Understanding the Chinese Real Estate Investor

With no signs of property restrictions easing in China and newly minted millionaires on the rise, Chinese investors look overseas to invest. To understand how the international landscape for the luxury property market is developing, it is important to look at the impacts of the Chinese.

Credit: Flickr / MattMawson

WHO?

The last few years of economic boom have brought with it a new wave of Chinese wealth. Along with Russia, China saw the biggest increase in global billionaires since 2007, and in August 2012, the number of millionaires surpassed the 1,000,000 mark. According to Huron report’s face-to-face interviews with 549 millionaires and 54 billionaires, the average millionaire is 39, loves to golf, and is substantially invested abroad. 85% of millionaires and 90% of billionaires intend to send their children abroad for education, and more than half of them have submitted or are intending to submit immigration applications. It should come as no surprise, then, that overseas assets, such as real estate, account for a large portion of that wealth, up to 20%. The interest in foreign property investments shows no sign of abating as the domestic political and economic environment become increasingly volatile and the Chinese look abroad for good values.

WHY?

First and foremost, Chinese investors are often looking for a good investment that promises security, not necessarily capital appreciation. A few driving factors are fueling this surge in foreign real estate investments from the Chinese. Amongst the wealthy, the Chinese appetite for tangible assets as a form of wealth diversification has only been growing with increasingly volatile stocks and bonds. However, the restrictions the Chinese government has enforced in an effort to curb a potential domestic property bubble show no sign of abating, as President Wen Jiabao announced recently in October. These restrictions include higher down-payment requirements, property taxes, limits on owning multiple properties, and development requirements for low-cost housing.

At the same time, as the economy’s astronomical growth slows down, existing properties have been dropping in value. Property values have been appreciating steadily at an estimated 300% between 2005 and 2009, according to state media; however according to Knight Frank Research (see graph below), at the end of the first quarter of 2012 new home prices were 6% lower than last peak in third quarter 2011 and during 2012 nationwide property values have dropped almost every month.

Due to property drops in 2012, 16 of the top 100 billionaires in China have lost a combined $3.9 billion, of their net worth. The combination of depreciating value and restrictive limits have made domestic property investments less appealing, and Chinese investor are quickly becoming attracted to the stable yields and lax restrictions abroad.

Additionally, growing concerns about political and economic stability as a whole push the Chinese to look outward, not only in investments but for relocation as well. Speaking of the nervousness towards the opaque state government, billionaire Louie Huang explains, “Most of [the wealthy] think, ‘I’ve got so much money here but one day maybe the government will change the policies and take it all back’.” Others look to exit residency for a better quality of life, including cleaner air, a less restrictive government, and a better lifestyle.

Credit: Nikonaft / Shutterstock

WHEN?

The surge in Chinese investments overseas started in 2008, when the appreciation in yuan offered a 24% yuan to sterling discount; at the same time since the beginning of 2008 the Chinese currency has appreciated almost 30% against the Euro. Since then, restrictive regulations around domestic real estate and concerns about the economy have led to an outpouring of foreign investments. According to International Business Times, this phenomenon led to an outflow towards foreign markets at nearly $63 billion. Last year the Wall Street Journal caught an eye on the increasing flock of Chinese buyers in an article on the internalization of the resi property scene.

Credit: Daniel Kirkegaard Mouritsen / Shutterstock

WHERE?

Chinese buyers are the 2nd largest group of foreign property investors in the U.S. market, after Canadians. In the States the top ranked location in terms of luxury real estate sales is California, followed by cities like New York and Miami. Worldwide other safe havens for property investments are perceived to be Hong Kong, Vancouver, and cities across Australia, according to the Colliers international property department. While in London Chinese buyers only account for 3% of all real estate acquisitions by value, they are a quickly growing consumer base. On an aggregate, foreign investment in London real estate accounted for 1/3 of all European investment transactions according to CBRE, totaling £30 billion from January to October of 2012, up 15% over all of 2011.

Behind London, Paris is certainly the city where far-Eastern buyers acquire more properties in Europe but other locations that traditionally had never seen Chinese buyers are also witnessing a sharp interest in property enquiries such as the French Riviera and Tuscany, in Italy.

Becca Wu is a current MBA student at London Business School, with a background in management consulting in the U.S. She has extensive experience helping companies across a wide variety of industries identify inefficiencies and cut costs, with a focus on supply chain operations. She has an avid interest in European real estate financing and development. Along with blogging for Te Atrium, she works part time at Ennismore Capital, a hospitality investment fund in London.

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