Floating Bubble: Are Chinese Investors Spreading Real Estate Inflation Around the World?

It is match made, well, somewhere south of heaven. Real estate remains depressed in most parts of North America.

Meanwhile, the Chinese government has deemphasized real estate development to try to deflate an investment bubble that was growing unsupportable. Recognizing an opportunity when they see one, Chinese investors, flush with cash and a rising currency are snapping up homes, condos, hotels and other tangible assets in Canada, the US and other parts of the world.

One may be tempted to say that this is a felicitous example of the free market at work: money finding opportunity. The problem is that the same forces which created real estate bubbles in China and the US may be revived by this activity. The US government is not as strong as China's and not inclined to interfere with politically connected real estate interests. To those who are inclined to scoff at the risk, it is worth noting that the publication which investigated and printed this article is not American or Canadian, it is Chinese. JL

Zhu Yishi, Sun Huixia and Zhang Tao report in Caixin:

"In late May of this year, more than 400 people lined up to purchase apartments at a site in New Westminster City, a suburb of Vancouver. Within two and half hours of the start of the sale, all 153 units had been sold.

The otherwise unexceptional set of properties stood out on the sole basis that they attracted unprecedented excitement from Chinese investors. Bill Morrison, head of sales for the project, told local media that they had not considered marketing the apartments to Chinese buyers until the project was 50 percent complete, but, "their demand was crazy and Chinese clients accounted for 40 percent of the total transactions."

Many such scenarios have been reported recently by the Canadian media. It seems that where previously Chinese real estate investors had been fixated on speculative home buying only in China, they now seem to have set their sights on foreign real estate markets, fueling speculation.

Bent on Buying

According to a report by consultancy Colliers International, 2,527 homes were sold in the first quarter of 2011 in Vancouver, up 35 percent from a year earlier, with the spike in sales mainly due to a surge of investors from Mainland China. The report noted that Chinese investors accounted for 29 percent of total home sales in the first three months, and stated that number is likely to keep rising.

Additionally, a similar report by the Canadian Real Estate Association in May of this year shows that Vancouver's housing prices grew 10 percent year-on-year in April, led by price hikes for luxury apartments.

Zhang Jun, who immigrated to Canada in 2006, had witnessed a brief downturn in Vancouver's property market following the global financial crisis, but also the ensuing recovery and recent boom since last year, which he attributed in part to increased Chinese interest in Canadian real estate. "Increasing numbers of my friends in China have consulted me over the process, laws and regulations, and tax policies concerning home purchases in Canada," he said.

In addition to Canada, Chinese home buyers are bolstering real estate investment in countries like the U.S., U.K., Australia and Singapore. According to a report released by the U.S. National Association of Realtors in May, overseas buyers bought US$ 1 billion worth of homes in the U.S. in the 12 months to March, Chinese buyers accounted for nine percent of those overseas home purchases, making them the second largest foreign home-buying group, after Canadians.

According to real estate agency Savills, 35 percent of the buyers in London's primary property market came from East Asia and South Asia, of which buyers from Mainland China and Hong Kong were the majority. In the same vein, consultancy CBRE projected that Mainland Chinese buyers will account for 5 to 10 percent of London's residential property sales by volume this year.

Shopper Types

Colliers International North China's managing director Amanda Gao told Caixin that Chinese buyers of overseas property can roughly be divided into three groups.

The first group are those studying overseas. Their well-to-do parents prefer purchasing homes rather than renting homes overseas, and some even purchase large houses, renting out portions to partly fund their children's studies.

A second group are immigrants. A large wave of Chinese people migrating overseas occurred around 2010, with the number of investment immigrants rising quickly. In major migration destinations such as Canada and Australia, Chinese immigrants' demand for high-end property has been robust, fueling booms in local real estate markets.

The third group are those who are simply investing in property. To rein in the overheating domestic property market, the Chinese government has implemented policies such as credit tightening and home purchase restrictions. In comparison, some overseas countries have looser mortgage policies and lower lending rates, attracting profit-driven speculators into local real estate markets.

Anton Eilers, executive director of Residential China at CBRE, told Caixin that overseas property transactions by Chinese purely for investment purpose have been increasing steadily since the start of 2011, already accounting for one third of the total.

Whistling Out

A private business owner in Northeast China said that the prospect for increasing property values in China has become bleak amid government restrictions, making the investment value limited in the coming two years.

He is currently considering offloading his Chinese property holdings and turning to overseas property investment. "In cities like London and Sydney, the property investment outlook compares favorably with the domestic market, both in terms of rental returns and the room for property appreciation," he said.

Beyond the prospect of higher appreciation, DTZ's Ho said that mature overseas property markets serve as a hedge against inflation. "Mature real estate markets overseas are more stable and less risky."

Ho said that, "switching part of domestic investment to overseas property is not only a good means of fighting inflation, but also allows one's personal asset structure to become more stable and balanced."

Moreover, the appreciation of the yuan has also driven Mainland China investors to buy property abroad. Over the past five years, the yuan rose by 22 percent against the U.S. dollar, not only strengthening its purchasing power, but also easing pressure to repay overseas loans.

This increase in the value of the yuan, combined with sharp depreciation and low interest rates for the British pound, has also made property in London and neighboring area look cheap in the eyes of Chinese investors. A property consultant in London said that the weak pound meant property in London has become more attractive than real estate in Beijing, Shanghai and Hong Kong.

Unwavering Interest

The entry of Chinese capital into overseas real estate markets has also been accompanied by "Chinese-style" real estate speculation.

The rapid rise of housing prices in Vancouver has resulted in calls from some locals to curb foreign investment. Royal Bank of Canada economist Robert Hogue has taken extra caution not to label Vancouver's real estate market as a "bubble" though he admitted it remains "high risk."

Scott Brown, vice president of Colliers' Residential Project Marketing Services in Western Canada, told Caixin that housing prices in Vancouver and Toronto are now at high levels, but home rents have yet to rise, with many rental returns already as low as 2 percent. Factoring in loan interest, property taxes and property management fees, returns on investment are next to nothing.

Zhang told Caixin, "Chinese people's anticipation for property appreciation far exceeds expectations for rental income." Even so, the wave of property invesmtment from China looks dead set to grow.