Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
As I have reported before, Chinese buyers have become a force in real estate in the U.S., with an insatiable appetite for both commercial and residential property.
But that tide is turning. Somewhat. Okay – only a little. For now.
The reason?
In December, the Chinese government started to implement stricter capital controls.
Those controls require that government departments are required to sign off on all foreign acquisitions over $10 billion or $1 billion if it's outside of the acquirer's "core" business. And also, the controls put a stop to foreign real estate purchases of more than $1 billion by state-owned enterprises.
It seems China is worried about its currency, having actively manipulated it for decades. So, it’s clamping down on the outflow of capital from the country, which hit a new high in October of last year, which in turn led to a depreciation of their currency, the RMB.
With the RMB on track for the biggest one-year fall ever, Chinese investors have been eager to diversify overseas, into assets denominated in other currencies.
According to an article I read recently, sky-high real estate prices in China and the desire to secure assets outside of China have helped fuel a huge uptick in outward investment. In the first half of 2016, Chinese buyers snapped up an estimated $15 billion in overseas real estate, with the U.S. a top destination. In all, overseas purchases by Chinese companies reached $146 billion in the first 10 months of this year, surpassing last year's record $121 billion.
And the decline in buying has already started, as the purchase of foreign assets by Chinese companies and households fell to $1 billion in October, compared with $20 billion in September.
Varied Impact
As usual, the “experts” think the impact will vary.
They think that large commercial transactions won’t be affected much because the vast majority of real estate investments are under $1 billion. And 70% of Chinese commercial purchases between 2013 and mid-2016 were less than $1 billion.
Another reason they think the impact will vary is that the controls focus on state-owned enterprises and insurance companies.
On the other hand, the impact for privately held companies, smaller companies and wealthy buyers is likely to be a bit more noticeable. The article stated that currency restrictions are creating some issues for investors buying condos in the U.S., as it has become increasingly difficult to get money into the U.S. from China.
So, while those buying at the half-million-dollar level may not see any difficulty, smaller investors looking at transactions in the $10-million range are encountering some difficulty.
One transactional impact is that sellers are demanding larger deposits of 30% to 40% from foreign buyers, especially from China, instead of the typical required minimum deposit of 10% as a reaction to the currency restrictions.
Strong Interest in U.S.
Through all of this, Chinese interest in the U.S. market continues to be strong. Juwai.com, the largest global real estate listing site in Chinese, has said it expects that Chinese government oversight will have minimal impact on private investment in residential real estate.
In addition, the article pointed to a recent survey that found that 60% of respondents said the U.S. was the country providing the most stable and secure real estate investments.
By comparison, only 19% of respondents said the same of Germany, which ranked as the second favorite country. U.S. cities took up 3 out of the top 5 favorite global cities for foreign real estate investors with New York ranking first, Los Angeles third and San Francisco fifth.
According to the article, the bottom line is that the investment opportunity is the United States itself. The real estate fundamentals are sound; the economy continues to be strong; there are opportunities across all sectors of the real estate spectrum and in both gateway and secondary cities.
Your Take?
Share your thoughts about this Chinese impact in the comments section below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.