Chinese Investments in U.S. Real Estate

U.S. properties are a bargin compared to those in China

Earlier this week, I read an article in the Wall Street Journal about a sharp increase in U.S. real estate investment from the Chinese and how American sellers are marketing their products. This is especially true in the high-end residential segment of the market.

In the past two months, wealthy Chinese buyers made high profile purchases on both coasts. My friends in China often ask me about a $34.5 million Beverly Hills mansion that was recently sold to a mainland Chinese couple. In New York City, a $50 million apartment in the new One-57 condominium tower was also sold to mainland Chinese buyers. Less well-heeled Chinese buyers are buying properties in other parts of the U.S. as well, including Florida and Nevada.

Historically, because real estate is tangible and constrained by land supply, Chinese have favored property investments over financial assets. That is one reason property prices have vastly outperformed stocks in every region dominated by ethnic Chinese — mainland China, Taiwan, Hong Kong and Singapore.

Also, Chinese traditionally prefer to live in urban settings, so all of these regions are densely populated. After the Global Financial Crisis, central banks in the region kept interest rates low to stimulate the economy. The combination of tight supply, high density, and low rates drove property prices sharply higher in the past five years throughout the region while property prices dropped in most parts of the U.S.

As a result, U.S. properties are relative bargains compared to prices in Hong Kong, Singapore, Taipei or even mainland Chinese cities such as Beijing and Shanghai. For the price of a 500-square-foot one-bedroom apartment in Hong Kong, around $2 to $3 million US, one can buy a 5,000 square foot house on a half-acre lot in most parts of the U.S.

In Asia, prices got so high that local governments in all of these regions announced policies to curb property price increase to prevent public backlash. Despite predictions that the bubble would burst two years ago, property prices remained high in these regions because, unlike in the U.S., carrying cost for real estate in China and the surrounding region is very low. There is no property tax and maintenance cost is next to nothing.

The main impact of government interference so far has been a decline in transaction volume. Many residential brokerage firms went out of business in the past two years while prices remain high. That is why we exited our positions in Chinese residential brokerage firm E-House—transaction volume declined, but prices did not go down. The relative few Chinese investors with the capability to get money out of China are investing in U.S. properties, both for good value as well as bragging rights to their friends and relatives.

Large Chinese investors are also helping U.S. real estate developers with financing. China Development Bank is in talks to loan $1.7 billion to Lennar (NYSE:LEN), the third largest U.S. home builder, to develop properties in San Francisco. I think buying U.S. real estate at this time is a shrewd move for Chinese investors. Unlike the Japanese in the late 80’s, who bought after a big run up at the top of a cycle, today’s Chinese investors are buying after a protracted downturn.

Despite a slowdown in the growth rate of the Chinese economy, China is still growing rapidly. At a time when wealth destruction is occurring in Europe, and to a lesser extent in the U.S., new wealth is still being created in China. There are millions of dollar millionaires in China today, and investors everywhere should find ways to benefit from their spending, whether in real estate or in stocks.

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