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Red carpet for Renminbi in real estate

p1Countries are welcoming Chinese investment in their real estate and despite some backlash and slower Chinese economic growth, expectations are that these investments by both individuals and corporations will rise in the coming years.

Text by Jan Yong

“China is a sleeping giant. Let her sleep, for when she wakes she will shake the world.” – unknown but most commonly attributed to Napoleon Bonaparte.

“That giant has awakened in Southeast Asia and Australasia. For years, we have done everything possible to feed it and appease it. Now it is coming for our farms, our ports and our industry.” – Callum Wood (The Trumpet)

And real estate too, if I may add. Callum wrote a very interesting albeit a rather cynical perspective on the sale of farm land in New Zealand and Australia to Chinese companies. He blamed China for causing the near bankrupt state of some Kiwi farms but to be fair, he also blamed the country for being the author of its own fate. Due to overwhelming demand by the Chinese for dairy products, NZ farmers had overleveraged on loans to expand their farms since 2015. Then all of a sudden, the demand tapered off.

Without their realising, the Chinese had apparently stockpiled their milk imports and coupled with a slowdown in China, demand had fallen considerably. This resulted in farmers facing bankruptcy since they couldn’t pay off their bank loans. But help was at hand, the Chinese swooped down to buy up farms during fire sales, thus helping the banks recoup their losses and the farmers from bankruptcy.

Callum interpreted this as a long-term strategy of the Chinese to buy up Australian and NZ farms on the cheap. First, inflate prices artificially, just like what they did to Australian mining resources, then reduce demand, and when these mining companies and farms face bankruptcy, buy them up cheap. The analysis sounds simple enough but forgets that there are other factors involved as well. It’s capitalism played to perfection by the Chinese; otherwise known as ‘market forces’. And China doesn’t just buy up the resources of the country, it also builds infrastructure and provides jobs to locals, thus helping to stimulate the economy of the beneficiary country. An overall winwin situation but looked at from a purely protectionist perspective, may seem like the Chinese are buying up strategic assets of a country.

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This scenario is repeating itself all over the world – it started out in Southeast Asia, then Australia, New Zealand, and may reach all the way to Europe via China’s OBOR (One Belt, One Road) initiative that seeks to link China with Europe through Central, Western and Southeast Asia.

GOBBLING UP ASSETS GLOBALLY
Along the way, China became the biggest trading partner of Australia, New Zealand and most of Southeast Asia. Along with the closer trade ties, real estate also became a much sought-after commodity by the Chinese. Traditionally, the Chinese have valued property as a long-term investment for posterity. This explains why the top billionaires in Asia have mostly started out as property developers. This mind-set carries over today with many newly minted upper middleclass Chinese buying real estate not just in China but in countries they have visited or where their kids are studying.

These tourist-turned-property investors have made many real estate agents and developers rich in the US (top country preferred by Chinese for real estate investment), followed by Australia, Canada, New Zealand, Thailand, the UK, Japan, and Spain. According to Juwai.com, China’s largest property portal in English, findings from the Asia Society and Rosen Consulting Group’s latest study revealed that Chinese investors spent a combined USD37.1 bil on US residential and commercial real estate in 2015. And this is predicted to rise to USD50 bil by 2025. In Australia, according to the Foreign Investment Review Board (FIRB), Chinese invested AUD24 bil (USD17.6 bil) last year.

Properties in these top countries, i.e. the US, UK and Australia are deemed to be safe due to the stronger rule of law. They also have the added benefit of enjoying clean air, nice surroundings, pleasant climate and more freedom of expression.

In Japan and South Korea too, the Chinese have come in the bus or ship-load for property shopping, according to Ziv Nakajima-Magen, a property consultant based in Tokyo. They have mostly bought residential properties below USD500K while Chinese companies have invested in commercial and office properties.

GLOBETROTTING CHINESE DEVELOPERS
It’s not just individual investors who are buying up properties – Chinese developers have also ventured out in a big way to develop property overseas due to overcapacity in China. The Chinese government has encouraged its developers and other corporates to venture outside. A number of big developers have done so and are slowly changing the landscape in places where they build, whether on their own or through joint ventures. For example, Iskandar Malaysia, a top destination for Chinese developers is seeing 10,000 apartment units launched in a single project by a Chinese developer, something that is unheard of in the country so far.

Major Chinese developers that have been venturing outside China include China Vanke Co Ltd, Guangzhou R&F Properties Co Ltd, Country Garden Holdings Co Ltd, Qingdao Zhuoyuan Investment Holdings and GreenLand Group. They have been active in real estate projects from Los Angeles and London to Sydney and Pattaya as well as Iskandar Malaysia as part of their diversification plans. In the latest update, Shanghai-based property group, Shenglong along with Australian builder Grocon and shopping centre giant Scentre could soon be building a AUD2 bil (USD1.5 bil) mixed-use project in the centre of Sydney (if they win the bid).

Already, four of China’s top developers have joined the Fortune Global 500 list of the world’s biggest companies based on revenue – ranking number one is Shanghai-based Greenland Group (at No: 311 spot) followed by China Vanke, Dalian Wanda and Evergrande Real Estate.

INEFFECTIVE BACKLASH?
Despite the backlash of protective measures in some countries like Singapore, Hong Kong (technically part of China), Australia (see our story on page 19), New Zealand and the UK, which have imposed high buyer’s stamp duty and higher real property gains tax for foreigners, the numbers from China are not expected to fall significantly.

On the other hand, Juwai.com predicts even more Chinese buyer interest in Australia due to its new 10-year visitor visa for Chinese and new visa for foreign students.

Similarly, despite the new requirement of IRD numbers and bank accounts for foreign investors in New Zealand, the expectation is that more Chinese will still invest in NZ due mainly to the increase of Chinese tourists to NZ, a policy strongly supported by the Kiwi government. Tourist arrivals from China is projected to grow a staggering 30% each year, according to Key2 – a growth that is believed to most likely stimulate NZ’s property market as well.

Even Brexit may not stop the flow of Chinese investors to the UK, a traditionally top investment destination attracting high-end Chinese investors especially those who send their kids to study there.

Within Asia, next to Japan, Thailand is the darling of Chinese tourist-turned-investors since 2015. In Chiang Mai, which is the top destination for Chinese Mainlanders in Thailand due to its proximity to China, you will find trip packages and food menus not just in Thai and English like previously, Mandarin is also common now. Even the tourist map now has been adjusted to cater to Chinese property investors – it displays available properties for sale or rent in Chiang Mai – all in Chinese language.

The trend is obvious – more Chinese are discovering Thailand and they want a piece of the action. For the first time last year, Thailand has emerged as the topenquired property destination in Asia, according to Juwai.com. A similar pattern can be seen in Bangkok too – not surprisingly, as a recent readers poll by Travel & Leisure magazine has rated both as among the top 10 best cities in Asia.

In Hong Kong too, despite some of the severest fees for foreign buyers, Mainland Chinese’ passion for Hong Kong property is unshakeable to the extent that prices of properties sold to Mainlanders are breaking record after record. The latest in the news is the purchase of an office tower in Kowloon for HK$4.5 bil by Cheung Kei Group, the Mainland Chinese conglomerate which earlier had bought a house on the Peak for HK$2.1 bil, considered the most expensive price paid for a residential property in Hong Kong to date. At the same time, China’s property developers are aggressively bidding for prime public land in Hong Kong as competition heats up in the sector. Meanwhile in Singapore, although home prices have posted the longest losing streak on record from the peak in 2013 and sales have declined to about half the level that year, developers remain hopeful that some of the restrictive measures will be eased this year. The city state, despite being the second most expensive real estate destination in the region after Hong Kong, still retains its safe haven status and will continue to attract HNWIs and multinationals looking to set up base in Asia.

‘RENMINBI EFFECT’
Clearly, China is gobbling up land everywhere including countries previously not in anybody’s radar – Africa and Central Asia. China’s Outward Direct Investment (ODI) is experiencing phenomenal growth including in real estate. It is safe to assume there is not a country in the world currently which has not felt the ‘Renminbi Effect’ i.e. more economic activity due to the buying spree of increasingly wealthy Chinese.

With 1.37 bil Chinese on Earth which is set to rise to about 1.41 bil by 2030s (Population Reference Bureau for projections between 2015-2050), it is not an exaggeration to say that the world is currently experiencing a Chinese wave in real estate investment which will continue through the next decade.

Despite a much-hyped slowdown, the so-called “new normal” of single-digit growth rate, China’s economic ascendancy is on the cards at the rate it is expanding overseas and influencing markets through its sheer volume and size of investment. Most, if not all, analysts are of the opinion that this surge in buying will continue through the next 10 years amid a rising middle-class in China.

The Chinese market is already the biggest e-commerce market in the world. With the tourism arrival numbers and purchases by the Chinese doubling each year in some hotspots like Japan and Thailand, it looks like there is no stopping this Chinese ‘invasion’. Even legendary investor, Jim Rogers, is betting on China, confident that it will dominate the world’s economy in the coming years. This decade could very well prove Napoleon (or Mr X) right – China is ‘shaking’ the world now that this giant has awakened from its slumber.

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