By EB5 Investors Magazine Staff
With the Yuan still devaluing, Chinese investors are increasingly interested in diversifying their portfolios through foreign investments. Investing abroad can often bring attractive returns; and perhaps more importantly, foreign investment offers the security of safeguarding funds in a stronger economic environment. Savvy investors – individuals as well as companies – choose to diversify not only in the sense of bonds or equities, but also in terms of currency and political risk.
As Chinese look to invest in the United States, real estate continues to be a popular option. A Chinese insurance giant recently bid roughly $14 billion for Starwood Hotels & Resorts Worldwide Inc. The unsolicited bid led by Anbang Insurance Group Co. would be just one of many recent Chinese takeovers of U.S. companies. In just 2015, Anbang purchased the Waldorf Astoria for nearly $2 billion. While this example is from large insurance company, the same principle applies to individual investors.
For those looking to invest through the EB-5 program, a well-trod investment path and teams of professionals stand ready to guide the sizeable investments in EB-5 projects. However, navigating the world of non-EB-5 investments can be complicated for Chinese investors. Chinese investors, and those advising them, should be aware of the general market conditions and risks, and be alert to special challenges Chinese investors might face.
This article will begin with a macro-level market outlook, discuss growing industries, and then examine factors determining Chinese investment decisions and particular risks. Finally, it will close with a focus on real estate investment since it remains a huge draw for Chinese investors.
Overall Market Outlook
EB5 Investors Magazine had the pleasure of speaking with CBRE Group, Inc. (“CBRE”)’s head of research, Spencer Levy, CBRE’s Americas head of research, Jeannette Rice, head of investment research, Americas, and Wei Xie, research manager for CBRE.
CBRE conducts extensive market research on real estate, global trends, and commercial real estate trends in the United States. According to Levy, 2015 was a record year across most real estate asset types in terms of rent and occupancy, and he is optimistic about U.S. real estate returns in 2016.
Levy explains the macro factors behind such optimism, “U.S. overall growth is expected to be good – in the 2.5 percent range. Our job growth has been strong. Our consumer confidence has been strong. And, most importantly, from a commercial real estate perspective – commercial real estate’s fundamentals have been strong.”
Industry Sectors Strong in Fundamentals
According to Levy, construction in 2015 did not have the same level of growth as in previous cycles, but relatively high construction levels continued in certain types of developments, like apartments. Levy mentioned that construction has largely been concentrated into the top-tier markets, where with the exception of the energy sector CBRE is seeing great strengths in rent and occupancy.
In the industrial sector, 2015 saw new construction, but not overbuilding, which Levy remarked, signals that 2016 is well-poised for growth in construction.
Industries Driving Market Growth
Certain hot markets and industries are driving growth in the United States, and will see a surge in foreign investment in 2016. Understanding the marketplace, and which industries, cities and regions, are doing well is important for potential Chinese investors. A firm grasp of the options is necessary for potential investors as they make decisions for diversifying their portfolio with foreign investment.
Jeannette Rice, Head of Investment Research Americas at CBRE spoke about some of the industries driving growth in the United States’ top markets and beyond:
“Technology, of course, has been the leader,” Rice explained, “and the major tech cities, they’re pretty well-known, but they certainly have been out-performing other sectors. San Francisco, Boston, Seattle – those are just some [of the cities] on the tip of everyone’s tongues.”
Rice emphasized that growth in the technology sector goes beyond the major tech cities that everyone knows about. A second set of cities is also creating jobs and industry that not everyone knows about. Tech industry leaders also include Dallas, Atlanta, Denver, and smaller metropolitan areas like Salt Lake City and Portland. Southern California has also been doing well for tech and other industries in recent years, Rice noted. As for the Southeast, Rice mentioned that Florida is catching up and Miami, Orlando, and to a lesser extent, Tampa, are some of the hottest markets in the country right now. Also in the Southeast, Atlanta is a “dynamic market” and Charlotte “stands out as one of the faster-growing metros.”
Potential Chinese investors should take note of second-tier cities on the rise like those above. Especially in the world of real estate, solid investment opportunities are often a smart choice in these growing markets.
The manufacturing industry has a strong presence in the Midwest. The auto industry in particular supported the region for decades. The record-book car sales, Rice noted, have been good for the Midwest, “but the manufacturing sector as a whole is a concern because of exports and the strong dollar that has started to slow down exports.”
The energy market has slowed down, which Rice notes is cause to worry, and has already hurt certain regions of the country. “Backing up,” she explained, “it used to be that when energy prices went down, all consumers had more money in their pocket to help regional sales and so on, but today it’s more even. The contraction of energy has had more of an impact than it has in the past.” CBRE researchers do not see oil prices going up any time soon, Rice said, “partly because of politics and partly because our energy system here is so strong that it’s been hard to really scale back.”
Outlook for Chinese investment in 2016
Rice noted that Chinese foreign investment has really started booming within the last five years, largely as a result of changes in legislation in China. Nonetheless, Rice emphasized, the United States is a solid economy, and is growing better than most economies in the world.
In terms of real estate, it’s not just Chinese capital coming into the United States. Rice explained, “we’re talking more international capital because real estate is often a better return even at what we consider high prices. It’s a better return, it’s a strong economy, it’s a safe economy with less volatility historically and certainly at present.”
“Chinese investors,” Rice estimates, “are very smart, very savvy, and they’re making investment decisions based on both short-term gains and long-term investment yields.” CBRE researchers expect a continued rise in Chinese investment through all different kinds of vehicles, including high net worth investment programs like EB-5, but also through other non-institution investment methods.
What Influences Chinese Foreign Investment?
CBRE’s Wei Xie, research manager and a Chinese native, emphasized that China is experiencing volatility with the recent political environment, and the United States is a “very established market that has a lot of growth in different areas.”
Xie mentioned, “I speak to my friends and family members back in China, and now is a time when a lot of people are considering different options, not only in the United States, but also in Europe and other parts of the globe for folks to diversify their wealth and seek stability.”
Education & Family
Xie emphasized that aside from financial motivations, Chinese investors are interested in furthering their families’ long-term well-being, in terms of education and employment opportunities for their children, for generations to come.
The market has opened up in China to the extent that it is now easier for people who may not speak English to get the facts and have insight into their many options.
Risks for Chinese Investors
First, Xie noted, as with any international transaction, potential investors rely on industry experts to provide them with advice. Challenges include being in a different country and time zone, and speaking a different language.
A significant challenge to overcome, Xie noted, “is that potential investors have less connection in terms of truly understanding the market [themselves] and making an informed decision. [The investor] relies on the professionals who are advocating for hundreds and even thousands of different individuals. A lot of decisions might not be in [the investor]’s best interest.”
Investing in Real Estate
Despite investment options in other sectors, real estate remains a huge draw for Chinese investors. The first step for prospective investors is to identify the purpose of the investment and the desired result.
According to CBRE’s research, Chinese investors tend to gravitate towards large-scale projects. Xie notes that the EB-5 world, and Chinese immigrant investors, currently tends to favor mixed-use projects, or those that have residential or hospitality components, like hotels.
Furthermore, the choice of purchasing a family home as a primary residence, or a vacation property as an investment, will bring different factors into consideration. For some EB-5 investors who are planning to move to the United States, purchasing residential real estate for a family home may not necessarily be made as an investment for resale. Choosing the location may be based on other factors, such as where their children will go to school.
At the same time, investors may choose to invest in commercial real estate such as hotels or apartment complexes in the United States to further diversify their portfolio.
Residential Real Estate
EB5 Investors Magazine spoke with Scholastica “Gay” Cororaton, research economist for The National Association of Realtors (“NAR”) about current trends for Chinese investors in residential real estate.
When choosing a residence, the first factor to consider is location. Hot markets for residential real estate often fall outside of the “gateway cities,” like New York, Boston, Washington, Los Angeles, San Francisco, and Chicago. This is important to consider, because the motivations for choosing a residential property are often not purely financial.
Cororaton noted that according to 2013 data, permanent resident immigrants from the People’s Republic of China overwhelmingly choose California and Illinois to call home. In 2013 alone, 20,000 immigrants from the People’s Republic of China became permanent residents in California, which is a significant majority over the second largest community in Illinois, which welcomed just over 2,000 permanent residents from the People’s Republic of China for the same year.[i]
The choice of where to purchase a home is often based on considerations like where children will attend school or university, and where there is a strong Chinese community.
NAR data shows that most Chinese homebuyers strategically choose a primary residence with the hope of benefitting their children’s education. The data changes when looking at real estate investment for a second-home or vacation property. There is delineation between the amount and type of real estate that’s purchased for someone who is purchasing a vacation home for an investment or tourism, and someone who is buying for personal residential purposes.
Vacation property buyers tend to look at temperate areas, but that is not always the case for Chinese buyers, who tend to gravitate towards suburban areas in California, New York, Massachusetts and Illinois.
For Chinese buyers looking for a primary residence, metro areas are the most likely targets, where being in close proximity to jobs would be the most important factor.
Financing Residential Purchases
For Chinese homebuyers, buying in cash is the most common way to purchase, and indeed is the preference for most foreign buyers.
For those who wish to obtain a loan, the process can be a challenge. Traditional banks require extensive documentation for home loans.
To be eligible, the NAR noted, a recent immigrant faces extensive documentation requirements. A bank usually will request documentation such as: a list of assets, income for the last three years, spousal support, and proof of tax payment, among others.
Andrew Pan, senior vice president and head of China business and strategy at EastWest Bank, noted that foreign investors have few choices for obtaining a loan:
“Most banks offer only full-document loans,” Pan explained, “they have to check credit history, income in the United States, and if you do not have income in the United States then you are not qualified to obtain a mortgage loan.”
For many Chinese homebuyers with no U.S. income, these requirements are nearly impossible to meet.
Some banks, like EastWest Bank and Wells Fargo, among others, offer an alternative program.
The program differs for each bank, but does not require a credit report (although it is always welcome, if available, and if the applicant does not have the ability to show income in the United States, they can show their income in their home country (i.e. in China).
“This kind of product,” Pan notes, “requires a much higher down payment than normal. For example, we require a 40 percent down payment, and the loan will not exceed $1.5 million.”
This special mortgage loan product, Pan emphasizes, does not mean that applicants do not have to show their income or assets, and there is a very complicated checklist about what kind of income the applicant provide. The goal, he says, is simply to help the buyer navigate the process when they do have all of the documentation that can establish their financial position in their home country.
Working with an Agent
Especially where the buyer is purchasing a residential property with a bank loan, an agent is increasingly necessary to help foreign investors navigate the system.
The NAR emphasized that investors should look for an agent with strong knowledge of English and Chinese (or the investor’s native language), knowledge of the investor’s native culture, and knowledge of the local area, schools and regulations around the residential property.
Commercial Real Estate
Rice mentioned that Chinese investors tend to prefer the primary markets, what people often call the “six gateway markets”: New York, Boston, Washington, Los Angeles, San Francisco, and Chicago. There is more capital in those markets, but as Rice’s research into global capital can attest, investments end up everywhere in the United States, which makes sense for a portfolio acquisition.
“Certainly, Rice says, “I think that Chinese capital and Chinese investors would want to look beyond gateway markets for opportunity, and I expect that will happen as they become more familiar with the U.S. landscape.”
Levy added that Chinese are increasingly comfortable with investing outside of the “gateway cities,” especially where there are strong university and healthcare systems, or other anchors that attract Chinese investors. Markets with anchors, like the top-tier national healthcare systems or universities in second-tier cities like Pittsburgh, Baltimore or Richmond, are also attracting investment.
Rice mentioned that investment by Chinese for existing property (not developments mentioned above) has been biased towards office assets.
“If I were advising a Chinese investor, I would say hey – the industrial sector is just outstanding in the United States.”
Xie emphasized that, based on data, “Our perception of Chinese investors is that they are long-term buyers and that certainly makes sense with a lot of the investments that they are making...And they’re buying some great assets. I mean there’s no question about the assets they’re buying, they’re really trophy assets. So long-term, it can weather ups and downs that real estate will inevitably go through.”
For Chinese investors, the road to investing in foreign markets, including the United States, can be a difficult process of working through language barriers, geographical distance, and third-party information.
A firm grasp on the overall marketplace outlook, and knowledge of which industries and markets are growing, is key for investors. Only after arming themselves with the right knowledge, can potential investors best decide how, when, and where to diversify and strengthen their portfolio.
, Rick Carew, Julie Steinberg and Joshua Jamerson, “Starwood Gets Offer from Group Led by Anbang, Threatening Marriott Deal,” The Wall Street Journal.http://www.wsj.com/articles/starwood-receives-unsolicited-offer-complicating-tie-up-with-marriott-1457954245 (accessed 3.17.2016).
[i] National Association of Realtors, “Supplemental Table 1: Persons Obtaining Lawful Permanent Resident Status by State or Territory of Residence and Region or Country of Birth: Fiscal Year 2013.”