June 2015
Wealthy Chinese property investors are increasingly looking outside China in order to gain the most from their money. What began as a fairly small scale approach to overseas residential ownership has grown to become a highly significant proportion of both US and Australian property markets. Thirty five million of China’s wealthiest people have stated that they would like to emigrate overseas in the near future and if and when they do, they are likely to bring with them substantial investment into local economies: in 2014, Chinese investors spent US$22 billion on homes in the USA (Ambrose, 2015).
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What type of property is attracting investment and why?
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What positive impacts may this have?
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What negative impacts may this have?
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References
Most Chinese investors look towards the USA for their overseas property and to California and New York in particular. These regions have long attracted second home ownership amongst the international elite, with Russian investors dominating the foreign investment markets until relatively recently. Chinese investors themselves have started to look beyond the traditional investment grounds of Singapore and Hong Kong as alternative lifestyle choices and ‘western’ future opportunities (such as entrance to US schools) start to enter their decision-making processes.
(Data source: Ambrose, 2015. Picture source: Nick Bastian)
These new investors are notably wealthy compared to their predecessors too. Of all Californian homes worth more than US$20 million, seventy five percent have been bought by Chinese investors (CAR, 2014) and two thirds of these will be bought outright with cash (Favela, 2015). However this is not to suggest that these elite are frivolous with their money: one of the key reasons investors look to the USA is because homes there offer excellent value for money – sometimes this can be difficult to achieve in China due to rising taxes on Chinese real estate. Chinese investors are also looking for cleaner living and more liberal lifestyles – something many see as a sharp departure from the smog and strict composition of cities such as Shanghai and Beijing.
The types of homes that Chinese investors are buying are not always available in mainland China, and especially not in the main cities. Sixty seven percent of Chinese investors in California are buying large, detached family homes with pools, gardens and basement garages (CAR, 2014) as well as properties within gated communities which are very popular too. The wealth of investors is displayed by their choice of style they make for their homes: many are lavish and sit amongst other international elite residents and the value of owning within a particular post code (where you will subsequently have access to potentially influential and elite social circles) is expressed acutely. New builds within these areas often have an oriental feel to them, with hybrid Chinese-American architectural styles, feng shui alignment with mountains and the sun, fountains and Chinese sculptures in the gardens, the use of the colour red to bring good luck and practical elements like wok-friendly stoves and tai chi rooms.
California and Melbourne offer a very different set of lifestyle choices to Shanghai, pictured here. (Source: Eustaquio Santimano)
Young Chinese are increasingly going to the USA to study and may live in flats and apartments bought for them by their parents for the duration of their time at college and university. Parents can use their children’s student visa as way of transferring money into the USA and by allowing their children to appear on the deeds, a further chance to buy additional properties too. Some parents seek permanent residence in these countries in order to be close to their children while they study, knowing that they are often surrounded in the neighbourhood by a strong and well-established Chinese-American community already. Just under a third of Chinese people looking to move to California quoted “to be closer to friends and family” as their main reason for investing in property there (CAR, 2014).
Host countries themselves have made it easier for overseas investors to buy residential property. Many countries, including the USA and Australia are offering longer students and investor visas in order to attract such wealthy migrants and give them an opportunity to establish themselves in the country. Under recent rules an AU$5 million investment in any industry in Australia allows investors a right to permanent residence in the country (FIRB, 2015). Slowdowns in both the US and Australian domestic property markets has left space for big investors and both countries see the Chinese growth in this sector as crucial to keeping this part of the economy buoyant (Favela, 2015).
The growth in the Chinese overseas property market has brought life to an industry which in many countries was in danger of stagnating between 2010 and 2015. Chinese money now accounts for an equivalent of fifteen percent of national housing stock in Australia and exponential growth is expected to continue until 2020; accounting for US$60 billion worth of additional demand over the next five years (Tevfik et al, 2015). In Australia, the injection of Chinese cash into the property market has created a property boom in the suburbs of Sydney, Melbourne and Adelaide in particular, though this has centred on the top end of the property spectrum with most new construction jobs being put forward for multi bedroomed mansions.
Hundreds of new jobs and huge tax revenues have been created in an industry that Australia itself at both state and private level can otherwise not finance. China is now Australia’s biggest source of foreign investment with AU$27.7 billion entering the country in 2013-2014, AU$3 billion more than the previous year (FIRB, 2015). Real estate investment was the biggest sector within this; accounting for nearly forty five percent of the income (Anderson, 2015).
Despite the large sums of money Chinese investors are bringing into the USA and Australia, not everyone is pleased to see the turn towards Asia for the maintenance of the real estate industry. Chinese investors are rarely buying just one home in one location – it is not uncommon for owners to have a portfolio of eight or more properties. This often results in homes being left empty and large areas of city suburbs becoming ghost towns, with knock-on effects for local businesses and whole communities. Even where the homes are occupied, this new investment does not always act as a catalyst for domestic market growth – there can be a fear that at the first sign of a Chinese market these homes will be sold, their owners move back to China and the suburbs will again struggle to sustain themselves economically.
Chinese investment has also created a new form of gentrification in some cities whereby the focus on large properties for elite clients has created spaces where there is limited affordable housing for local people. In both suburban Los Angeles and Melbourne, local people, who work in the centre of these cities, are being forced to move further away from their places of work and spend a far greater percentage of their salary on commuting: in some areas of these cities house prices have risen by forty percent in the last three years (Brown, 2015).
Chinese supermarkets are becoming increasingly common in Los Angeles suburbs. (Source: Nate Gray)
Some local people also feel they are being culturally marginalised by the rapid growth of Chinese overseas property portfolios. In Arcadia, on the outskirts of Los Angeles, such has been the growth of Chinese investment that Chinese supermarkets overwhelmingly outnumber American ones and Chinese signage and language is seen and heard everywhere (Ambrose, 2015). While outwardly racist incidences are extremely rare it is not uncommon to find people whom distrust their Chinese neighbours as a result of the manner in which these investments may be made.
Under the rule of Chinese President Xi Jinping, only US$50,000 per person is allowed to leave Chinese shores for investment purposes each year. Given the prices of the properties wealthy Chinese are buying, it is clear that this threshold is being significantly exceeded. The use of foreign bank accounts and ‘special financial services’ reserved for the wealthiest clients allowed an estimated US$1 trillion to illegally leave China between 2002 and 2014 (Ambrose, 2014). Under Australian laws, Chinese home buyers can only buy new properties. This means older homes in which Chinese investors are interested are sometimes knocked down and rebuilt with the exact same specifications prior to them being bought, all at a premium price.
Ambrose, D. (2015) China’s Home Invasion, Al Jazeera News
Anderson, F. (2015) China is Australia’s biggest foreign investor after $12 billion property splurge, Australia Financial Review
Brown, E. (2015) Chinese real-estate firm looks west – to California, Wall Street Journal
California Association of Realtors (2014) International Homebuyers’ Survey
Favela, M. (2015) California enjoying foreign buyer activity from China, Canada and Mexico, World Property Journal
FIRB (2015) Australian Government Foreign Investment Review Board Annual Report 2013-2014
Tevfik, H. Boey, D. and Janu, G. (2015) Australian Investment Strategy, Credit Suisse
Gentrification
The restoration and upgrading of deteriorated urban property by middle-class or affluent people, often resulting in displacement of those of a lower income level.
Ghettoisation
The process by which people of a similar background (such as ethnically, by age nationally, or socio-economically) start to residentially cluster in one place.
International Elite
A group of people who due to their high level of wealth and status can live anywhere in the world without negatively affecting their lifestyle and work practices.
Suburb
An area of a city at some distance from the centre which operates as a separate, often residential, area.
Students can compare the GDP per capita of China with Australia, the number of millionaires in each country, as well as the house prices (per m2) for property in Shanghai and Melbourne. Comparing the costs of moving, and what different groups of people can afford, students can gain an idea of the scale of possibility for Chinese people who wish to invest in Australia.
Students can take on the role of different players within the Chinese investment story (buyer, land owner, tax officer, Chinese president, real estate agent, existing local resident etc.) and suggest a three point plan for why Chinese investment should or should not be allowed to happen in a particular area. This can develop into a debate or a weighted score chart could be used.
Students can study an example of ghettoisation in their local area and research causes of it happening (comparing to this case study if necessary) and possible positive and negative impacts of this process.
Suburbs