Where are the Chinese Buying Overseas Property in 2011?

PacWest China-Beijing

On a sunny Saturday in early June, Larry Zhou strolled the floor of a property exhibition in Hong Kong, wondering whether it was time to buy another home -- not in the city, where residential prices have soared 50 percent in the past two years, but maybe in Thailand or Malaysia. “My wife and I have been thinking about investing outside of the country since we already own an apartment in Shanghai, “Zhou, a 38-year-old civil engineer, said in an interview at the Hong Kong Convention & Exhibition Centre before wrapping up a business trip and returning home. “I’ve known people in Shanghai who like to bring their money and invest in Hong Kong properties, but I think Hong Kong is way too expensive.”

Investors are grabbing everything from $68,000 foreclosed condominiums in Florida to $2 million beachfront villas in Vietnam; a buying spree fuelled by China’s surging wealth that mirrors the country’s expanding influence in markets for gold, oil and food. The search for overseas property accelerated in the past seven months as the governments in Hong Kong and Beijing imposed purchasing and financing limits, steps that are starting to cool off domestic markets.

In North America, moderate weather, good schools and established Chinese communities are drawing buyers to cities such as Vancouver, which had the third-highest housing costs among English-speaking cities worldwide in 2010, according to Canada’s Frontier Centre for Public Policy. Hong Kong and Sydney were first and second.

The Chinese are usually in a hurry when they shop, often buying at least two houses per visit, paying cash because they don’t have time to take out a mortgage. Amanda Sun bought three houses in Australia's coastal city of Gold Coast after visiting the town just once as a tourist. The 33-year-old owner of a small trading firm is one of thousands of Chinese who are beginning to export China's house price inflation abroad by piling into property markets overseas. Stifled by a clampdown on property speculation at home, cash-rich Chinese are buying up homes in Australia, the United States, Britain and Canada instead, countries popular with Chinese students studying abroad.

Property developers are courting the international rise of the wealthy Chinese home buyer with ardour, marketing their projects in Shanghai and Beijing. CB Richard Ellis has set up a special arm to help Asian buyers purchase homes abroad. China's biggest real estate website, Soufun Holdings, has been bringing Chinese investors to tour Western cities in the past two years

"The Chinese are my most important clients now," said Cindy Chan, chairman of AGC Property Centre Pty Ltd, Sun's property agent in Australia. "The number is growing very fast." Business is so good that Chan visits China every other month to showcase homes on sale in Australia. She plans to start an office in Shanghai in May.

Chinese interest has also flooded the U.S. market, with a high increase on the number of enquiries received from Chinese buyers. Although there is an abundance of discounted property on the U.S. market, it is the lifestyle that Chinese investors desire from the States and that is what attracts their interest. Since the recession there has been a drastic drop in the number of Chinese investors, but industry experts are predicting 2011 to be the year they return.

Canada’s real estate market has always attracted Chinese buyers, but experts in the country have stated that the Chinese buyers are flooding into Vancouver and Toronto, while in the past they were generally only interested in the Richmond real estate market.

Chinese investors are used to the steep prices offered in Canada as the prices represent what’s on offer at home for them, so Vancouver and Toronto house prices are more affordable for many Chinese investors, which has created an increased interest from mainland China. As with the U.S., Chinese investors are drawn in with Canada’s stability and favourable lifestyle.

These are just a few of the markets Chinese buyers are entering; because of restrictions of ownership in China, investors are looking at alternative real estate markets to buy into, targeting markets that offer stability and high-end properties. The annual “Spring of Shanghai” Real Estate Expo reported an expanding enthusiasm for investing in property overseas, with the exhibition noting that Chinese buyers are interested in investing in countries they can send their children to study in, typically targeting English-speaking communities.

But while Chinese buyers, or any buyers for that matter, may be welcome in severely depressed property markets such as those in the United States, the UK or parts of Europe, the inflows of Chinese money are causing headaches for economies elsewhere which are growing at a much faster clip. Singapore and Hong Kong, for example, have found it tough to keep a lid on surging home prices amid strong demand from Chinese nationals, despite government efforts to cool the market and stave off destabilising asset bubbles.

Shut Out in Australia

Australia clamped down on foreign buying of homes in the country last year in a bid to calm buoyant prices. While Chinese buying has provided a welcomed boost to struggling U.S. cities, there has been a backlash in Australia, long a magnet for Asian immigrants. The federal government introduced rules in April 2010 requiring temporary residents to seek approval to buy existing property and sell when leaving. Buyers living overseas can purchase only newly built housing. The changes, which reversed a 2008 easing of restrictions on foreign investments in property, came after local homebuyers and real estate groups blamed demand from overseas investors, particularly Chinese, for inflating prices. Values rose 5.8 percent in 2010 after soaring almost 14 percent in the previous year, government statistics show.  “There’s a whole field of Chinese buyers wanting to buy, but they can’t purchase existing properties here anymore,” said Garth Turnbull, property consultant at City Residential in Melbourne. “There are some sales to parents whose children are studying here. That used to be just part of the market, but now it’s basically all that’s left.”

Capital Controls

Chan and other property agents could be a lot busier if not for China's strict capital controls. Chinese citizens are barred from buying more than $50,000 worth of foreign currencies a year, restricting them to smaller property purchases when they venture abroad. There is talk that the cap may be raised to $200,000, but that is just unconfirmed chatter so far. "The government worries about whether Chinese investors have a good understanding about foreign real estate markets," said Li Wei, an economist at Standard Chartered in Shanghai. To beat the rules, Sun, like many other Chinese, turned to her relatives for help. They pooled their annual quotas together to give her enough foreign currency to put a downpayment on the three houses, which were worth a total Australian $3 million ($3.1 million). Others sneak their money out of China by disguising the funds as import bills. Although the annual limit for Chinese citizens to buy foreign currencies is just $50,000, it’s not proving to be any real obstacle, as many of the wealthiest buyers have located their trade companies or offices in countries without currency restrictions, enabling them to pay through their companies’ offshore accounts. Such cracks in China's capital controls will help feed demand for houses elsewhere. "We think that in a relatively short period of time and in a way that is measurable, Chinese buyers are going to account for something on the order of 10-20 percent of the London market," said Gerald Allison, a director at global real estate agency DTZ in London. So far, there is no official or private estimate on the total amount of Chinese outbound real estate investment. Some developers hope China will relax its capital controls over time, albeit in its characteristic "gently" manner. After all, China needs to slow the rapid build-up of its foreign exchange reserves, which at $2.85 trillion are the world’s largest and a headache for the country. Freeing up Chinese investment overseas can do just that.

Companies Prudent

In contrast to individual Chinese investors, Chinese firms are more cautious about moving abroad. Although some developers including SOHO CHINA have eyed foreign markets over the last two years, they have yet to announce any deals. "It takes time for Chinese companies to understand the rules of the game abroad," said David Chen, a Shanghai-based executive director of CB Richard Ellis for China residential sector. He said Chinese developers would most likely start from small deals and team up with foreign firms. China insurers such as China Life and Ping An Insurance are waiting in the wings as well. Beijing allows insurers to invest 10 percent of their total assets -- 5.2 trillion yuan at the end of February -- in commercial real estate markets, at home and abroad. On the whole, however, insurers can only park 15 percent of their total assets outside China. "They are actively watching (to invest in real estate market abroad) to diversify their investment portfolios, but haven't reached any deals yet," said CBRE's Chen.