Thursday, April 3, 2014

Chinese investors are making a huge splash in the U.S. real estate market.

America’s real estate recovery is being bolstered by an unexpected and reluctant ally – Chinese investors, who are gobbling up both commercial and residential properties.  The Asian country with over a billion people have a booming economy that’s led to unprecedented financial expansion, and now they’re putting their dollars into the land of the red, white, and blue.   Chinese investors are buying both commercial properties and residential properties, for the returns they hope to capture but also as second homes.

Chinese developers pushed hard on big commercial projects in 2013, completing over $3 billion in commercial transactions, up from $335.3 million in 2012.  They’re interest is not arbitrary – they’re investments almost unilaterally focus on a certain class of real estate and in certain markets.  Dynamic signature commercial projects in the $10-$25 million range and luxury homes, typically in the $500,000 to $2 million range, fit their real estate modus operandi.  They’re purchasing in six large metropolitan areas, especially Manhattan and prestigious area codes like Beverly Hills in Los Angeles, perhaps enchanted by the sizzle of Americana they see in the movies and popular culture. 

Development group China Vanke and Tishman Speyer signed a deal for a $620 million 655-unit condo project South of Market in San Francisco last winter.  Across the bay in Oakland, China’s Signature Development Group closed a commercial deal for $1.5 billion recently.  Last summer, Zhang Xin, CEO of Soho China, bought a stake in the General Motors building in midtown Manhattan and the Dalian Wanda Group is breaking ground on a luxury hotel not far away.  China Vanke, one of the most active firms, also broke ground on a luxury condo project in Manhattan. The Greenland Holding Company is another aggressive player, buying a 70% stake in the $5 billion Atlantic Yards redevelopment effort in Brooklyn, New York and launching the Metropolis Project in Los Angeles, a mixed-use, 275,450-square-foot complex of hotels, apartments, retail, and luxury condos.  Not long after, Greenfield added a $1 billion residential and entertainment project in downtown Los Angeles.

By the looks of it, the Chinese are just getting started, as analysts predict the Chinese will spend up to $178 billion on U.S. real estate in the next couple years, a titanic amount that will definitely contribute to our real estate economy.  An interesting facet of their purchase trends is that the Chinese are not focused on low-end houses, bulk purchases, or distressed markets, a signature of most U.S. investors who look to profit from low prices, the wave of foreclosures, and troubled areas.  They’re also not interested in cheap strip malls and other low-end commercial projects.  That provides a perfect complement of interests to help our real estate market find its true balance.

So why are U.S. markets so attractive to the Chinese?  Of course it has to do with prices, as they see the U.S. as a bargain after the worst housing bust since the Great Depression, but Chinese builders also love the stability and predictability of established markets on the upswing in the U.S.  But the trend has a lot to do with China’s internal economics, too.  Their government recently loosened their rules on direct overseas investments, coupled with tighter regulations on their own housing market, designed to prevent a bubble burst like we saw in the U.S.  It’s not just the U.S. that’s a hot target; Chinese investors are buying in Canada, Australia, and closed on some huge commercial projects in England.

Of course, this is nothing new – in the 1980’s, based on foreign booms and a U.S. recession, Japan was the opportunistic buyer.  Now, it’s China’s turn, and indeed they’re taking advantage in regions and markets they see as quality, especially California and metro New York.  In fact, in California, China is the third largest foreign buyer of real estate, followed only by Mexico and Filipinos.  Overall, the Chinese account for 9% of all foreign U.S. homebuyers, second to Canadians.  The Chinese now buy more residential real estate than people from India, Mexico, or England.  The real estate website Tulia reported that from April 2012 t o March 2013, foreigners accounted for almost 5% of all searches for U.S. properties on its site.  Still, investors from Canada, England, and Germany make up the largest searchers on the site, 34%, but that number has dwindled down from 38% only a year ago.  Even wealthy businessmen from lower or middle income countries are getting in on the real estate sale, as we’ve seen a big increase from other Asian and African countries like India, Nigeria, Russia, and the Philippines, as well as Argentina, Brazil, and the Dominican Republic. 

For the large part, Chinese investors have been welcomed with open arms, often in partnership with U.S. development groups, politicians, and community leaders.  Eric Garcetti, Mayor of Los Angeles, recently stated in an email that, “This billion-dollar investment not only will bolster downtown Los Angeles’s economy, creating hundreds of jobs and generating ongoing tax revenue, but it will bring the kind of world-class amenities that will enhance the appeal of our city center nationally and internationally.”  There are some cultural barriers of course, and Chinese inventors have expressed shock at the litigious business climate in the U.S. 

“Everybody is afraid of getting sued,” said an anonymous source at Greenland, “In China we may step on somebody else’s feet, but so what? Sometimes somebody else will step on mine. It’s all good. I won’t sue them.”

Buying U.S. real estate is so popular among Chinese nationals that it’s whipped up into an infomercial-like frenzy among buyers looking to put their Yuan on a sure bet, creating all too many similarities to our own pre-recession climate.  There are even regular workshops, seminars, and buying tours, like the one held in Hawaii last October for wealthy Chinese.  Some of them are even named “How to buy your American dream home.”  

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