A Tidal Wave of Chinese Cash Is Hitting the U.S. Real Estate Market
 
In the year that ended in March 2015, Chinese buyers spent $28.6 billion on American homes. That’s more than twice the amount from 2013, according to the National Association of Realtors.1 For the first time, China ranked first among foreign countries with overseas homebuyers in the United States, with 28 percent of all foreign purchases.
 
Increasingly, Chinese buyers are targeting the high end of the U.S. real estate market. They account for one of every fourteen homes sold for more than $1 million. On average, they pay $831,800 for a home, which is more than three times as much as the average of $255,600 that Americans spend.

Chinese buyers are also rushing into the overseas commercial real estate market, with their purchases increasing by 49 percent last year, according to one estimate. According to the commercial real estate services firm CBRE, Chinese outbound capital flows into global commercial real estate markets have exceeded $10 billion in a year for the first time ever.

Among the higher-profile acquisitions recently are the Waldorf Astoria hotel and the General Motors Building. Meanwhile, according to International Business Times, China’s state-run China Life Insurance Company is investing more than $1 billion in warehouses across the U.S.2
 
What’s driving the U.S. real estate investment boom among Chinese buyers?

As we reported in previous issues, China’s housing market recently went through a bubble followed by a painful crash. Then early in 2015, its stock market skyrocketed, fueled by unrealistic valuations of Internet companies and boosted by unsophisticated investors, many of whom are illiterate.

As we predicted, the Shanghai Composite market crashed by 40 percent last summer, destroying trillions of dollars in market value. Now Chinese investors are turning to the one haven they consider safe for their money: the U.S., with its relatively stable economy, transparent government, and secure political system.

Some Chinese investors are buying homes and renting them out, hoping they can use the houses as income property.

Other Chinese buyers are trying to move their money to the U.S. to keep it from being confiscated by the government. According to the New York Times, “A recent Goldman Sachs analysis found that some types of capital outflows closely follow Chinese anti-corruption campaigns. As crackdowns intensify in China, outflows tend to increase.”3

Still other buyers are purchasing homes in order to establish residence in U.S. cities that have good high schools or are near universities, in order to give their children a better education than they could receive in China. An estimated 23,500 Chinese citizens are enrolled in American high schools - and the Chinese account for one-third of all international college students in the United States.

Another group of buyers is using real estate purchases as a strategy to obtain green cards.4 They are exploiting a federal program called EB-5 that fast-tracks immigrants for residency if they put $500,000 to $1 million into a U.S. project that will create at least ten jobs. Simply by purchasing a home in a new subdivision, investors can get a green card. In 2015, 86 percent of the EB-5 visas were granted to Chinese citizens.

Finally, the Chinese government has actively promoted overseas investments by its citizens, private companies, and state-owned enterprises. It has also relaxed restrictions on individuals, allowing them to move large amounts of money overseas. Finally, it has changed its policy to allow its insurance companies to diversify their risk by investing up to 15 percent of their assets overseas.
 
Going forward, we foresee the following developments emerging from this trend:

First, the infusion of Chinese investments is helping to shore up real estate market in places like Texas and Michigan, but it is increasing competition in large cities on the coasts.

The Chinese tendency to pay all cash - according to the National Association of Realtors, more than two-thirds are all-cash transactions - gives them an advantage over American buyers who are trying to make a purchase with mortgage financing.5 Even in Silicon Valley, according to the New York Times, tech company moguls whose money is tied up in stock options can’t compete with Chinese buyers who are liquid enough to close in a weekend.6

Second, homes targeted to Chinese buyers will need to be designed and marketed with their unique needs in mind.

For example, in a gated subdivision of 99 luxury homes near Dallas that is being built and marketed for buyers from China, each house includes a second master suite for the homeowner’s aging parents. The development also includes a concierge service that will guide Chinese immigrants through the process of ordering Internet service, while chauffeurs will drive them until they become familiar with local roads. Meanwhile, according to the Times, some innovative American brokers serve their clients in China by using a video camera and a compass when they tour homes.7 They use the camera to film the house for their prospective buyers; they use the compass to verify that the house has a north-south alignment to ensure proper energy flow in accordance with feng shui.

Third, the boom in commercial real estate deals is only beginning.

As noted, China’s government now allows insurance companies to invest 15 percent of their assets overseas. But as of the end of 2014, less than 2 percent had actually been invested in foreign countries, so there is still a lot of Chinese cash looking for opportunities. How much? Darren Xia, head of real estate services firm JLL’s International Capital Group of China, told The Wall Street Journal that Chinese insurance companies could invest as much $240 billion in overseas real estate.8

Fourth, residential sales to Chinese investors will similarly expand.

That’s because the Chinese government’s new Qualified Domestic Individual Investor (QDII2) program will allow Chinese citizens with at least $160,000 in financial assets to qualify to make overseas investments directly. According to Business Insider, Andrew Taylor, co-CEO of Juwai.com, a website that helps Chinese to buy properties abroad, predicts, “With QDII2 in mind, within five years we might look back and think of the current levels of Chinese cross-border investment as quaint.”9

Fifth, U.S. policy makers will need to revise the EB-5 visa program to prevent its abuse as a path to obtaining a green card.

According to the recommendations from a 2015 staff research report from the U.S.-China Economic and Security Review Commission, “In theory, EB-5 investors can stimulate the U.S. economy by generating employment. However, the program was not designed to accommodate such a high number of applicants from one country. There is currently no sign of abatement in Chinese applicants; indeed, China’s ongoing anti-corruption campaign could accelerate the offshoring of wealth by the country’s elite. At the same time, a number of poorly executed and fraudulent EB-5 projects have surfaced. . . . Stemming the flow of Chinese applicants could require modifying the quota system and/or improving vetting of EB-5 projects.”10

References
1. To access the report “Profile of International Home Buying Activity,” visit the Nation Association of Realtors website at:

http://www.realtor.org/reports/profile-of-international-home-buying-activity

2. International Business Times, November 5, 2015, “China Life Insurance Invests Over $1B in US Warehouses in Company’s Largest Real Estate Deal Abroad,” by Sneha Shankar. ⓒ 2015 IBT Media Inc. All rights reserved.

http://www.ibtimes.com/china-life-insurance-invests-over-1b-us-warehouses-companys-largest-real-estate-deal-2170629

3. The New York Times, November 28, 2015, “Chinese Cash Floods U.S. Real Estate Market,” by Dionne Searcey and Keith Bradsher. ⓒ 2015 The New York Times Company. All rights reserved.

http://www.nytimes.com/2015/11/29/business/international/chinese-cash-floods-us-real-estate-market.html?_r=0