The Tip Of The Chinese Iceberg

May 19, 2016

The Asia Society, in collaboration with Rosen Consulting group, released a substantial Special Report yesterday entitled Breaking Ground: Chinese Investment in US Real Estate. Notwithstanding the title, the report provides some compelling reasons why cities like Vancouver, Toronto, LA, Seattle, and NYC have seen only the proverbial “tip of the iceberg” when it comes to Chinese activity in the real estate sector. It’s a notion that should keep those of us in this sector fat and happy for some time to come, if indeed their hypothesis is correct.

Coming in at a weighty 110 pages, it’s a hefty read that will take more than your lunch break to get through. That said, I perused it over my morning coffee and reflexology session today, and discovered some very interesting insights that the VERV team will definitely pay attention to over the coming weeks, months and years.

Chinese capital deployment decisions, it seems, are not much different from capital decision-making in Europe and North America. Whether institutional or private capital allocation, motivations include business goals, macroeconomic conditions and personal concerns.

The motivators for Chinese institutional investors are somewhat unsurprising. They include:

  • Longer-term outlooks that may look beyond cash flow to capital gain.
  • A North American market that is much more liquid than other countries.
  • Expansion of their corporate brand and a heightened level of business sophistication learned in the US and Canada.
  • A constrained set of opportunities in China due to the slowing economy.
  • A diversification of products, real estate vehicles and market entry points.

Similarly, the motivators for Chinese individual investors are not shocking, but are definitely insightful. The report outlines the following:

  • Diversification, capital preservation and yield – our markets are a safe haven from volatility and the unknown.
  • A highly sought-after education system. We all probably have a sense of this, but check out the numbers! In 2010, 127,000 Chinese students were enrolled at US universities. By 2015, that number had risen to 304,000!
  • Pricing – even our prime markets (NYC, LA, YVR, TO) are much more attractive than markets in China or peer global cities.
  • Pollution, water contamination and food safety are other drivers that push newly minted Chinese millionaires West in search of a cleaner, safer existence.

Chinese investment swelled from a trivial $10 billion in 2010 to a colossal $110 billion in 2015 for both residential and commercial real estate. But we ain’t seen nothing yet: that number is expected to explode to $218 billion in the next four to five years. The lion’s share of the growth over the past five years came on the residential side, averaging around $20 billion per year. If we believe this report, that number will shoot up to almost $50 billion per year sometime in the next 8 to 10 years. It’s staggering.

But be aware: the report isn’t all orchids and Maotais. It also considers potential factors that could hinder Chinese spending in North America – including government controls, turbulent economic times, and inflow bottlenecks by the US and Canada that might, at most, temper the growth we’ve talked about.

Over the past eight years, Chinese capital has flowed in mostly from the following sources:

  1. Sovereign wealth funds
  2. Tier-one Chinese developers
  3. Insurance corporations
  4. Very high net worth individuals

In the years to come, we will see more capital from a broader range of sources, including:

  1. Chinese REITS
  2. Tier-two and tier-three Chinese developers/builders
  3. Upperclass

A note from the Asia Society report on that last group: “Wealthy individuals are already extremely active in the US residential real estate market, but the investment to date has only scratched the surface of the potential investment pool from Chinese individuals. Chinese individuals, as opposed to larger corporate investors, have generally accounted for most of the purchases of single family homes, condos, and small commercial properties. Estimates of the number of Chinese millionaires range from 1 to 4 million, trailing only the United States, while Boston Consulting Group estimated that the number of upper-middle-class households in China could reach 100 million by 2020.”

As I said, we ain’t seen nothing yet!

As always, if you need help deciphering your market give me a call – 778.997.2868

-Ryan Laurin

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