By Nick Segal 04/30/2013
There is an optimistic perception borne by homeowners in major cities across America that Chinese investors are seeking to buy homes in great quantities, and that they’re even prepared to pay premium prices to do so. Certainly an understandable position when we’ve heard how our home prices are quite inexpensive relative to the high cost of housing in China’s major cities, where wealth is being created exponentially.
However, there is an issue with this notion that may dash some of our euphoria. Having now spent a concerted period of time in both Hong Kong and Shanghai speaking with wealth managers, private bankers, and heads of real estate brokerage firms about the mindset of Chinese investors, I have a much better understanding as to what drives them to purchase property in our — or any — market.
Before we dive into looking at the individual types of buyers, it’s important to first understand that there is a generation of Chinese investors that has grown up idolizing and aspiring to everything “American.” At the same time, this group actually can be rather ill informed. Since their information comes from general media and TV, and we all know that, at best, is only a partial portrayal of the actual society, and at worst a gross misrepresentation. Many Chinese, after arriving in the States, face the harsh reality that what they dreamt about does not match reality.
Secondly and somewhat related, Chinese investors tend to cluster. Because of the strength of relationships they trust (more on this key element later), if one of their circle of friends invests in one area, it’s likely that many others will follow. From a property perspective this can be both a blessing and a curse: it can drive prices up beyond their fair market value as the lead investor, in essence, has established a new (Chinese) market value for a particular community just by virtue of moving there. On the other hand this inflated value only applies to other Chinese investors and, in fact, a heavily Chinese community may decrease the attractiveness and therefore the property value for non-Chinese.
As I see it, here are the four types of Chinese investors looking to acquire property in the United States.
1. THE ACCELERATED-RETURN BUYER
Massive short-term wealth has been realized in Hong Kong and Shanghai for thousands of Chinese investors in recent years through the acquisition and sale of property within China’s borders. Accustomed to that fantastic appreciation, the accelerated-return investor looks now to replicate this double-digit return strategy when seeking additional investment abroad – which can be very difficult.
In a recent study about investment strategies of the Chinese über-wealthy, there’s a much greater appetite for “wealth growth” over “wealth preservation.” This focus on “more, more, more” tends to drive investors to look for returns in the 20 to 40 percent range, responding to a 5 to 8 percent return with little interest.
In the residential arena, this investor isn’t interested in a home that can’t create a short-term rate of return (unless you are willing to sell at a deep discount), which therefore takes them out of the potential buying pool and the payment of those hoped-for premium prices.
2. THE FUTURE GENERATIONS BUYER
Consider the Pasadena and San Marino areas of Los Angeles, where the Asian population has growth dramatically in recent years because of the emerging family-oriented community and access to high-caliber schools. Culturally, family and children have the greatest value for wealthy Chinese, who are especially focused on diversification and asset protection due to the government’s ability to give and take at its discretion.
Here the motivation to buy is strongly based on making sure their next generation has the best education to prepare them for getting into the top colleges and universities. An investor will likely pay fair market value (and not more, after having done much analysis of facts and figures) for a home because the return is realized through the support of their children rather than a quick jump in their bank accounts. Because for these buyers, the ultimate reward is providing the absolute best for their family.
3. THE CITIZENSHIP BUYER
The U.S. offers some programs that provide a path to citizenship for those who create new business that provide sustainable jobs over 5-year periods. However, I have been told that foreign investors have lost some $10 billion simply because the programs’ stringent terms cannot be met. This type of news travels fast. As such, this type of investor isn’t looking toward the acquisition of residential real estate as part of the design for citizenship.
4. THE ANECTODAL VALUE BUYER
When those with immense wealth can buy anything they desire, the experience and/or the uniqueness of an asset takes on tremendous value in terms of bragging rights and/or exclusivity that makes one’s heart rate quicken. The ability to play golf with Tiger Woods — if that’s even possible for the average person — is a once-in-a-lifetime opportunity, and wealth pays for that without batting an eyelash.
In the residential space, if you have a trophy property — or one of notoriety, perhaps if a famous celebrity recently owned it — you can attract the attention of the über-wealthy. This seduction is done in a highly discreet manner. And only after the acquisition has been realized, is the circle of friends made aware for all to see.
Relationships are absolutely critical to penetrate the inner circle to even present these types of opportunities.
And unless you’ve gained an insider’s trust, no measurable amount of blind marketing will capture anything more than a passing interest. Trust is earned over time through the demonstration of caring and through requests and favors in the highest spirit of integrity. As it was said to me: “I care for you and you care for me. When I need something, the fact that I would ask you to assist is the highest form compliment I may pay you. And when you need something of me, I hope that you will trust me enough to ask.”
For sellers with these types of “experience” properties, the way to reach this class of foreign buyers is from the inside out — and that takes patience above all else.
These four main types of Chinese buyers all still have one thing in common: a vast amount of wealth. However, this only tells part of their story. For instance there’s the:
Highly Educated and Sophisticated Buyer
• mostly educated overseas (many in the US)
• made their money in China, on par with top American buyers
• looking for top level of service
• extremely demanding, wanting to know every detail of the deal
• will rely heavily on their stable of lawyers, financial advisers, etc.
Barely Educated Nouveau Riche
• mostly locally trained
• very little education
• made a lot of money through connections or hard work
• enamored with trophy real estate for sake of bragging rights
• drives the best cars, lives in the largest homes (often gaudy in design)
• tend to be the biggest spenders with the least hassle during negotiations
• usually make “gut” decisions
Well Educated but Local Rich
• representing the wealthy, well-connected intelligentsia of China
• a little lost when coming to the USA and frustrated by that fact
• may need the most advice
• extremely diligent in learning all aspects of life in America as soon as possible
• appreciates consultation and introduction to similar level executives
Identifying the ideal type of foreign buyer for your home is one thing. But there are other challenges to striking deals with these buyers that you should be aware of, as well. One such element is the language barrier, which leads many foreign investors toward Asian-speaking brokers and agents that may or may not be as well versed with the customs and practices of our local communities. Some representatives of these buyers make deals to give portions of their commissions back as a form of “partnership,” which compromises the integrity of the home-buying process. Locally, offers have even been presented with the agent having signed on the buyer’s behalf, or with no buyer’s signature at all.
Also in play is the fact that much of the money needed to finalize these purchases is located in Chinese banks, which can create its own problems. However, in speaking with UBS in Hong Kong, I was assured that, if the money is held with their financial institution, transferring money from China to the United States can take as little as two to three business days. Thankfully, if the funds are with UBS or in a similarly reputable financial institution, this shouldn’t be a major source of frustration.
It took me coming to these environments, and talking with smart and experienced players in this economy, to better understand the depth and breadth of the foreign investor’s mindset. And candidly, I’m still just scratching the surface. But from what I’ve learned so far, China is poised for tremendous growth for the foreseeable future. The Chinese government, by many accounts, controls the flow of money and resources to support themselves and allow hundreds of thousands of current and emerging millionaires and billionaires to share in the gain. Understanding how they think culturally and what motivates them are keys for our success if we are going to manage our own expectations as to whether our not they become our next home purchaser.