Archive for September, 2011
Growth in the number of well off mainland Chinese, an increase in overseas study by their children, a drop in US property prices, and a dropping US dollar, and a rising Chinese Yuan all create a perfect storm for the Chinese investor.
The US represents a good value for what is considered a rapidly globalizing Chinese investor. Permanent private ownership and the market adjustment in the last five years represent a good time for people who are well funded with cash to take advantage of market conditions. The US on the whole does have some softness; in particular, Las Vegas, Phoenix, Detroit, and Atlanta are really dragging down the market. But New York, particularly Manhattan and the LA area are not behaving in the same way as the rest of the US market.
In LA properties are still in many cases 20% below their 2007 peak and there is some room for capital appreciation. Education is also a huge driver to many of these purchases. Boston is a natural market with universities such as Harvard and Boston University in the vicinity. There is also a business connection where investors want to purchase properties where they do business.
There has also been a growing interest in commercial properties among the Chinese. It has grown substantially, because the U.S. commercial market has some stress and difficulties, and this creates opportunities. We are getting more inquiries from people who are interested in purchasing commercial property, primarily hotels, shopping centers and office buildings. We see a trend of emergence (of demand) on the commercial side. Miami, Las Vegas, Phoenix, LA, and San Francisco are the cities in which Chinese investors are most interested. Boston, because of the education angle, is showing promise as well There has also been an interest in golf homes especially if those homes overlook the golf course.
You can’t beat Manhattan overall, when you look at rental yields and when you look at how it’s been really restrained market over the last 10 years from a capital appreciation point of view despite everything that’s happened. Manhattan condominiums, for example, appreciated 60% between 2001 and 2010. We think that there’s still a lot of value there and a lot of stability there. If one of our clients says, “I want prime, I want stable, and I want safe,” we feel that Manhattan is very well aligned. Some of our clients have more of a “want to see more rapid appreciation,” and we think that Miami or Phoenix, as long as you buy right, is well positioned from a 3-5 year viewpoint.
The market saw some really substantial devaluation in properties, in some cases 50%+. Some very good developers (have) had some very prime properties that are selling for below construction cost. Residential real estate is our main focus. We think there’s a good opportunity for Chinese buyers who want to buy those now and do a 3-5 year flip.
The other interesting markets are the suburban parts of L.A. which still offer some very good value — places like Arcadia, Pasadena, Orange County, and Newport Beach. These areas are still 20% – and in some cases a little better than 20% — below their 2007 peaks. The market took a pretty substantial hit in 2007, but it rebounded quite quickly. Again, these are places that are well aligned with different clients we work with. The agricultural sector holds a lot of promise for investors.
The price of milk has gone way up proportionally to what price this dairy farm is on the market. According to the Asia-Pacific Wealth Report 2008 by Merrill Lynch and Capgemini, a consultancy, wealthy Chinese investors have traditionally held a high proportion of their assets in real estate. In 2007, a year that saw investors diversify into other assets against the backdrop of a booming stock market, high net-worth individuals in China allocated 21% of their assets to real estate, against a global average of 14%.
Now, the drop in housing prices and a steady renminbi have created an opportunity for wealthy Chinese to invest in real estate abroad, said Rupert Hoogewerf, CEO of the Hurun Report, a web portal that provides information on China’s wealthy. “What used to cost US$1 million now costs US$800,000,” he said. Hoogewerf estimates China is home to more than 50,000 people with a net worth of over US$10 million, and more than 800,000 with a net worth of US$1 million. But Chinese law restricts individuals from taking more than US$50,000 out of the country in one year.
According to Hoogewerf, the restrictions mean buyers are predominantly traders, or those with businesses that export overseas. These people have stockpiles of US dollars and the savvy to navigate real estate overseas. “Investing abroad generally means a combination of increased opportunity and a perceived increase in risk at home”, said Michael Pettis, a professor of international finance at Tsinghua University. Last year, China saw a large influx of hot money and a record trade surplus of US$290 billion.
Although much of this cash is now moving in the opposite direction, the flow is not as strong as that which brought it in. This leaves experts to infer possibilities from other trends. While it’s still too early to tell whether these prospective US homeowners herald a shift in Chinese spending and investing habits, it is worth monitoring the movements of small business owners, said Pettis. “They’re the ones that have the best sense of what’s going on at the ground level,” he said. “It’s good to watch what they are doing.” To investors from China: If you are interested in touring Los Angeles, San Francisco, Phoenix, or New York for these kind of real estate deals, please contact Dennis Kolodin at 602.315.9292 or firstname.lastname@example.org .