Rent seekers

Sell Beijing, buy this

“Home is the nicest word there is.” That’s how Laura Ingalls describes the new wooden house her father has built on the banks of Plum Creek in Walnut Grove, Minnesota. It is the 1870s and the Ingalls had travelled by covered wagon across the Kansas prairie in search of the American dream. Laura later turned these childhood experiences into a novel, The Little House on the Prairie. It became one of America’s bestselling books, not to mention a hit TV series.

Nearly 150 years later, a new wave of pioneers are staking their claim on American soil and this time they are coming by plane from China. A report published by the US National Association of Realtors (NAR) last week reveals that Chinese buyers accounted for almost 25% of home purchases by foreigners for the year through to March.

Foreign investors now account for 7% of America’s $1.2 trillion housing sector. The Canadians have the most transactions but the Chinese are top in terms of purchase values.

Total purchases by Chinese amounted to $22 billion, up 72% from the year before, with 75% of property paid for in cash. This outflow is still small relative to China’s $1.3 trillion domestic property market, but newspapers on both sides of the Pacific highlight the potential impact of aspiring Chinese homeowners.

“The Chinese may just overwhelm the US with purchases,” New York realtor Hall Willke tells the Washington Post.

A number of key findings emerge from the NAR’s survey of 3,500 realtors. One is that many Chinese buyers want a secure investment – 25% cited this as a reason in 2013, up from 20% in 2009. Analysts believe this derives partly from fears about the direction of China’s own house prices.

In 2013, the average Chinese buyer spent $523,000 on a US house compared with $199,000 by the domestic population. A recent Hurun report, however, highlights that high net worth individuals are spending an average of $1 million on foreign real estate purchases, their favoured choice of asset for overseas purchases.

The Hurun report ranks New York as Chinese buyers’ fourth most popular choice for North American property investment after Los Angeles, San Francisco and Vancouver. Chinese buying patterns also differ from European investors who tend to favour holiday hot spots such as Florida. By contrast, the NAR report says the Chinese are overwhelmingly interested in dense urban areas. And this applies right across the spectrum, with middle class investors just as keen to buy inner city properties as their wealthier counterparts.

Typical of this wave of newly affluent buyers is a woman surnamed Li from Beijing, who told Chinanews.com last week that she sold her two-bedroom apartment in Beijing’s Chaoyang district for Rmb3 million ($486,223) in order to buy six houses in Houston.

Her plan? She expects that these properties could net a monthly rental of $2,400. Li is now renting a house in Beijing and hopes the asset reshuffle will deliver an extra Rmb10,000 ($1,619) in investment income (after deducting her own rental costs in Beijing).

Lu Heren, president of a Chinese real estate agent which specialises in overseas property, explains the maths. “US properties yield up to 8%. When you combine that with a higher price-to-rent ratio, then you’re looking at about six to seven years to recover your costs,” she comments. “In China, it would take about 100 years to recoup the cost of a Beijing property.”

But other analysts aren’t convinced that property investment in the US will turn out to be so profitable. “Six houses for Rmb3 million and you are looking for an 8% yield for each of them?” a columnist at Guangzhou Daily mulled, adding that investors should watch out for hidden costs such as maintenance fees before making a decision.

Chinese agents also warn potential buyers of the old adage: location, location, location. Last year, a number of news outlets picked up on Chinese buying activity in Detroit’s distressed market. However, Lu warns that just because a house is cheap does not mean it offers long-term value. Buying a house in poorer neighbourhoods can make it difficult to find tenants, or even worse to collect the rent from them when they move in.

“Such houses may sound fantastic on paper, but they’re not easy to manage,” she concludes. “Buyers end up with a very hot potato on their hands.”

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