Chinese investors, like those from other foreign countries, found deals aplenty in U.S. real estate at the height of the recent financial crisis here. Now that the U.S. economy has regained strength, the pickings aren’t as easy, but the Chinese remain as enamored of U.S. real estate as ever, even overtaking perennial leader Canada in 2015 as the largest foreign buyer of single-family homes in the United States.
This development was made even more startling by how swiftly it occurred: Chinese investment in U.S. real estate was “negligible” prior to 2010, according to a recent report by the Asia Society and Rosen Consulting Group.
“Breaking Ground: Chinese Investment in U.S. Real Estate” states that “between 2010 and 2015, Chinese buyers spent at least $93 billion on homes, including condominiums, for occupancy and investment.” Spending increased at a 20 percent annual rate and helped some markets that were severely impacted by the real estate downturn.
The report adds that Chinese buyers also pay significantly more for U.S. housing than do other international buyers because they tend to buy in expensive markets like New York City and California. (Texas and Florida are also popular with Chinese investors.)
The trend was foreseen by members of the Association of Foreign Investors in Real Estate (AFIRE) in the organization’s 23rd Annual Survey, released early last year. Two-thirds of respondents said they expected China to become the largest source of capital into the United States in 2016 and beyond, and 72 percent predicted Chinese investment will be a long-term, permanent inflow. AFIRE’s 24th Annual Survey, out this past January, says foreign investor confidence in the U.S. real estate market remains strong, and that for the Chinese and others, this is the safest destination for their investment dollars.
Wen Hsu, a broker with City Connections Realty in New York City who helps Chinese clients buy condos in Manhattan, agrees with the timing of the Chinese investment push. “Chinese buyers have really taken off around the 2011-12 timeframe, and because I speak and read Chinese, that has been a main focus for my client base,” she says.
Why have the Chinese become so interested in U.S. residential real estate? It turns out that Chinese investors view the United States—especially its major markets—as some of the best places in the world to park their yuan.
Why America, and Why Now?
Experts point to several reasons for the sudden influx of Chinese capital into the U.S. real estate market:
• The United States is viewed as more socially and politically stable than China.
• The Chinese government does not allow direct ownership of real estate by its citizens. Instead, buyers get a long-term lease on the property from the government. Well-heeled Chinese buyers are increasingly showing an appetite for direct ownership of real estate.
• The erratic performance of the Chinese stock market and the yuan’s fluctuations have led Chinese investors to seek the stability of more developed markets, including the United States.
• “China has more billionaires than any other country in the world, and nearly as many millionaires as the U.S.” says Charles Pittar, CEO of Juwai.com, a company that helps Chinese buyers invest in U.S. real estate. “The average budget that our buyers tell us they have for property in the U.S. is about $2.6 million.”
Juwai’s survey of its users who made inquiries on properties showed the following motivations for purchasing property in the United States:
Immigration is a main driver of Chinese real estate investment, according to Hsu. “We’ve been seeing a big wave of people doing the EB-5 Program, immigrating to the U.S., and the main reason that they are doing that is because the U.S. has better education and a better living environment,” Hsu says.
The EB-5 program allows a quota of foreign investors to immigrate to the United States if they purchase real estate. Hsu says the Chinese have really taken advantage of the program and use it to get green cards and buy second homes to stay part of the year in the States. Many initially use the homes to be close to their children who are attending college in the United States, and then either live in them or let their kids use them.
Chinese are not very fond of renting, according to Hsu, as it doesn’t provide a return, and they view it as “basically money down the drain,” she says. Real estate is viewed as an investment and as a place to live, Hsu says. Chinese prefer new developments or condos over other property types, adds Hsu.
Pittar says that “all levels” of well-off Chinese are purchasing U.S. investment properties, from upper middle class families to wealthy families purchasing $100 million luxury estates. Property developers and large corporations are buying homes as well.
Although the ultra-wealthy are key to the “billionaire towers” being built in Manhattan, there are many more buyers able to spend only up to about $1.5 million, according to Pittar. Despite the fact that Chinese prefer “name brand” real estate in places like Manhattan, “The New York borough of Queens is actually the most popular destination for Chinese buyers in the Big Apple,” Pittar says.
Pittar says that 69 percent of Chinese investors buy in cash, as using financing would lead to concerns “about having to pay a U.S. dollar mortgage that would get much more expensive if the yuan were to fall in value.”
American developers have noted the trend and are actively marketing to Chinese investors. In 2015, Extell Development exclusively marketed The One Manhattan Square condo tower to Asian buyers. The 800-unit building has condos priced from $1 million to $3 million. U.S. buyers were told to wait until this year for their chance to buy.
Chinese investors love New York, especially Manhattan. Not only is it “the” name brand in American real estate, properties hold their value on Manhattan. Even though it’s a very expensive address, Hsu says Chinese investors find value on the island. “The vacancy rate in Manhattan has been below 2 percent for the past 10 years. During the financial crisis, it went up slightly above 2 percent, but generally, it has been very, very low compared to other places,” she says, making it easy to rent out a condo.
Governments Making Buying More Difficult
Hsu says that the Chinese and American governments are now making it more difficult for Chinese clients to buy U.S. real estate, putting a crimp on Chinese purchases. Chinese investors have traditionally been able to transfer $50,000 per year out of China to buy real estate. To buy a million-dollar property, 20 people would transfer their $50,000 allotments into one account.
After years of lax enforcement, both governments are strictly enforcing the policy. “Since that started last year, it’s definitely a little bit more challenging for a Chinese buyer whose money is not already out of China to buy in the U.S. There’s a way it can be done, but it’s generally a lot harder compared to before,” says Hsu.
That said, Hsu thinks that “the U.S. is still a very good investment. The law mainly targets the politicians and money laundering, so since the majority of people are not politicians, my feeling is that it will work out. It’s just a matter of time. The need is there, so I still believe that this market is still very strong.”