a Boom for California Real Estate?China’s Bust

The downfall of the Chinese stock market and economy could lead to more investment overseas

Despite numerous alarming articles following the implosion of the Chinese stock market, it is too early to declare China’s recent economic woes a Bust. In fact in the past two months the stock market has seen moderate signs of recovery. Certainly, the crash of China’s two major stock exchanges in Shenzhen and Shanghai this past June had investors and the Chinese government worried enough to implement a freeze on trading for almost 50% of its shares, underscoring the difference in China’s ‘managed market’ and the free market stock exchanges in the United States and Europe.

While $3.1 trillion in market value has been erased since mid-June1, it is important to understand several factors: the way this lost wealth was distributed; the actual impact on Chinese consumers; and the perception of what is yet to come, that may provide a prediction of what all this means for international markets and specifically for the area of our interest, real estate in the U.S.

Waning Confidence in China’s stock markets Let’s start with a balanced view. The international media has in fact been divided. For every doomsday prediction such as the one by Bloomberg stating that “China is steering towards a Subprime Economy”2 , there has been a counter view such as by Goldman Sachs that “Everyone’s wrong on China’s ‘fast and furious’ stock market collapse”3 . In fact there is truth to both sides. China’s stock market was indeed in trouble despite recent gains, and the government’s somewhat desperate measures to shore it up and in essence establish a hard floor, reflected the seriousness of the situation. However, only 9% of Chinese households actively trade in shares. Moreover, while a lot of the trouble was due to an increasing number of margin trading, the number of such margin traders accounted for only 6%. In other words, “the losses could be attributed to a relatively small group of extremely wealthy investors who had taken big risks with mostly borrowed money”1.

The actual impact on the spending power by most Chinese as a result of the recent stock market volatility is relatively limited. Nevertheless, the overall slowdown of the Chinese economy over the past three years and the continuing decline in China’s domestic home prices over the past eight months has contributed to a “chill” in the market with consumer spending within China down to a 6-year low. Overall the biggest impact from recent events is a rapidly declining confidence in China’s stock markets by international and domestic investors alike

Only 9% of Chinese households

actively trade in shares

China’s domestic real estate market and overseas investing

The Chinese domestic real estate market continues to decline4. Both sales prices and volume of have been falling. This decline is expected to continue, as investments in real estate and new developments are still rising leading to more overbuilding. Despite the contracting domestic real estate market however, the economy is overall still growing at a rate of around 7%. So the question is where will Chinese investors be investing their still growing amounts of Chinese money.

One of the major impediments to overseas real estate investments for Chinese is how to gather sufficient foreign currency to make such investments. Each Chinese individual is restricted to exchange a maximum of USD 50,000’s worth of Chinese Yuan (RenMinBi) into foreign currency per year. Until now, in order to make an overseas real estate purchase, Chinese have had to rely on friends and family to put together sufficient foreign funds or find creative other means. This is largely the reason why in the past five years, the average prices of residential property in the US purchased by Chinese have been limited and hovered around USD 1 million. It is not that Chinese investors cannot afford higher priced real estate but rather that they is it not easy to take Chinese money out legally.

Since the beginning of 2015, Chinese government policies have slowly been loosening the restrictions on foreign currency exchange and at the end of Q1 2015, a new Qualified Domestic Institutional Investor (QDII2) program was announced to make it easier for wealthy Chinese to invest in overseas real estate and international stock markets. This new program is anticipated to come into effect, first as a pilot in limited cities and free trade zones5 , followed by much broader adoption.

Conclusions for the impact on the US real estate marketIt stands to reason that within the next one to two quarters, China’s investors will take stock of their investment options and proceed with greater caution. The short-term impact, through the end of 2015 on the US real estate market is expected to see a modest decline compared to last year. However, with the combination of reduced confidence in China’s domestic stock exchanges, the decline of China’s own domestic real estate market, the continuing push to diversify assets overseas and expected loosening of restrictions on foreign exchange, China’s investors will not only continue to purchase overseas properties, but such purchases will likely increase significantly. The two to three year outlook projects robust growth in overseas property purchases by Chinese investors, with the top destinations being the real estate markets in the US, and especially in West and East Coast cities; Australia; and the European Union.

For brokerage firms and real estate developers in the US, it would be wise to prepare now for this continuing trend and anticipated growth in both the number of Chinese buyers and the amount of available funds. Such preparations include overcoming the language barrier by offering listings in both English and Chinese; hiring Chinese speaking staff to host buyers when they visit; being aware of and ready for the seasonal nature of visits by Chinese buyers; building their brand in China, so that buyers are already familiar with the type of properties and service offerings before they make their visits.

Partners Trust China was founded precisely to help our Partners establish a high profile presence in China and the opportunity to reach the increasing number of Chinese high net worth and ultra high net worth clients. The short-term challenges and competition in this market are many. Our local team specializes in working with our Partners to meet these challenges and take full advantage of the growing opportunities that the Chinese market represents.

It would be wise

to prepare now

1.Jul 11 2015 – Keith Bradsher, The New York Times: http://www.cnbc.com/2015/07/11/china-feels-economic-chill-from-stock-market-plunge.html

2.Jul 6 2015 – William Pesek, Bloomberg: http://www.bloombergview.com/articles/2015-07-06/china-steers-toward-a-subprime-economy

3.Jul 13 2015 – Oscar Williams-Grut, Goldman Sachs: http://www.businessinsider.com/goldman-sachs-china-stock-market-collapse-correction-2015-7

4.Oct 24 2015 – Jamil Anderlini, Financial Times: http://www.ft.com/cms/s/0/2af87f46-5b3a-11e4-a674-00144feab7de.html#axzz3s6kO3LyU

5.Oct 22 2015 – Shanghai Reuter: http://www.straitstimes.com/business/economy/china-considering-launching-qdii2-trial-in-shanghai-free-trade-zone

With over 23 years of professional experience, Sean has been recognized as a leader in

connecting high-net worth clients with a wide variety of opportunities. He is the principal

in TH Capital Hong Kong (formerly known as Trendstorm China), where he has built an

extensive network of high-level business connections, advising clients at several of China’s

top private banks on foreign investment opportunities in the USA and Europe. He was also

the managing director and founder of the International Sports Investment Company, which

was created to invest in high quality youth fencing programs in China and counts among its

members some of the leading and most affluent families in Shanghai.

Sean’s career began in architecture. After an 11-year career in design, Sean co-founded and

managed two technology start-ups backed by renowned venture capital firms. Among

those was Screampoint International, which pioneered 5D solutions used in Apple Stores

visualization, the World Trade Center redevelopment projects and the digitization of entire

cities in China and Dubai. Sean sold the company’s assets to Satellier Inc, a Sequoia Capital

backed company.

While completing a graduate degree at the University of Pennsylvania, Sean was hired

by Adele Santos, then Director of Penn’s Graduate School of Fine Arts and later Dean of

Architecture at MIT. There he collaborated on the First Prize entry to the MOCA Housing

Competition in Los Angeles. He holds a Master of Architecture from the University of Penn-

sylvania, and a Bachelor of Science (Architecture) from Kent State University. He is fluent in

five languages including English and Mandarin.

Sean Mei Founding Partner, PT-Chinasean.mei@thepartnerstrust.com

Sean Mei | Founding PartnerPARTNERS TRUST —CHINA

5F SOMEKH BUILDING ROCKBUND | 149 YUAN MING YUAN ROAD | SHANGHAI 200002 CHINA | +86 (21) 3120 3218 | partnerstrustchina.com