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Trust Issues Send Chinese Investors Overseas

Adnan Zai

Even as China is locked down in hopes of curbing the outbreaks of Covid-19 in their nation, an interesting phenomenon is occurring regarding the economy. China is changing the way it looks at foreign investments, as the number of people with money in the country increases, and their faith in the safety of investing in their own nation decreases. This makes it a great time for the Chinese to invest in foreign real estate. Many have turned to nearby Singapore, but it is also a great time to move towards investments in the US housing market. For Chinese investors with a family office, moving towards US investments is a promising idea.

Changing the Game

Investing in China has been modified for the last several years due to the economy, as well as the pandemic. What started in 2019 when protests rocked Hong Kong’s economy and sent Chinese investors scattering for a better place to store their own wealth, was exacerbated by the crackdown of the education industry in 2012 and Chinese President Xi Jinping’s emphasis on common prosperity. Iris Xu, founder of an accounting and corporate services firm, said her Chinese clients “believe there are plenty of opportunities to make a fortune in China, but they are not sure whether it is safe for them to park money there,”

Many wealthy Chinese turned to Singapore for a safe place to store cash, as they don’t have a wealth tax. Creating a family office is a good way for these Chinese families to create a mechanism in order to invest in a way that brings more confidence. A family office manages the wealth and investments for well-to-do families and is a privately held company. Starting one in Singapore will typically require $5 million in assets.

Another reason Chinese are interested in instituting a family office in Singapore is because of China’s response to Covid-19. “The country has a global investor program that allows adults who invest at least $2.5 million Singapore ($1.8 million) to apply for permanent residency.”

Because China’s government could even suspend issuing passports in order to control the virus, many Chinese people have been looking for a way to more easily move around the globe.

Interestingly, Hong Kong money managers still have more clout when it comes to investments, even in Singapore, and are still called on as advisers. “If Singapore cannot catch up in providing [quality] wealth management services, Chinese assets will still be managed by professionals from Hong Kong. After all, family offices are not restricted in where they invest,” Xu said.

Investing Across the Pond

In addition to Singapore, investing in American real estate is a viable option for family offices and other investors, but the process has been hampered by the virus. China’s borders are still closed in hopes of containing Covid-19, which is bad news because Chinese investors like to see the properties they purchase before buying. The pandemic has also slowed studying abroad programs, and a 20% reduction in the number of Chinese students studying in the US has impacted the market, because Chinese students sometimes buy homes with family money.

Chinese FDI (foreign direct investment) inflows into the U.S. have remained low. The average inflow over the 2018 to 2021 period was $7 billion, compared to the 2016 peak of $49 billion and then $37 billion in 2017. For 2021, our preliminary estimate is $5.7 billion. This is hardly surprising, with the intense influence of the pandemic as well as national security issues.

The problem will not improve in the near future, believes Reva Goujon, senior manager at New York-headquartered Rhodium Group, which specializes in China research. “Slower economic growth in China in recent years has already been weighing down inflows. The current economic headwinds are strong and growing,” he said.

Back to Life

Investors on both sides of the ocean hope that things will get back to normal soon, as Chinese investors buying American real estate is a win-win scenario. Currently, the Chinese (including People’s Republic of China and Hong Kong, represent the largest foreign real estate investment into the United States. Between 2010 and 2021, Chinese buyers of US real estate have purchased an average $18 billion per year of US property, with a total of 27,000 units purchased each year.

According to the National Association of Realtors (NAR), “China (includes Hong Kong) emerged as the top country of origin among foreign buyers in 2021, accounting for 8% of all foreign buyer purchases in terms of dollar volume of existing home purchases in the United States.”

The number was much lower than in the previous year, a decrease of 66% in terms of the number of units sold, and that can be attributed to the Covid-19 related travel restrictions.

Experts believe the business will bounce back.  “When China’s borders reopen to free travel, the rebound in Chinese property acquisition will rapidly gain pace as visits climb,” said Kashif Ansari, whose firm gauges demand based on client enquiries and advertises US$4 trillion worth of property from 111 countries.

“The US home market is very appealing to Chinese buyers,” he said. “In particular, the prospect for continued rapid price growth attracts buyers who are eager for capital gains.”

California, Georgia, New York and Michigan were the top four US destinations for Chinese residential property money as of March 2021, the trade association said.

With the advent of more family offices, as well as more freedom for the Chinese to put their money in places that make them comfortable with their investment profiles, investment in American real estate should continue to grow. If the pandemic can be held at bay and the Chinese are able to travel in order to check out their purchases in advance, most experts think that there will be a burgeoning amount of American real estate sold to Chinese investors in the coming months.

Adnan Zaiq1

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