27 December, 2015
According to some in the U.S., UK and Australia, Chinese hot money is flowing into local property markets, driving up prices and making a home even more unaffordable for local buyers.
Furthermore, this money is allegedly being laundered by shadowy figures hiding behind opaque shell companies, casting a further pall over the new kids on the block. Can this really be true?
Anti-social neighbours are supposed to be noisy rather than mysterious. But when those neighbours are wealthy foreigners the usual rules seem not to apply.
Governments are acting accordingly, imposing greater restrictions on foreign property buyers and introducing fees should rules be broken, which is stoking the hysteria further.
Although there will of course be those who attempt to flood the property markets — an easy target it must be said — with ill- gotten gains, the argument is a bit rich.
House Prices
It is of course no secret that property prices are rising in many of the highest profile markets targeted by foreign investors, and have done for years despite the temporary plunge caused by the global financial crisis.
According to Knight Frank, prices of prime homes have in the past year risen 2% in London, 15% in Vancouver, 12.5% in Sydney and 7.9% in Melbourne.
New York prime housing fell more than 3%, although average general residential property prices rose 4.5% according to the New York State Association of Realtors. The general average for London rose about 4%, while Sydney increased 18%, Melbourne 11% and Vancouver about 8%, according to various industry sources.
The popular culprits among market watchers, regulators and hysterical real estate participants are the increasingly wealthy and ultra-wealthy Chinese who they say are buying up huge swathes of prime property.
Some take this a step further and broadly accuse such investors as having questionable backgrounds and exploiting the real estate market to launder funds.
Regulators and politicians have responded in kind. UK Prime Minister David Cameron last month said the government would take steps to prevent corrupt money entering the country’s real estate market. This follows the introduction of a capital gains tax — from this year — on foreign property investors.
Meanwhile, former Australian Prime Minister Tony Abbott, in February announced a series of fees and penalties for foreign real estate investors.
The New York media, meanwhile, has excitedly drawn attention to specific cases of foreign spending, including the much coveted Time Warner Center overlooking Central Park. One publication produced a list of (wealthy) foreigners who bought floor space in the building and went on to question their backgrounds.
Who?
This level of hysteria actually serves a good point because the common — but misguided — perception is that this is solely a Chinese issue.
China’s wealthy are clearly buying properties in overseas markets in increasing numbers: according to the National Association of Realtors, Chinese buyers are the largest foreign purchasers of U.S. homes. They are also the biggest buyers of housing in many major western cities, including New York, London, Sydney and Vancouver.
So far so alarming. However, as the Time Warner Center hit-list demonstrates, the geographic spread is actually much broader, partly representing the world’s emerging ultra-wealthy.
Non-U.S. citizens who allegedly bought floor space include members of the Saudi royal family, a former governor in Colombia, an Indian steel magnate, a Russian senator and a Greek business magnate.
This nicely illustrates the diaspora. For many years, Saudi princes and Russian oligarchs bought up large patches of London’s residential property, along with football clubs and other businesses.
New York and other U.S. cities are now being targeted by Middle East property buyers, although London remains the city that attracts the most funds.
Knight Frank said last year that Middle East investors accounted for 7.5% of foreign buyers of prime central London property, while 9.1% were Russian, other Europeans were 16.5%. Asians only accounted for 4.5%.
According to Australia’s Foreign Investment Review Board, meanwhile, China last year was the largest source country for approved proposed real estate investment, overtaking the U.S. However, other major sources of approved proposed investment were Canada, Malaysia and Singapore.
Why?
The big question of course is why these exotic ultra-wealthy are spending their money on real estate.
Some vocal critics — including venerable watchdogs such as Global Witness and Transparency International — argue that at least some of these investments are the result of ill-gotten gains.
The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals
The organisation argues it is too easy for the criminal and corrupt to launder money through luxury property and hide the real owners behind anonymous companies.
Such an argument has gained traction due to the situation in China, which has seen President Xi Jinping crack down heavily on excess and corruption, leading to a rush for the exits among the country’s increasingly rich.
This argument, however, is too convenient and also ignores the basic laws of the market — invest in something that will make you money and somewhere that will allow you to realise those gains.
It’s not rocket science to understand that most of the time property prices rise wherever you are in the world and therefore investing in property is a good idea.
Having ready access to your investments is not a given in markets such as China, India or Russia, where regulations can be murky, change without warning or benefit from vested interests, and the Chinese and Russian currencies are effectively instruments of their governments.
After all, the Chinese government’s crackdown on corruption and excess is surely sending legitimate money overseas along with the ne’er-do-wells. According to a 2014 study by Barclays, nearly half of China’s wealthy plan to leave the country in the next five years, for example.
Add this to the relaxing of rules governing outbound foreign investment in 2014 and the highly volatile nature of the country’s stock markets, and this paints a better picture of why there has been such an increase of Chinese property investment overseas.
Other countries have similar issues and stock markets generally are often considered too unpredictable for some investors. Property, meanwhile, is a safer bet.
So, while it is easy to blame nefarious foreign figures parking their laundered money in local property for prices that would most probably rise anyway, regulators have to be careful.
It is wise to remember that it is not unreasonable for investors to seek perceived safe havens where funds are protected by laws built up over hundreds of years.
What is driving property prices is local condition, good climate and trust. In particular, trust in a legal system that has been developed over hundreds of years to provide certainty of property ownership.
The easiest targets are not always the right ones.
For further information, please contact:
Rod Sutton, Chairman, Asia Pacific, FTI Consulting
rod.sutton@fticonsulting.com
