Jan152015

Wealthy Russians dump high-end US real estate

As foreign investors need cash to solve domestic problems, they often dump real estate investments in prime US housing markets.

high_end_airMost people in California assume buyers from mainland China will provide an endless source of demand for high-end Coastal California real estate. Everyone knows China’s real estate bubble is bursting, but most assume the contagion will be “contained” in China and won’t spill over to the US. I think the faithful are wrong; when the Chinese real estate bubble bursts, Chinese owners will sell California real estate to solve their financial problems at home.

When wealthy oligarchs and the nearly-wealthy who support them in exchange for government largess find themselves faced with tough times, rather than exporting their wealth to foreign safe havens, these wealthy players often find domestic concerns force them to repatriate their money to preserve their status at home.

To see how the Chinese repatriation might impact California real estate, one only needs to look at how Russian repatriation hurts New York real estate.

With Ruble in Freefall, Russians Scramble to Dump Trophy Homes and Break Contracts

The stereotype of a Russian buyer pushing a wheelbarrow full of cash to the waiting doors of 15 Central Park West is a thing of the past.

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By Polly Mosendz | 01/13/15 8:00am

Just before the holidays, a handful of unusual business proposals made their way to the desk of Marlen Kruzhkov, an attorney at New York’s Gusrae Kaplan: Russian buyers were looking to flip closed real estate contracts.

The half dozen offers were all apartments in Miami and the surrounding area, ranging from $5 to $12 million, initially purchased before the December collapse of the ruble, which shrunk the combined wealth of Russia’s 20 richest men by $10 billion in two days.

Between the economic sanctions and the collapse of oil prices, it’s been a bad time to have assets tied to rubles lately.econ_russiachart10_405

The buyers who approached the attorney and his clients had placed sizable down payments on the apartments but following Russia’s increased economic woes, no longer felt they had the liquid assets to carry on with the transaction.

“They were offering to sell the contract at a loss, willing to take a fifty percent loss on a down payment as not to take a hundred percent loss. Due to the exchange rate, they did not have the liquidity to finish the transaction,” Mr. Kruzhkov told the Observer. Second and in some cases third homes of this kind stopped being a priority for Russian buyers. “An apartment in Miami, even the most glorious beachfront apartment, is not a priority right now.

Everyone in New York blithely assumed the influx of foreign cash would continue forever. They completely discounted the impact domestic problems could have on their real estate market. We have the same complacency here in California today.

Troubles with Russian buyers have also found their way to the New York real estate market, materializing in a slightly different way as buyers look to escape contracts during the negotiation process. Several wealthy Russian buyers canceled deals based on Russia’s increasingly strained relationship with the western world. “I have had Russian clients who were about to purchase properties in New York change their minds within days of Russian occupying Ukraine,” attorney Petro Zinkovetsky told the Observer. One of the buyers was purchasing a $10 million home; another was looking to spend over $17 million. Mr. Zinkovetsky promptly canceled both deals.

No-Rilsk

While the stereotypical Russian buyer is a billionaire handing over a briefcase of cash for a park view penthouse, the true buyer is a millionaire who considers both financing options and bustling downtown lofts. Billionaires unaffected by the stumbling ruble are, in fact, infrequent buyers in the American real estate market compared to mid-range millionaires.

Most Chinese buyers here in the US aren’t the uber-rich. Just like the Russians, they are upper-middle class Chinese looking for a place to park money.american gothic parody 200309

“Your average Russian buyer tends to be someone who works in the $5, $10, $15 million range. Obviously very wealthy people, but also people who are much more likely to feel a pinch given the economic situation and the exchange rate,” Mr. Kruzhkov explained. …

“We have deals with Russians below five million but no one is talking about it because they think its just billionaires buying, but that’s incorrect.” As well as dealing with lower million sales, Mr. Shemesh has increasingly been putting the apartments purchased by Russian buyers on the rental market immediately after close.

The $2 to $3 million apartments preferred by the buyers bring $8,000 to $12,000 per month on the rental market, enough to cover common charges and taxes, though perhaps not turn a sizable profit. “Russian buyers look to New York as a safe haven for their investments. Even if they aren’t going to make money on the place, they are going to preserve their wealth,” Mr. Shemesh said.

It won’t preserve their wealth if many of them must sell their holdings at the same time.

Even Russian buyers who purchased trophy apartments in the city years ago are now looking to rent them out. A client of Mr. Zinkovetsky’s has owned a New York apartment for two years but spent only five collective weeks in the space. Last month, he decided it was time to rent it in an effort to level out the increasingly burdensome maintenance costs. “[Russian buyers] view United States real estate as a ‘safe deposit box’ that occasionally comes with a good view. Their objective is to move money out of their home country and safeguard their assets by placing them in the U.S. real estate… [But] at this point, it becomes expensive to maintain a ‘safe deposit box’.”

The Chinese only endure property taxes in a few locations in China. How will they feel maintaining poor-performing assets with an enormous cash drain here in the US?

Domestic real estate markets can’t be sustained in perpetuity by the influx of foreign investment. The Russian experience is a microcosm of what will happen here in California when the inflow of Chinese money turns to an outflow. I believe this will happen due to their collapsing housing bubble, but as the Russian experience also shows, it could be instability in another market, a declining currency, or a bank solvency scare that could force that too.

chinese-rehypothocation


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