American commercial and residential real estate has been an increasingly popular investment vehicle for foreign investors. While only recently Canada was the source of most foreign investment, in the last couple of years China has overtaken our northern neighbor to become the single largest foreign real estate investor.
In 2016, Chinese real estate investments totaled $33 billion. The United States was by far the most popular target for China, with Hong Kong running in second with a relatively small $14 billion. Between 2010 and 2015, China invested $350 billion in American real estate, with $93 billion of that going into single and multi-family residences.
Why is China in particular investing so heavily in foreign real estate?
As with investors anywhere, Chinese investors are driven to diversify their portfolios. Simply investing solely in their own country’s markets could prove disastrous, especially given the slowly eroding value of the Chinese renminbi versus the dollar.
Chinese nationals looking for overseas opportunities have found limited options. Volatility in Europe in the wake of Brexit and increased nationalism has made European investment a somewhat riskier proposition than it once was. Meanwhile, the United States is expected to experience further growth in its economy, and interest rates are incredibly low.
Despite the occasional political push against foreign investments, there’s a very practical motive for Chinese investors to purchase American homes—these homes provide a potential exit strategy for loved ones and friends in a country known for its unpredictable political and economic policies.
Regardless of the motivation for individual investors, and in spite of the government’s recent efforts to prevent money from leaving China, it’s likely that China will continue to be a heavy hitter in the U.S. real estate market for years to come. In fact, a study conducted by the Rosen Consulting Group and the Asia Society estimates that Chinese investment in U.S. real estate could top $50 billion by 2025.
Foreign investment isn’t just going into commercial real estate, or even luxury homes.
The idea of foreign real estate investment likely brings to mind wealthy financiers buying up luxury penthouses, and while there may be some truth to that, investor interest is increasingly focused on middle-class single and multi-family homes.
Between April 2015 and March 2016, foreign investors purchased 214,885 homes in the U.S., with a total value of $102.6 billion. That averages out to $477,465 per property. While this sounds pricey for many regions of the United States, 42% of the homes were purchased in Florida and California, both of which are renowned for their extremely high home prices.
Last year, the Washington Post reported that Chinese buyers have been increasingly targeting middle class markets. In the article, a property broker in New York estimated that the number of Chinese buyers picking off properties in Brooklyn and Queens has doubled in the last five years.
As the U.S. market becomes increasingly impacted and once popular alternatives such as Hong Kong and Ontario pass taxes targeting foreign homebuyers, Chinese interest in all levels of real estate will likely only increase.
But, it’s getting harder to move cash from China to the United States.
As noted earlier, China is trying to crack down on citizens sending money overseas. As a consequence, many Chinese buyers are now struggling to successfully transfer the capital needed to buy American homes. While many have already safely harbored large amounts of funds in overseas accounts, many are faced with an uphill battle to get money into the United States.
Such investors are often able to assemble cash from other sources, but it can be difficult to come up with all of the funds needed. However, banks won’t touch foreign-based home purchases. This is where lenders like Socotra Capital can help. We have loan documents specially tailored for the purpose of providing large-scale homebuyers with the equity-based loans they need to purchase attractive properties in California’s bustling real estate market.
We would like to advise that lending funds versus direct ownership of American real estate has its advantages, as managing a passive investment is much simpler and requires less effort. Additionally, market volatility creates uncertainty, which is why we prefer lending on real estate with healthy equity protection, versus direct ownership of the actual asset.
If you are a foreign investor in China or elsewhere looking to take advantage of California’s climbing property values, contact us today to learn more about your investment options, and how Socotra Capital can help you make the most of your investment capital.