Chinese Go Bargain Shopping for U.S. Real Estate

Americans are witnessing one of the worst corrections in history in the U.S. real estate market as evidenced by steep declines in new home sales and rapidly growing real estate foreclosures. The S&P/Case-Shiller Home Price index reported that 11 of 20 metro areas around the nation showed the highest decline in annual rates ever on record. This huge decline in real estate prices is due to immense oversupply caused by dwindling demand as a result of numerous factors including low consumer confidence, high unemployment rates, high cost of production and difficulty in obtaining mortgage financing. The Center of Responsible Lending projects that foreclosures will reach 2.4 million nationwide in 2009.

During this same time, while not unaffected by the global economic crisis, China continues to be one of the world’s fastest growing economies. From 1979 to 2007, China’s real GDP grew at an average annual rate of 9.8% and it shows no signs of a long-term slowdown. Even in 2008, its real GDP still grew at 9%. Trade and foreign investment are the major drivers of China’s economy. In 2007, China’s exports exceeded U.S. exports for the first time and its trade surplus registered a historic high. China is also the world’s largest holder of foreign exchange reserves. This is principally a result of large trade surpluses, foreign direct investment and large-scale purchases of foreign currency. International financial statistics compiled by the International Monetary Fund predict if these trends continue, China could become the world’s largest economy within the next 10 years. China is now home to the 5th largest number of U.S. dollar millionaires in the world, with many of them owning substantial amounts of liquid assets.

Many analysts believe Chinese companies and individuals will increasingly use their cash reserves to purchase resources across the globe at bargain-basement prices. Key policy decisions have limited how China can spend its case reserves--U.S. real estate, equities and debt. Since 2000, $96 billion was used to purchase stock in U.S. companies, $16 billion was invested in corporate bonds, $474 billion was used to buy debt of government chartered organizations, $439 billion was used to purchase U.S. treasuries, and the balance of $400 million remained in Chinese banks and was invested in U.S. real estate or entered the U.S. through foreign intermediaries. Some Chinese companies have already started purchasing existing international firms to increase the global visibility of Chinese brands. Recent examples include Lenovo Group Limited’s purchase of IBM Corporation’s personal computer division, Aluminum Corp. of China’s investment in Rio Tinto, Tempo Group Inc.’s purchase of certain assets of Delphi’s global brake and suspension component business and China’s multi-billion dollar investment into the Morgan Stanley Sovereign Wealth Fund. The easing of lending rules by Chinese bank regulators has contributed to the increase of cross-border acquisitions. Individuals have similarly sought attractive overseas investments. Making investments in U.S. real estate is considered both financially sound and prestigious. According to the National Association of Realtors, investors from China are the most likely foreign investors to purchase U.S. properties valued at $1 million or more. Moreover, the median price paid by Chinese real estate investors was $450,000, which was the highest median of any customer segment. Due to rising Chinese income levels, the strength of the Chinese currency against the U.S. dollar and fewer domestic investment options, these trends are expected to continue. According to an annual survey of the Association of Foreign Investors in Real Estate, the U.S. still remains as the most stable and secure country for real estate investment with the best opportunity for appreciation.

With this in mind, U.S. real estate owners, developers and brokers would be wise to embrace the changing global economic landscape and position themselves to take advantage of these historic opportunities.