Global Perspectives February 2016: Update on China

8/18/2019 Global Perspectives February 2016: Update on China

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Certied International Property Specialist

TO LOCAL, INTERNATIONAL & LIFESTYLE REAL ESTATE

02.2016

China’s importance on the global landscape in indisputable. Itspurchasing power, amplied by several years of strong economicgrowth and the sheer size of its population is felt across the globe.

Chinese investors—including individuals, corporations, andinstitutions—have all displayed a strong appetite for real propertybeyond their borders. Will the trend continue in 2016?Probably, yes. Even though the country’s roaring economic engine

has cooled, there are many reasons to expect overseas propertypurchases to remain strong.

In fact, some segments of the market and destinations maywitness even more robust interest. That’s because, as a rule,Chinese buyers do their homework. If the numbers don’t add upbecause prices are too high, they’ll explore other locations. At thesame time, Chinese buyers are also well represented in the globalluxury market, where sky-high prices are seldom deal-breakers.

As a nation, China has been taking signicant steps aimed at morefully joining the world’s economic leaders. Even if you aren’t directly

affected by these developments, it’s important to be informed aboutthem, especially if you’re working with Chinese clients. This issuewill get you up to speed.

Inside, you’ll also nd an update on the latest overseas buying trendsamong Chinese investors—tips that can be extremely benecial inmarketing to and working with clients.

What Global AgentsNeed to Know About

CHINA TODAY

> UPDATE ON CHINA


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PROPERTY PORTALS

2 ~ Global Perspectives 02 .20 16

PROPERTY OR LSUPDATE ON CHINA

Unleashing the YuanCautiously, but deliberately, Beijing has been takingsignicant steps aimed at deregulating China’s capitalmarkets and turning the renminbi into a global currency.Among the most important liberalization efforts:

Qualied Domestic Individual Investor program:Commonly called QDII2 (a second iteration of anearlier program limited to institutions), the new ruleswill allow Chinese individuals direct access to overseasinvestments at much higher levels than the currentoffi cial cap of US$50,000.

Once launched, the pilot program will includesix Chinese cities (Shanghai, Tianjin, Chongqing,Wuhan, Shenzhen and Wenzhou) and will be open toindividuals with nancial assets of at least 1 million yuan(US$160,000), potentially unleashing billions of dollarsin Chinese savings on global stock and bond markets.

Eligible investment classes are expected to include:

• Equity shares, bonds, funds, insurance products,foreign exchange and derivative products

• Greeneld and joint venture projects

• Real estate

Once satised the program is not generating excessivecapital ight or volatility, QDII2 could be expandedmore broadly.

Foreign-owned investment management rms: Traditionally, offshore fund managers had to partnerwith local managers via joint venture arrangementswith 49 percent offshore ownership caps. Offshore fundmanagers are now being given direct access to ChineseHNW investors and are allowed 100 percent foreignownership of private managed funds operating in China.

No interest rate ceiling on bank deposits: In October,2015, the People’s Bank of China (China’s central bank),took a major step towards nancial reform by liftingits long-held interest rate restrictions. This allowsbanks’ rates to reect market conditions and competemore directly with the shadow banking sector’s wealthmanagement products.

Devaluation: Last August, the People’s Bank ofChina rocked the global markets with back-to-backdevaluations of the renminbi. Its move triggered a majorselloff in the stock market and left Chinese investorsnervous about further erosion in their overseas buyingpower. Many have opted to move money offshore soonerrather than later, putting additional downward pressureon the renminbi.

IMF Weighs InLate in November, China achieved its long-term goalof inclusion in the International Monetary Fund’s(IMF) offi cial basket of currencies, frequently used as

Just over a year ago, China overtook the U.S. as the world’s largest economy. Since then, China’s importance on theglobal economic stage has only expanded. Some of the most signicant developments, outlined here, could impactChina’s enthusiasm for global real estate.

C H I N AKEY ECONOMIC & FINANCIAL

DEVELOPMENTS IN


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02 .201 6 Global Perspectives ~ 3

Distribution of IMF’s Currency Basket(special drawing rights)

What’s in a Name?

China’s currency, which goes by many names, is a frequentpoint of confusion. If you’re working with Chinese clients,you’ll want to understand the different terms:

Yuan - The Chinese word for “dollar,” historically a silvercoin used for centuries of global trade. It is also calledChinese Yuan and abbreviated CNY.

Renminbi (RMB) - Translated as “the people’s currency,”this is the offi cial name of China’s currency, introduced bythe Communist Party in 1949. Use this term when referringto the currency markets, but not as a unit of money. (It isn’tcorrect, for example, to say something costs 10 renminbi.)

Kuai - Chinese nationals are most likely to use this term(instead of yuan or renminbi) which means “piece” (similarto a coin). Kuai is a colloquial word for money, much like

“buck” in the U.S.

Mao, Jiao and Fen - These are also colloquial terms,referring to smaller units. Mao and jiao are usedinterchangeably, although mao is more common (and hasno connection to Mao Zedong). One yuan equals 10 mao(or jiao), and one mao (or jiao) equals 10 fen.

a benchmark in many central banks’ reserve measurements. Thedecision, effective late-September 2016, is largely symbolic, butdoes give the renminbi new global status, placing it in the companyof the dollar, the euro, the pound and the yen. (See chart.)

In all likelihood, Beijing will need to take additional stepsto deepen its nancial system and make its economy moretransparent before central banks fully embrace the renminbi as a

reserve currency. In spite of efforts to loosen its grip, China stillmaintains heavy regulatory control over its nancial system andfaces strong internal opposition to further reforms, which couldgrow more acute if China’s economy continues to soften.

Emergence of a New Global BankFor the past two years, China has championed the creation of anew multinational, multibillion-dollar bank to rival organizationslike the World Bank, the International Monetary Fund (IMF) andthe Asian Development Bank. Named the Asian InfrastructureInvestment Bank, its stated purpose is to nance roads, rails,power grids and similar projects across Asia to spur economicdevelopment, especially in poor areas, and to promote the region’sposition as a world wealth center.

In spite of concerns that China’s true objective is to promoteits own global status and economic agenda—while forgoingkey Western priorities like environmental and human rightsprotections—57 nations have signed up, as of this writing,rationalizing that China can’t be ignored and it’s better to workwithin the framework of the new bank.

{

2010

2016

42%

42%

37%

31% 11% 8%

9% 11%

8%

U.S. dollar Euro Chineserenminbi

Japaneseyen

Britishpound

(continued on page 4.)

*International Monetary Fund


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UPDATE ON CHINA

The U.S. and Japan remain on the sidelines, while many key allies, including Britain, Germany,Australia and South Korea have joined. At $100 billion, the bank’s total capital commitmentis already double the amount originally envisioned. Initial projects are expected to beselected shortly.

Latest Development PlanEvery ve years, China’s leaders issue a new development plan—asignicant document that establishes key goals for the country’s futuresocial development and economic growth. The 13th Five-Year Plan, the rstsuch plan under President Xi Jinping’s leadership, will run from 2016 to2020. While the latest plan won’t be nalized until March, key elementsare expected to include:

Economic growth —China has struggled to meet its previous GDPtargets and appears to be aiming for a more modest 6.5 percentannual growth rate.

Green development —A stronger audit system will aim to improveenvironmental protections. Future economic growth will be achieved intandem with a stabilization of energy consumption and greenhousegas emissions.

Innovation —Technological upgrades in both the industrial and servicesindustries will increase productivity, protability, and promote higherwages from skill-intensive jobs.

Financial reforms —Further easing of restrictions and promotingmarket transparency are top priorities, reected by steps already takenin this direction.

Other goals encompass health care, education, societal gains, agriculture, the military, and more.Many critics argue, however, that China’s ultimate challenge involves pitting its GDP goals againstother objectives. Still, anyone interested in understanding China’s future should read the nal 13thFive-Year Plan when it’s released, as it provides as much insight as one can get into the prioritiesof China’s leadership.

What Happens Next?Analysts view China’s long-term economic picture as murky, with bearish opinions generallyoutnumbering the bulls. Doubts are further fueled by broad speculation that China is overstatingits economic growth (offi cially 6.9 percent for Q3 2015) by at least two percentage points. China’seconomy may be facing headwinds, but nancial reforms are likely to proceed, generally viewedas necessary for its long-term growth. In the near-term, analysts will continue to closely monitorthe Chinese economy to see if sub-par economic growth translates into additional currencydevaluations and nancial market volatility at home and abroad.

C H I N AKey Economic & Financial Developments in

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02 .20 16 Global Perspectives ~ 52. 1 Global Perspective

Most preferreddestination topurchase offshorereal estate amongChinese HNWI’s(% of sample)

Source: Hunan Report and Visa Consulting, 2014, published in“The Expanding Role of Chinese Capital in Global Real Estate Markets,’by CBRE Research

REAL ESTATE FORECAST:

Where Is China Buying?China’s economy may be slowing, but it’stoo soon to predict an end to the country’sstrong appetite for overseas real estate.Even though declines in the stock marketand the value of the renminbi have shakenup buyers, some have paused to reevaluatetheir situation, while others view thecurrent economic conditions as a strongermotivation to move money outside China.

“For China’s ultra wealthy, a one- to two-percent devaluation of the renminbi isn’tgoing to have any signicant impact,” saysSimon Henry, co-founder and co-CEO ofJuwai.com. “They’ll still invest in overseasproperty, although the destinations maychange.”

Even though Chinese individuals face a$50,000/year cap on overseas investments,many get around the rule by sending moneythrough family and friends, channelingfunds through export-oriented businesses,or simply accruing large amounts throughyears of planning. Recently, the governmenthas threatened to enforce its rules morestrictly, a move widely viewed as having theopposite effect, intensifying capital ight outof China.

MotivationsLike all international buyers, purchasingmotivations can vary dramatically.However, Chinese buyers’ objectives ofteninclude:

Investment: Looking for good returns inincome, capital gains and/or portfoliodiversication.

Security: Place money beyond the Chinesegovernment’s reach and into countrieswith strong property rights.

Family: Provide quality education fortheir children; may also prioritize safecommunities, clean environment.

Residency: Some buyers may be drawn tospecial visa programs, like the U.S. EB-5 visa.

Leading Destinations United States

After a years-long buying binge,the U.S. remains a favorite destination. TheChinese currently hold the number-oneposition among international buyers ofU.S. homes and rank among the top veinternational buyers in 46 of 50 U.S. states.Total U.S. property purchases by Chinese

buyers are estimated at $28.6b for the yearending March, 2015.

Prices have been driven up in manyof the most popular coastal markets,prompting buyers to take a closer lookat other options, including central states.For example, the Stonewater communityin a Detroit suburb is one of severaldestinations promoted in Windham Realty’sShanghai offi ce.

Wherever they shop in the U.S., Chinesebuyers are more likely (than otherinternational buyers) to be interestedin luxury properties. On average, theyspent $831,800 for their U.S. homeduring the one-year period ending lastMarch, compared to buyers from the U.K.($455,600), India ($460,200), Canada($380,300) and Mexico ($274,800).

Australia Chinese demand for Australianproperties remains strong, although buyersare less focused upon Sydney. Accordingto Juwai.com, interest in Victoria andMelbourne grew by 74 and 92 percent,respectively. Juwai.com attributes the surgein large part to a substantial growth in new

(continued on page 6.)

13.6%Vancouver

U.S. & Canada

8.5 %Seattle

16.5 %San Francisco

18%Los Angeles

7.7 %Toronto

5.5 %Boston

9.9 %New York

Australia

1.8%Melbourne

2.2 %Sydney

New Zealand

1.8%

UK

1.8%


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UPDATE ON CHINA

residential developments. According to CreditSuisse, sales of Australian homes to Chinesebuyers are expected to total $60 billion between2015 and 2020, double the amount spent in theprior six years.

Canada China’s wealthiest buyers of Canadianproperties appear to be shifting their attentionaway from Vancouver and towards Toronto.In October, 2015, the average search price onJuwai.com for Toronto properties was nearly$2m, compared to $1.27m in Vancouver. A yearearlier, however, the average search price for

Toronto was $1.58m and $1.84m in Vancouver.

Luxury shoppers are still actively interested inboth cities, but the same can be said of Chinesebuyers at lower price points. Many families, forexample, remain interested in $300,000 condounits intended for a son or daughter’s future useas a student at the University of Toronto. Plentyof new construction and lower-than-Vancouverprices are big draws, not to mention largeChinese immigrant communities in both cities.

REAL ESTATE FORECAST:

Where Is China Buying? (continued from page 5.) United Kingdom While President Xi Jinping’s visitto London in October 2015 spurred positiverelations between the two countries, propertyprices have reached a point where Chineseinvestors are beginning to question furtherbuying, at least in the heart of London.

The U.K. is also highly regarded among theChinese for educational opportunities, rankedsecond only to the United States. According toBritain’s Higher Education Statistics Agency,87,895 Chinese students studied in Britain in2013-2014, including 58,810 newcomers.

Japan Closer to home, Japan’s strong andsafe economy, the weakness of the yen relativeto the renminbi, and the upcoming 2020 TokyoOlympics are all welcoming signs of steadyinvestment returns for Chinese property buyers.The country is also a top vacation destinationfor Chinese visitors.

In China, college enrollment issoaring, but space is limited inthe top schools, spurring manyfamilies’ search for overseasproperty. There are over 300,000Chinese students in the U.S. alone,representing more than 31 percentof all international students in thecountry. While the top universities

on both coasts are still highlydesired, substantial interest isalso apparent in the heart of thecountry, including giant institutionslike the University of Illinois, OhioState University and MichiganState University.

Does the study abroad trendimpact housing markets? Youbet. Quoted in The New YorkTimes , Juwai.com’s Simon Henryclaims that “if you look at thestudent populations of any majoror nonmajor university, you’ll geta really good indication of whatproperty prices are going to do.”

The growth trend is also extendingto younger students. About 23,500Chinese citizens were enrolled inAmerican high schools in 2013,the most recent year for whichgures were available. Increasingly,Chinese families think it’simportant to expose their children

to Western education at earlierages and many private institutions,eager for capital infusions, activelymarket to Chinese students.

The United Kingdom is anotherfavorite destination for Chinesefamilies seeking top educationalopportunities for their children,

also beginning several years beforetheir university studies. In fact,Chinese interest has extendedinto ownership of private schools.Chase Grammar School inStaffordshire is one such example,purchased in October 2015 by aChinese-owned company.

NAR’s Field Guideto China Real Estate

For more excellent resources,be sure to check outrealtor.org/eld-guides/eld-guide-to-china-real-estate ,which includes:

• Chinese real estate websites• Articles about real estate

in China• Chinese buyers in the U.S.• Key real estate

industry contacts• Websites, ebooks and

other resources

REPORTCARD:

Chinese

OutboundStudents

http://www.realtor.org/field-guides/field-guide-to-china-real-estatehttp://www.realtor.org/field-guides/field-guide-to-china-real-estatehttp://www.realtor.org/field-guides/field-guide-to-china-real-estatehttp://www.realtor.org/field-guides/field-guide-to-china-real-estate


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02 .20 16 Global Perspectives ~ 7

Other CountriesBased on Juwai.com’s data, severalMediterranean countries can expect growinginterest among Chinese buyers, including Spain,Portugal, Italy, Cypress and Greece.

Commercial PropertiesChinese demand for offshore commercial

property is already strong, but expected to heatup even more, especially given more relaxedinvestment rules on Chinese corporations andinstitutional investors. By the end of 2014,for example, Chinese insurers only had 1.44percent of their assets overseas, but are nowallowed to invest up to 15 percent.

To be sure, Chinese companies have beensnatching up or developing trophy propertiesacross the globe. (See sidebar.) However,commercial property buyers aren’t limitedto mega-deals by big Chinese companies.Increasingly, Chinese buyers are investing insmall offi ce buildings, chain hotels, strip mallsand other nondescript properties in or nearmajor U.S. cities. While yields are certainlyimportant, buyers are also motivated bydiversication and parking capital outsideChina’s borders.

Chinese Outbound Commercial Real EstateInvestment by Destination Region

Source: CBRE Research, 02 2015, RCA

10

8

6

4

2

0

2009 2010 2011 2012 2013 2014

US $ Billion

Asia Europe Americas Pacic MENA*

*Mena = Middle East and North Africa

AUSTRALIA

China Investment Corporation, a state-owned sovereign wealth

fund, bought nine offi ce towers for $2.45b, Australia’s largest-everreal estate deal.

UNITED STATES

China’s Anbang Insurance Group Co. offered $1.95b for New York’sWaldorf Astoria hotel.

Oceanwide Holdings, a Shenzhen-listed real estate company, plansto build twin towers in San Francisco, including the city’s second-tallest building, on a site acquired for $296m.

UNITED KINGDOM

Chinese developer Dalian Wanda Group plans to build Nine Elms,twin luxury towers on London’s Thames River, including the tallestresidential building in western Europe. Flats will start at £1.3m.

FRANCE

The 192-room Marriott Champs-Elysées in Paris was sold to HongKong investment company Kai Yuan Holdings for €344.5m.

5 Noteworthy Commercial Purchases

1

2

3

4

5

Study AbroadNumber of ChineseStudents Hosted

United States ................ ................... ..... 303,789United Kingdom .................. ................... . 92,915Australia .................................................. 91,089Canada ................. .................. .................. . 87,329Japan .................. .................. .................. .....77,792Germany ................. .................. ................. 30,511New Zealand.............................................15,526Netherlands ...............................................6,642Ireland .................. .................. .................. ..... 2,71

Norway .........................................................1,042Source: Institute of International Education; Project Atlas


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UPDATE ON CHINA

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Global Perspectives February 2016: Update on China

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