Feb112015

China’s real estate bubble inflates California commercial values

The Chinese government is loosening restrictions on the flow of capital, inflating real estate values in California.

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Is the influx of Chinese money is based on sustainable fundamental factors? I don’t think so. In my opinion, this is hot money escaping an inflated and collapsing market, subject to the policy whims of an unpredictable totalitarian government. Chinese capital is an unstable source of investment, and it could reverse course in a moment based on policy changes in China.

Most California real estate market bulls and enthusiasts blithely assume the influx of Chinese money will never stop because everyone in China wants to live here, right? Unfortunately, in the real world, for money to leave China, it generally has to pass through a Chinese bank and get wired to an overseas location. The Chinese government could easily stop the flow of electronic capital by decree, but for now, the money spigots are wide open.

New regulations make it easier for Chinese individuals and companies to invest abroad

25 July 2014

SAFE’s Notice on Certain Issues Relating to Foreign Exchange Administration for Overseas Investment and Financing as well as Roundtrip Investment by Domestic Residents through Special Purpose Companies (Decree 37) reflects the growing popularity of China’s “going abroad” strategy, with more Chinese enterprises and individuals using “special purpose vehicles” (SPV) for overseas financing and investment.

It repeals and replaces SAFE’s Notice on Certain Issues Relating to Foreign Exchange Administration for Financing and Roundtrip Investment by Domestic Residents through Overseas Special Purpose Companies (Decree 75) under which foreign exchange registration was one of the key steps for establishing a valid roundtrip investment structure. …

Notice movement of Chinese capital is completely dependent upon government decrees that either restrict or encourage flows of capital.

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Decree 37 seems to be the first rule allowing PRC individuals to make foreign exchange registration when they establish offshore SPVs for direct overseas investments, not only round-tripping into China but also to other countries through SPVs. Under Decree 37, PRC individuals can invest overseas by setting up offshore SPVs or by participating in an offshore SPV’s employee stock ownership plan (ESOP).

Decree 37 also allows SPVs’ foreign exchange incomes from overseas financing or investments to remain abroad, and PRC residents to fund SPVs from domestic sources. This is a step further reflecting SAFE’s loosening control over foreign exchange, consistent with China’s changing policy on the administration of foreign exchange, which seems to be driven by China’s huge and still growing foreign exchange reserves.

facadeApparently, decree 37 is largely responsible for a new influx of Chinese bubble equity flowing into Coastal California. Will we have decree 38 shutting this flow off? Or perhaps decree 39 demanding this money flow back to China?

The people who deny a real estate bubble in China are wrong, and the deflating Chinese property bubble could destabilize the world economy, but of greater interest to owners of Coastal California real estate, the deflating Chinese housing bubble could turn local real estate buyers into desperate sellers; however, for now, the money is still flowing into California.

Chinese Real-Estate Firm Looks West—to California

China Oceanwide Holdings Becoming One of Golden State’s Most-Aggressive Property Buyers

By Eliot Brown, Jan. 27, 2015

A Chinese real-estate firm known for its big investments at home is casting its net much farther afield, becoming one of the most aggressive property buyers in California.

dumbmoneyBack in 2006, Rich Toscono pointed out that foreign money is generally dumb money that comes to the party too late and overpays for assets in markets they don’t really understand.

China Oceanwide Holdings Group Co. and its chairman, Lu Zhiqiang, have poured hundreds of millions of dollars into U.S. West Coast commercial and residential real estate in the past two years, far from the company’s traditional turf of projects in cities such as Beijing and Wuhan. The buying spree shows how, amid a wave of foreign money coming into U.S. commercial real estate, Chinese investors often top the list.

After buying a site in 2013, Beijing-based Oceanwide is embarking on one of the largest developments currently under way in downtown Los Angeles: a three-tower complex of apartments, retail space and a hotel. In December, it announced it intended to build the second-tallest tower in San Francisco, a gleaming Norman Foster-designed 910-foot office building. It also paid $41 million for a ranch in Sonoma County that can hold a winery.

Doesn’t that sound foolish to you? Perhaps they believe they can buy off the local officials and get permission to build something grand on this site — that’s how it would work in China, but they are likely to find that opposition groups here in the US can’t be steamrolled by bribed government officials as easily as they can back in China.Chinese_freedom_support_California_real_estate1

Perhaps the most intriguing move: Mr. Lu has amassed an unusually large amount of private residential property in the tony Silicon Valley town of Atherton.

Since 2012, Mr. Lu has purchased three giant mansions in Atherton, paying $21 million, $25 million and $30 million, respectively, for 70 Barry Lane, 250 Atherton Ave. and 236 Park Lane, according to several people familiar with the sales. Collectively, the three properties have 19 bedrooms and 22 bathrooms, according to property-sales listings.

It’s either ego or stupidity; perhaps a combination of both.

Then last spring, Mr. Lu tried to buy an even pricier home, offering $41 million to buy the former home of Jim Clark, co-founder of Netscape, according to court records and a person familiar with the matter. The deal, however, fell apart and the house was sold to another buyer.

Oceanwide’s dive into the U.S. is part of a diversification strategy, it has said of past acquisitions. In addition to property in China, the company invests in the financial industry, with holdings in banks, brokerages, trusts, and insurers. It also has investments in energy, advertising and print media in China.

U.S. property has become increasingly attractive to fast-growing Chinese firms, which face a slowing Chinese housing market and see room for growth in the U.S.

During the housing bubble, California equity locusts went to other cities across the West and inflated prices where real estate values had no other reason to rise. Bend, Oregon, Boise, Idaho, Las Vegas, Nevada, and many other cities saw substantial property value inflation due to California buyers purchasing second homes and investment properties. The influx of Chinese buyers is the same phenomenon but with different players in a different location.

Chinese investors bought a record $3.9 billion of U.S. commercial real estate in 2014, nearly 1% of all commercial-property sales and the most of any foreign country other than Canada and Norway, according to Real Capital Analytics LLC.

For Chinese companies, “there definitely is a strong interest to invest overseas,” said Darlene Chiu Bryant, executive director ChinaSF, an organization set up by the San Francisco mayor’s office that aims to promote Chinese investment.

This is how the Chinese will export their real estate bubble around the globe. So far their real estate bubble is largely contained inside China because the Chinese government limited the flow of capital overseas. With these restrictions relaxed, their real estate bubble will go global.

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Similarly aggressive prices are being paid by Chinese investors in Atherton, a leafy town near Stanford University where the 1950s-style ranch homes on winding streets have gradually been transformed into endless rows of mansions that have attracted Chinese investors. Brokers say foreign buyers, mostly from China, represent more than 75% of the market for houses listed at more than $20 million. A decade ago, the vast majority of buyers were local.

“Around 2011, that’s when the floodgates really opened up,” said Ken DeLeon, founder of DeLeon Realty, which specializes in high-end homes in Silicon Valley. Mr. DeLeon said developers have begun bringing in feng shui consultants, and prices of homes are listed with more eights at the end, a lucky number in Chinese culture.

We’ve seen the same in Irvine.

Peter Carpenter, a board member of the Menlo Park Fire Protection District, which includes Atherton, said he worries about firefighters, who typically take risks to extinguish a fire under the presumption that a house is occupied.“If you knew for sure that there was nobody in it, you would take a very different approach,” he said. “From a fire-department standpoint, it means putting your people at risk for no reason.”

Apparently, they will let them burn.

The Chinese real estate bubble fits the typical pattern of a bubble: excessive debt creation with no relation to cashflow, an unfounded faith in ever-increasing prices, frenzied buying by investors who keep properties empty, and constant denials from people who should know better.

Unfortunately, it looks as if China is exporting it’s real estate bubble to the United States, not unlike the Japanese did 25 years ago.

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