and visa programs).
The Chinese middle class represents 300 million people, which is quite large considering the total population of the U.S. They are generally looking in the $500,000 to $1,500,000 price range and the U.S. is their No. 1 destination. They want new, safe, and clean and represent 70 percent of all Chinese buyers. The remaining 30 percent are seeking luxury properties. Both segments are looking to fulfill one of the four attributes.
Stephany Chen: U.S. markets are more predictable and stable and have more investing options. Properties are also considered relevant or affordable compared to the bigger cities, Beijing, Shanghai and Szechuan. Chinese nationals also like the fee simple ownership, which is something that is not common in property ownership in China.
Amy Hsueh: As mentioned by Charles Pittar (CEO of Juwai), there are a couple reasons why Chinese investors want to invest in the US market:
- Chinese buyers want to invest here because they understand the importance of a Western education for the next generation; and
- They purchase luxury properties in the U.S. because that signifies they have achieved the “American Dream,” California being the No.1 state of purchase due to the amazing coastal weather, followed by Texas (in 2015).
Michele Chiu: Two main reasons: first and foremost, the U.S. market is stable and immensely less risky than their own market. Secondly, we have some of the best educational institutions in the world. Up until this year, China’s one-child policy limited most Chinese families to having only one child. Since education is a main priority for many families, parents will pour all resources to ensure that their one child receives the best education their family can afford. This typically translates to buying a home in the U.S. and enrolling their child in the top U.S. school districts.
CPE: How much Chinese capital is filtering into the U.S.?
Stephany Chen: Define filtering. If you are talking about the Chinese capital market, the credit market has tightened, outflows are controlled and the depreciation of the RMB has made it more difficult to get funds out of the country.
Amy Hsueh: $47.5 billion from 2000-2014, with 90 percent of this investment from 2010-2014, according to CNBC & LA Times [quoting a report by the National Committee on US-China Relations and Rhodium Group that maps Chinese FDI across the U.S.]
Michele Chiu: The current Chinese regulation limits individual citizens to the equivalent of $50,000 USD per year in foreign exchange. There are obviously ways around this but honestly, who knows?
CPE: Is the Chinese government altering repatriation limits and creating programs for Chinese citizens to increase investments overseas?
Peter Hernandez: Yes, they’ve made it easier for citizens to invest in foreign countries. China recognizes the need to open its commerce and participate more fully in world markets. They are fascinated with the entertainment industry, real estate and technology, and have invested heavily in such. They are participating more globally in sports, particularly in soccer. They travel a lot, particularly to the US. Overall they recognize the advantages of opening up and being less insular.
Stephany Chen: The instability of the Chinese stock market, the depreciation of the RMB and the altering of the repatriation limits has forced Chinese investors to look into overseas investment. In an effort to decrease outflow capital, the Chinese government has created an economic stimulus to cut interest rates and bank reserve requirements to encourage reinvestment in the country.
Amy Hsueh: Chinese investors are currently allowed to convert the equivalent of $50,000 into other currencies, although that is about to change once the Chinese government rolls out the QDII2 (Qualified Domestic Investor Program), which will allow Chinese investors to invest as much as half of their assets overseas.
CPE: What U.S. sectors and markets are Chinese investors focused on?
Peter Hernandez: They like Los Angeles, San Francisco and New York. In L.A., there’s a huge focus on several markets in the San Gabriel Valley, such as San Marino. For luxury, New York, Beverly Hills, Newport Beach and San Francisco are primary targets and although they have participated in some huge iconic and trophy properties, 70 percent of their real estate investments are under $1 million. There’s heavy investment in single-family residences.
Amy Hsueh: Chinese buyers are focusing on areas with highly ranked school districts. Here in southern California, Irvine and Arcadia are amongst those cities that are academically sought after. Not all Chinese investors are buying mega mansions that are $4 million and above. The majority of my buyers are looking for properties between $750,000 and $1.5 million. Not only are Chinese investors conservative in their investing habits, they also seek properties that can be resold quickly if they decide to put them on the market.
Michele Chiu: Any type of real estate with a residential component.
CPE: How much are Chinese developers building in the United States?
Peter Hernandez: They are beginning to develop in the U.S. They love downtown Los Angeles, Beverly Hills, San Francisco and San Gabriel Valley. They are also looking to develop in New York. For instance, Teles is the West Coast representative of the prestigious 118 E. 59th St. in Manhattan.
Stephany Chen: I don’t have the exact number but 80 percent of my clientele portfolio are Chinese developers already developing in the prime markets I mention above.
Michele Chiu: They are mainly interested in residential development and many smart investors are partnering up with boutique or non-institutional U.S. real estate developers on their projects.
CPE: How do housing prices in the U.S. compare with housing prices in China’s largest cities?
Peter Hernandez: U.S. prices are a better value and generally considerably less expensive.
Stephany Chen: U.S real estate is considered relatively inexpensive on the per-square-footage basis compared to the larger cities like Beijing, Shanghai, Szechuan and Shenzhen. You get a lot more living space here for your dollar or Yuan.
Michele Chiu: In the luxury sector, U.S. home values in major cities are generally more expensive per square foot than in China’s largest cities. The stacked apartment buildings in these high-density areas in China often make the U.S. residences look spacious and desirable. However, home values have been rising dramatically in high-profile cities like Shanghai, Guangzhou and Shenzhen due to a strong demand for high-end or luxury properties. In the luxury sector for example, a home in New York averages approximately $1,500/square foot while the sales prices of new houses in Shanghai averages the equivalent of approximately $460/square foot.