Attend any real estate investing group these days and you will hear at least one attendee holding forth about the joys of working with international investors flush with capital and eager to pay retail or higher in the U.S. market. All thanks to the country’s strong respect for private property rights and relatively stable housing market. Of those international investors, Chinese investors tend to dominate the conversation because of the massive amounts of money they have poured into the U.S. housing market over the past decade. However, there are a lot of factors that affect international investors, and Chinese investors in particular, that make the topic a complicated one. Here are three keys to understanding the Chinese real estate investment discussion and how your investing business could benefit directly and indirectly from Chinese real estate investors’ involvement:
1 | The Numbers are Astronomical and Uncertain
Chinese investors place a lot of capital in real estate markets outside of their own country. Billions, to be exact. Unfortunately, “billions” is about as exact a number as you can get when discussing the topic generally because nearly every data firm has its own way of evaluating the power of Chinese investments. In a review of two reports released at the end of July 2017, both by reputable experts in the sector, we found that one firm estimated outbound real estate investments by Chinese investors totaled more than $48 billion, while another estimated that number at $1.7 billion. The discrepancy lies in how the value of the investments are measured and whether a company values the entire property or just the money put into the property. Neither approach is wrong, but U.S. real estate investors working with Chinese investors and investment firms benefit from getting very familiar with the metrics used by their firm and sticking to them for consistency.
2 | International Investment Changes the System as We Know It
When international money from any country flows into a U.S. real estate market in high volumes, that market’s dynamics will change until the flow of international capital slows or stops. The presence of foreign investors making evaluations from the perspective not just of a different culture but also a different currency has the potential to send real estate values skyrocketing upward in very short order. When this happens, local and national investors gravitate toward that market naturally and often contribute to rising prices by creating their own business operations and opportunities based around the international cash influx. This leads to dependence on the foreign investors who can cause a market to fall fast if and when those foreign dollars move elsewhere. Real estate investors working in markets with high levels of international participation must watch the signs not just in the local market but also abroad to predict how their market may respond to global economic changes and other governments’ policies. If you are working in such a market, communication with investment firms or services that coordinate international investments can be an ideal way to keep abreast of these changes.
3 | You Cannot Assume the Same Priorities
One of the things that makes U.S. investors so fond of international investors and Chinese real estate investors in particular is that these investors are often happy to pay retail or even over retail in order to snag the properties they want. While it may be tempting to label this behavior as foolish, the reality is that international investors are seldom evaluating deals using the same priorities a resident of the U.S. market would use. United States’ private property rights and privacy rights are extremely attractive “amenities” worth paying for too many international investors. Cash flow may actually be something of a bonus for an investor who is interested in getting some capital out of the country and safely placed before his or her options are permanently restricted in that regard. Real estate investors hoping to work with international investors need to do more than the traditionally-recommended research about appropriate business behavior and cultural mores. They must familiarize themselves with the priorities of their target market as well and seek expert insight whenever possible.
Whether you hope to work directly with Chinese real estate investors or simply benefit from the participation of many international investors in your local market or elsewhere in the country, you must be able to participate in the conversation about these investors and the trends they create nationally and internationally. Understanding, empathy, and attention to detail will make this possible. The best way to gain this quickly is by aligning yourself with experts who will not only make this type of information and education available, but be willing to facilitate your interactions with these investors as well.
Carole Van Sickle Ellis is the editor for Think Realty. You can reach her at cellis@thinkrealty.com.
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