China's "Other" Export

“I want a big car and a big house,” a fellow diner told us over sushi in Taipei’s trendy Bellavita complex recently. “And property is so cheap there, I’m sure I’ll have enough left over for one of those giant SUVs the Americans love so much.”

The gentleman was sitting a few places down from us at the restaurant counter. He and his daughter were here in “Isla Formosa” to visit her grandmother. A successful chef (he mentioned that he’d catered more than one Oscar Night after party – “Russell Crowe is a nice guy…countryman of yours, right?”), our new mate has restaurants in LA and around his current hometown, just outside of Shanghai. Born here in Taiwan, he speaks fluent Mandarin, English and “kitchen Spanish.” His daughter, at the tender age of 5, is impressively well versed in all three languages.

“¿necesitas ir al baño?” asked father, proudly. The young girl looked sheepishly at her dad’s strange new friends. “Si.”

Returning from the bathroom a few moments later, he took up again with his plans for the future.

“I had a look at a few places last time I was there, earlier this year. We travel quite a lot and I’m always searching for a bargain.”

The gentleman wasn’t talking about buying a house here in Taiwan, where prices have been on the march higher for 21 consecutive months to May. Nor was he hunting for bargains over on the mainland, where fear of a property bubble has prompted the government to introduce a range of measures aimed at cracking down on rampant speculation. Rather, he has his eye on “a block or two” just outside of Houston, Texas.

“There’s just so much space available there…big, wide roads…plenty of parks. Prices have really been whacked in the last few years. I get more house for my yuan, and the area I’m looking at has a growing Chinese community, so this one [pointing at his daughter] can continue to practice her Mandarin.”

Our sushi buddy’s story is not a unique one. For a growing number of well-to-do, geographically mobile Chinese citizens, property investments abroad are becoming a popular store of wealth, and a hedge against an increasingly precarious market back home. The Middle Kingdom’s emerging middle class has relatively few options when it comes to protecting their savings. (The National Bureau of Statistics announced yesterday the annual rate of inflation rose to 3.1% in May – up from April’s figure of 2.8%.) Many are wary about investing in stocks after recent, violent selloffs in the markets (the Shanghai Composite Index “officially” entered a bear market last month after declining more than 20% from its 2009 high). And again, fears over government efforts to cool the housing markets in major cities are further encouraging them to look farther afield.

Seen by some as “the new Russians,” wealthy Chinese businessmen and women are snapping up top-end properties from London to Sydney, Vancouver to New York. According to a world wealth report published last year by Merrill Lynch and Capgemini, the number of dollar millionaires in China outstripped the number in the UK for the first time in 2008. Only the US, Germany and Japan now have more millionaires…although the rate at which China is promoting new super rich is by far outstripping the west (the US, for example, is actually demoting millionaires at the fastest pace globally.)

It’s hardly surprising then that these hard-working, well-educated individuals are pouncing on depressed real estate markets abroad. Last year, Soufun Holdings, one of China’s largest real estate companies, arranged a series of “property investment tours” around the US. For $3,600, Chinese buyers were given a whirlwind tour beginning in Boston and continuing on to San Francisco, Los Angeles and finally on to New York. Typically, buyers were looking for homes in the $500,000-$1 million range. The tours were so popular, the company had to put 400 people on the initial waiting list.

“We never thought these tours would garner such interest, but we’ve had an overwhelming response,” SouFun CEO Richard Dai, told newswire AP at the time. “Before, we heard of Chinese or Hong Kong movie stars buying homes in the US, and now more and more Chinese can afford to have the same.”

It’s not only distressed sales in the US that have piqued the interest of cashed up Chinese buyers. A notable portion of that mobile cash is flowing into Vancouver, Canada.

“Out of the nearly $200-million [worth of real estate] we’ve sold so far this year, I’d say 50 per cent was sold to Mainland Chinese,” George Wong of Magnum Projects recently told Vancouver’s The Globe and Mail. “There’s a growing middle class and a growing wealthy class. And they have become the fuel to our real estate.”

According to Mr. Wong, who travels to Beijing and Shanghai to showcase Vancouver properties, Chinese investors accounted for around half of the units purchased at the spiffy, downtown condo development, Harbor Green. The average unit cost there is a cool $5.5 million.

Earlier this year, Hong Kong-based billionaire, Joseph Lau, treated himself to a £33 million six-floor mansion in London’s exclusive Eaton Square, in Belgravia. [As an important aside, Lau also has one of the world’s finest private wine collections, with over 10,000 bottles.] Super rich Chinese buyers are also loading up on high-end luxury apartments in Australia. Ewan Morton, managing director of Sydney-based Morton and Morton, said Chinese investments in Sydney’s real estate market more than tripled during the past year, accounting for 16% of the agency’s $21 million turnover.

Whether or not this is a sustainable trend remains to be seen, of course. A sudden snapback in property prices in Mainland China – as many are forecasting – could put a kind of “margin call” squeeze on some international speculators. Home prices in China rose at the second-fastest pace on record in May, up 12.4%, despite Beijing’s continued efforts at cooling the market. Sales volumes are already beginning to peal back, however, with deals in Beijing, Shanghai and Shenzhen, the country’s wealthiest cities, down as much as 70% in May from the previous month, according to the official Shanghai Securities News. Land sales for residential development projects in 70 Chinese cities fell 14%, the report showed.

That said, most Chinese buyers front around 80% of the initial cost when they purchase property in their homeland, a far cry from the “no doc., interest only” teaser loans that led to the meltdown in the US market. Nevertheless, there is growing concern among experts that the China property bubble is waiting to burst, perhaps in spectacular fashion. Smart Chinese investors, therefore, are looking to diversify their holdings. For some, that means buying gold. For others, it means buying the houses westerners could never really afford…at prices they really can.

Joel Bowman
for The Daily Reckoning