26 October 2016
Philip Feder says outside China, the US is the favorite real estate market of Chinese. Photo: HKEJ
Philip Feder says outside China, the US is the favorite real estate market of Chinese. Photo: HKEJ

This is where rich Chinese like to invest in real estate

Wealthy Chinese have snapped up properties in Hong Kong over the past decade, marking their first foray into the overseas property market.

With many affluent Chinese families sending their children to universities overseas, buying property abroad is a sensible proposition.

US gateway cities with large Chinese populations are their favorite.

“The US market reacted quickly, bottomed out quickly, and there is a huge inflow of capital into the US,” Philip Feder, chairman of global real estate practice of Paul Hastings, said.

“Prices have gone up and there are many new developments. With price appreciation and demand, Chinese investors are critical in providing liquidity to the market,” he said.

China’s rapidly emerging rich class have shown increasing interest in overseas property investment in recent years amid ultra low interest rates.

In the first half, outbound investment in commercial real estate saw 46 percent year-on-year growth to US$6.6 billion, more than a third of total Asian-sourced capital flows during the period, according to CBRE Research.

Chinese investment in US commercial real estate was US$3.676 billion in the first half, more than 1.5 times that of the 2014 total (US$1.962 billion).

“Since Lehman, the US property market has grown dramatically. It reacted much more quickly to the recession than European or Asian countries,” Feder said.

The National Association of Homebuilders’ index of homebuilder confidence climbed to 64 last month, the highest since October 2005, from 61 points in September.

A reading above 50 means US homebuilders are confident about the housing market.

Feder said that outside China, the US is the favorite market of Chinese investors.

They like the fact that the US market is a safe heaven, there is rule of law and property rights are protected.

Investors under the immigrant visa program cite the high standard of US education, the highest in the world, as a big part of the reason they want an American education for their children.

Japanese buyers dominated the US property market in past decade but Chinese and South Korean investors have taken over.

Top five gateway cities

Feder said Chinese investors prefer major gateway cities where there is already a large Chinese population such as New York, Los Angeles, San Francisco, Seattle and Vancouver.

“They want good returns and safety, above all, in markets where they can educate their children and in places where they can retire,” he said.

List compiler Hurun said 60 percent of Chinese high-net worth individuals choose the US as their top property investment destination, 22 percent pick Canada and 7 percent Europe.

Los Angeles, San Francisco and Vancouver are some of their most favored cities.

In fact, among the top 10 destinations, seven are in North America.

In Los Angeles, the old Chinatown has been fading but now “we’re seeing a new Chinatown covering the whole area of Montery Park, spreading west to the Arcadia area”.

“Ten years ago, it was economically depressed. Now the region is much more vibrant, with a large number of Chinese and Korean investors. More than 50 percent of new developments in downtown LA is Asian,” Feder said.

For the first time, Chinese outnumber Canadians and Europeans as the top overseas buyers of homes in the US, according to the National Association of Realtors.

Chinese investment in US residential real estate soared to US$28.6 billion in the year to March.

Chinese buyers spend an average of US$831,800 on the US home purchases.

EB-5 visa program

There are three types of Chinese investors in the US property market — individual investors, Chinese developers and large institutional investors including sovereign wealth funds and insurance companies, according to David Blumenfeld, partner in charge of the Hong Kong real estate practice of Paul Hastings.

They each have different investment motivations.

“EB5 investors want economic return and a green card. Chinese developers aspire to become global companies. To do that, they want to enter the world’s second largest development market after China,” Blumenfeld said.

“Chinese investors typically enter the US market by setting up joint ventures with US developers but some have come on their own.

“Chinese insurance companies are very sophisticated institutional investors. They are putting their money in places where they think it’s safe and they can get the best returns,” he said.

“One of the major sources of overseas real estate investment in the US is EB5, which can create jobs that qualify for EB5 financing.

Many of the EB5 investments are in hotel development and other large real estate development projects, which are uniquely suited to satisfy the requirement that EB5 investments create jobs,” he said.

EB5 is an investor immigrant program foreign investors. 

Applicants and their spouses and children below 21 are offered green cards if they make an investment of US$500,000 to US$1 million and create at least 10 US jobs.

The program caps the number of visas issued annually at 10,000. Most of applicants are from China.

This is the first in a two-part series on Chinese overseas property investments. This article appeared in the Hong Kong Private Banking Journal on Nov. 18.

Translation by Julie Zhu

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