By Ivan Stupachenko, Tranio.com real estate brokerage.*
With so much money flying into overseas real estate markets, it begs the question: Who are these Chinese investors and why are they so eager to get their funds off the mainland?
Chinese buyers are setting records in overseas property purchases across the globe. According to Juwai, a leading international broker specialising in Chinese investors, they spent an eye-watering USD 52 billion on foreign property in 2015, up from USD 10 billion just three years ago. Knight Frank’s USD 30 billion estimate is certainly more conservative but one thing is for sure: the spending spree has been epic.
Between 2010 and 2015, Chinese buyers ploughed more than USD 98.1 billion into U.S. residential real estate and another USD 17.1 billion into commercial property, half of which was spent in 2015 – further increases are expected this year. The main benefactors, however, are a handful of cities and the country’s investor visa programme (EB-5).
EB-5: America’s institutions stress-test China’s favourite investor visa
A 70% share of these investments flowed hard and fast into New York, Los Angeles and San Francisco and the EB-5 programme has generated USD 11 billion from Chinese over the last 25 years. In other words, this nation is responsible for 70% of all funds to ever enter the scheme as well as the creation of 200,000 American jobs. Furthermore, the total investment volume for American commercial property could top USD 58 billion by 2020 according to the Asia Group. Chinese investors are clearly too eager to get their funds off the mainland with very good reason.
Some basic economics
Some structural economic changes, both good and bad, are forcing capital out of China. Analysts believe these are long-term changes, meaning that the money flood will continue. China’s economy has significantly slowed after years of stable double-digit growth. In 2015, it only grew by 6.9%, which is the lowest growth rate of the last 25 years. In fact, the economy expanded by just 1.1% in Q1 2016 year-on-year according to data from the National Bureau of Statistics.
Specifically, it is the yuan (RMB) devaluation that has distinguished itself as one of the biggest drivers behind the current capital outflow. During the period from August 2015 to May 2016, the national currency lost nearly 5% against the dollar and the future is still far from secure, so affluent Chinese are still actively seeking out foreign economies as safe havens for their capital.
Volatility on the Shanghai Stock Exchange (SSE) reflects the economic turmoil and the instability is encouraging stakeholders to find more reliable assets elsewhere.
These macroeconomic events are worsened by the country’s high rates of air pollution and other environmental problems as well as the constant threat of political repercussions from the government. For high net worth individuals (HNWIs) in China, countries like America, the UK and Australia are also attractive because of their renowned education systems and high living standards.
New regulations on capital outflow
Throughout China’s recent history, strict rules have regulated foreign investments but in November 2014, the government significantly loosened financial restrictions to stimulate its sluggish economy. In particular, they made it easier for citizens to buy assets abroad. The legislative easing applied to both individual and institutional investors, like insurance companies, in order to encourage better integration of the national financial system into the global one. By doing so, the yuan started to be used more around the world, which in turn, stimulated overseas real estate purchases.
Since 2012, insurance companies are permitted to have up to 15% of their assets tied up abroad, while individuals have a right to move out USD 50,000 overseas annually. However, the rules have been largely ignored and the system is notoriously “leaky” with money exiting the mainland into places like Hong Kong and Macau. In response, Chinese officials recently announced that they will step up vigilance over illegal capital outflows into insurance products in Hong Kong.
Mega-rich in the Middle Kingdom
China has the biggest population on Earth (1.38 billion) and has been enjoying a couple of very successful decades. So, naturally, it became home to one of the largest populations of HNWIs in the world. The latter are defined as individuals with over USD 1 million in financial assets.
According to a Hurun Research Institute report, in 2015 China had the biggest population of billionaires, beating the U.S. The country now is home to 568 billionaires compared to 535 in America. Even though this Beijing-based research clashes with Forbes findings (only 335 Chinese billionaires in 2016), the trend is clear: the Middle Kingdom’s ultra-rich population has risen sharply over recent years, growing by as much as 80% since 2013.
Real estate is by far the biggest producer of billionaires in the Middle Kingdom (20.6%), followed by manufacturing (16.5%) and technology (12%), meaning that these investors have a good and often professional understanding of the market.
China also had just less than 1.1 million people with assets exceeding RMB 10 million (about USD 1.5 million) in 2013. By 2016, their population had grown to over 1.2 million. The millionaires fall into four categories: private business owners, professional stock market investors, real estate investors and highly paid top managers.
What are their investment aims?
According to Juwai.com, there are four drivers behind their eagerness to own property abroad: investment and education, followed by lifestyle (including environmental concerns) and emigration. The National Association of Realtors (NAR) in the U.S. echoes these findings. As many as 30% of China’s millionaires prefer sending their children abroad to get educated so as to have better opportunities when they are adults. Furthermore, a Goldman Sachs report also highlights the crackdown on corruption as one of the strong drivers of capital outflow and emigration.
Top five countries for Chinese investments are all English speaking
The situation is also encouraged by local laws: the Chinese state has full rights to land leased to individuals or businesses, with the maximal term of 70 years. By doing so, investors have no guarantees that they can hold onto the land after the leasehold expires. Unlike China, developed countries hand over land for keeps and provide attractive returns on capital invested compared to low yields on the Chinese market, which is oversupplied in all real estate segments.
What next for Chinese investors?
Chinese citizens are likely to stay the largest and fastest-growing group of international property buyers. The report published by Asia Society and Rosen Consulting Group forecasts overseas real estate investments to reach USD 218 billion between 2015 and 2020. However, as countries modify investment visa schemes (the EB-5 is under fire in the U.S.) and popular property markets heat up, buying patterns will likely evolve. As per a recent Cushman & Wakefield report: “Reflecting their desire to grow holdings we see investment spreading to a broader range of geographies and assets as well as increased development.”
Some interesting facts
More than half of Chinese millionaires’ money and 66% of billionaires’ is invested in property.
China’s rich and mega-rich are 38 to 40 years old on average, health-conscious and obsessed with protecting their assets.
*Tranio.com is a Moscow-based broker doing business in 60 countries. It publishes daily news and analysis of foreign real estate. It also gives advice to property seekers, for instance suggesting locations for purchases. This article is an exclusive contribution to EmergingMarkets.me from Ivan Stupachenko, one of Tranio.com’s journalists.