For the first time, Chinese buyers surpassed Canadians as the top foreign buyers of U.S. homes, new data show. Their lead over all other foreign homebuyers can only grow, say analysts, especially with a new Beijing-led program coming that will make it easier for wealthy Chinese to invest overseas.
While Chinese citizens are subject to an annual limit of $50,000 on how much they can exchange from yuan to other currencies, there have always been ways to skirt the rules through unofficial channels–thus the big investments in real estate in the U.S., Europe and Australia.
Beijing is cracking down on some of those unofficial routes. But at the same time it is also preparing to launch, likely later this year, a new pilot scheme, called the Qualified Domestic Individual Investor (QDII2),allowing individuals from six cities, including Shanghai, to invest directly in overseas assets like stocks, bonds and real estate.
The $50,000-cap on exchanging yuan for foreign currency, imposed in 2007, won’t be valid on QDII2 transactions.
Analysts at Chinese brokerage China International Capital Corp., believe QDII2 will boost buying of real estate rather than stocks, because channels to buy overseas equities already exist, and Chinese investors tend to prefer buying hard assets.
“With QDII2 in mind, within five years we might look back and think of the current levels of Chinese cross-border investment as quaint,” said Andrew Taylor, co-CEO of Juwai.com, a website that helps Chinese to buy properties abroad. He added that the U.S. is the best-placed country to capture that flow because of its immense supply of existing real estate, potential for new construction, and liberal foreign ownership rules.
The U.S. and Australia were the top two targets of Chinese real estate buying overseas. Top U.S. destinations for Chinese buyers in the first quarter of 2015 were Los Angeles, New York City, Houston, San Francisco and Orlando, based on consumer activity on Juwai.com. The average property price for Chinese buyers on Juwai.com is $1.96 million.
QDII2 is being launched as Chinese top U.S. home buying among foreigners. Purchasers from China made up 16% of international buyers who bought primarily single-family homes and condominiums in the 12-month period that ended in March 2015, according to the latest survey by the National Association of Realtors. Canadians, for years the biggest foreign acquirers of American homes, came second at 14% while Indians, with a 8% share, were third.
QDII2 will still impose restrictions on prospective offshore investors, namely that participants will need at least 1 million yuan of net financial assets, excluding self-occupied property, and overseas investment cannot exceed 50% of their net wealth.
While there isn’t a formal program that lets Chinese investors buy overseas real estate, there have been several that allow stock purchases. The initial QDII program, launched by China before the global financial crisis, gave mainland investors the chance to buy overseas stocks through fund managers. The more recent Hong Kong Shanghai Stock Connect, launched late last year, gave China-based investors the opportunity to acquire stocks listed in Hong Kong.
Still, people shouldn’t expect an exodus of money from China from QDII2, when it launches. Money will flow to where returns are higher, and that’s more likely to be in China as Beijing loosens monetary policy to spur growth and the U.S. Federal Reserve tightens later this year. A net $20 billion in capital flowed into China in the first five months of the year, according to the State Administration of Foreign Exchange. China’s banks bought a net $1.3 billion of foreign currency in May, reversing net sales in the previous eight months.