For those tracking the trends of rich Chinese, few areas are more engrossing than overseas investments.
Particularly, observers have been following the flight of yuan into homes in some of the world’s leading cities. A new report by British property agency Knight Frank indicates that this is accelerating: The Chinese are now the world’s biggest buyers of expensive new properties.
In November 2011 a joint report by Bank of China and Hurun, a research and publishing house, claimed that up to half of China’s mega rich, those with at least US$16 million in the bank, were considering emigrating. Cue much speculation that the elites were lining up to flee.
While that may hold some truth, it shouldn’t mask the underlying motivation of Chinese investors: A desire to seek greater returns on their hard-earned, and sometimes ill-gotten, capital.
“Chinese buyers’ global presence is fueled in part by a strong yuan and slowing domestic economy, both of which are encouraging Chinese investors to look further afield in an attempt to diversify their investments,” Knight Frank said in the report released on Tuesday.
The conditions triggering this wave of overseas property investment look like they are strengthening. Expect ever greater swathes of big cities to become Chinese enclaves.
This year will be the third consecutive year of sub-10% annual GDP growth in China and macy be the joint weakest since 1990. There are mounting expectations that annual government growth targets will be lowered to 7% from 2014 as the new political leadership appears prepared to accept weaker expansion as it reconfigures how the economy works.
The performance of the yuan has also encouraged greater overseas activity. According to one property agent in London, a falling pound and rising renminbi make the UK a smart investment destination. The pace of the yuan’s strengthening against the pound since 2008 has outstripped the increase in prime property prices in the British capital, meaning it is cheaper for Chinese to buy top properties in the city now than it was five years ago.
London is the third most popular city for Chinese buyers of expensive homes after Hong Kong and New York, according to the Knight Frank report. Foreign nationals bought US$3.5 billion worth of newly built residential units in London in 2012, with Chinese buyers among the top three, according to a separate report issued by Knight Frank earlier this year.
Expect this to continue as the renminbi becomes more global. Li Keqiang, China’s new premier, has promised to press ahead with internationalizing the currency. His newly opened Shanghai free trade zone pet project is expected to be a test-bed for currency reforms.
Poor returns at home are also pushing assets outside the nation’s borders. The equity markets have been among the world’s worst performing in recent years. Interest rates are bolted to the floor. Increasingly expensive high-end properties mean nobody talks about finding a “bargain.”
One Shanghai-based firm that specializes in helping Chinese investors acquire premium property in Europe has switched from servicing individual buyers to marketing new developments to groups of investors pooling their money together. The reasoning: Most Chinese are on the hunt for investment bargains in the debt-ravaged region, not because they want to live there.
Jones Lang LaSalle, a US-based global real estate services firm, estimated in an August report that Chinese overseas investment will continue to expand at around 30% in 2013, with real estate a priority target. A stronger yuan and fast-growing prime property prices in cities such as London and New York were noted as among the main drivers behind the outflow.
High down payments of up to 50% on domestic properties, the legacy of a near four-year campaign to curb house prices, are also putting buyers off, according to Jones Lang LaSalle. By contrast, down payments on offshore residences can be as low as 25%.
Over the next decade millions of wealthy Chinese will invest abroad. Some will move; most will just move their money with the conviction that it will buy far more overseas than it ever could at home.