As China’s affluent continue to seek out ways to get their money out of China, U.S. real estate is seen as a stable investment that’s set to become even more attractive to Chinese buyers over the next five years.
According to a new study by Asia Society and Rosen Consulting Group called “Breaking Ground: Chinese Investment in U.S. Real Estate,” Chinese real estate investment in the United States has skyrocketed from a “negligible” amount in 2010 to reach to reach $110 billion by 2015. This number includes purchases of both residential and commercial real estate, and is predicted to shoot up to $218 billion cumulatively between 2016 and 2020. In addition, the aggregate value of both U.S. real estate holdings and investments such as mortgage-backed securities was estimated to be at least $350 billion by the end of 2015.
Residential property is overwhelmingly the most popular category with Chinese real estate buyers. Chinese nationals are the largest foreign group of homebuyers in the United States, spending at least $93 billion on residential property between 2010 and 2015. With Chinese spending on residential real estate growing 20 percent annually during this time period, buyers have been especially focused on expensive homes in prime neighborhoods in New York and California. This means that Chinese buyers paid an average of $831,800 per home in the United States in 2015, a number far above the average of $499,600 for all foreign buyers.
While commercial real estate takes up much less Chinese spending at $17.1 billion spent between 2010 and 2015, it’s growing at a staggering rate of 70 percent and China now ties with Norway as the third-highest source of foreign commercial real estate investment in the United States. The most recent high-profile purchase includes Anbang Insurance’s 2015 purchase of the historic Waldorf Astoria hotel in Manhattan for $1.95 billion, and the overall number would have been much higher had Anbang been successful in its attempt to purchase Starwood Hotels for $14 billion this year.
China’s slowing economy, turbulent stock market, and real estate bubble have all played a part to drive Chinese investment overseas, according to the report. As “ghost cities” have become a significant issue after a building glut in China, “the Chinese tendency to utilize real estate as a place to park capital helped fuel the speculative boom,” says the report. After the stock market’s dramatic fall in August 2015 and the country’s currency fluctuations, U.S. real estate has been increasingly favored for its “benefits of stability, liquidity, and capital appreciation, not to mention the familiarity of real estate as an asset class for Chinese investors.”
American schools are another major reason that Chinese nationals are opting to scoop up homes in the United States as 304,000 Chinese students enrolled in U.S. universities in 2015. “Investing in a residential property near the university that their child attends is attractive to many Chinese families,” says the report, which notes that buying property and establishing residency can be especially helpful in getting children into state schools.
The report downplays potential factors that could hinder Chinese spending on U.S. real estate in the future, such as tightened Chinese government controls meant to stem the tide of capital outflows. “In China, capital controls on outward investment represent a significant regulatory barrier to increased investment for firms and individuals, but a series of enacted and potential reforms for both groups—including new reporting thresholds, increased global real estate allocations for insurers, free-trade zones, and QDII2, among others—provide greater opportunities for investment in U.S. real estate,” it says.
In addition, the picture the report paints for what this will do for the U.S. economy is decidedly rosy, with the argument that wealthy Chinese investors coming in and pursuing development with the EB-5 visa program (or “millionaire visa”) have “created at least 70,000 jobs.” It also claims that homeowners trying to sell their homes and homebuilding companies can benefit from an increase in Chinese buyers.
The report glosses over concerns that Chinese buyers may raise prices to levels unaffordable for locals and cause a housing bubble—which are currently becoming major issues in other places popular with Chinese homebuyers, such as Canada and Australia.
While it admits that Chinese investors “are sometimes willing to pay a higher price for assets than are their U.S. counterparts with a shorter investment horizon or different investment strategy,” it states that “price effects are extremely localized” and “Chinese purchases of homes have little effect, in aggregate, on pricing trends.” With the aforementioned focus on speculative buying among Chinese investors, it is yet to be seen how "little" of an effect hundreds of billions of dollars can have in the long run.