Landmark Links May 20th – Drinking from a Firehose


Lead Story…. We’ve seen and heard a lot of evidence (both anecdotal and otherwise) over the past few months about foreign investment in general and Chinese foreign investment in particular waning in the US real estate market.  From high end condos in NY, San Francisco and Miami to mansions in Silicon Valley there has been a steady drumbeat of stories about wealthy foreigners sitting on the sidelines ever since late last year.  However, a new report by Asia Society in collaboration with Rosen Consulting Group throws some shade on the idea that Chinese investors are pulling back from the US real estate market and argues that there is much, much more to come in the next 10 years (h/t Darren Fancher)despite the massive downturn in China’s domestic economy:

Within real estate, Chinese owners acquired at least $8.5 billion in commercial property and at least $28.6 billion in residential property in 2015. Looking to 2025, the report projected that commercial acquisitions could hit $20 billion that year and residential buying could reach $50 billion.

The driving forces behind those projections are myriad, according to the report. They include an increasingly wide pool of Chinese firms that could look to U.S. real estate as an investing opportunity (including insurers, developers and construction companies that have yet to really enter the market).

There’s also the theory that investment breeds understanding breeds more investment, and that could come to play for the China-U.S. relationship. The expected proliferation of joint ventures and informal relationships (interpersonal and inter-company) should increase the flow of deals, the report suggested.

And while many are predicting a period of Chinese economic uncertainty, the report suggested that this could actually spur near-term foreign investment as capital tries to flee the country before the country’s currency loses value.

Beyond that, tighter capital controls (officially mandated or informal) could slow Chinese investment abroad in the next six to 24 months, but that is unlikely to hinder the long-term expansion of investment into areas like U.S. real estate, the report predicted.

Chinese investors have invested a whopping $110 billion in the US real estate market ($17 billion commercial and $93 billion residential) since 2010 as wealthy investor attempt to get their cash into anything perceived as stable to avoid what many (including hedge fund titans George Soros and Kyle Bass) believe will be an inevitable devaluing of their currency.  This cash influx is highly concentrated in gateway cities, mostly near the coasts and it’s impact is undeniable.  For example, in 2015, the average foreign buyer of a home in the US paid $499,600 while the average Chinese buyer paid a whopping $832,000.  By way of reference, the current median home price for an existing home in the entire US is around $188,000 for an existing home and $288,000 for a new home.

So, why will this occur in the US rather than other countries like Canada and Australia where Chinese investors have been buying aggressively for years?  For one, the US is still the largest economy in the world and the dollar is still the world’s reserve currency, making it particularly attractive to foreigners from a currency hedging standpoint in addition to the fact that we have a relatively stable, diversified economy.  But there is another reason that the US is increasingly becoming the primary area of focus for wealthy Chinese investors and institutions: a backlash against Chinese investors in other hot markets like Sydney, Melbourne and Vancouver where locals are blaming them for contributing to housing bubbles:

Of course, these countries have had a variety of reactions as Chinese investment surged. While there is often public scrutiny for commercial real estate investment, the most vocal opposition has been in the residential sector. The current wave of Chinese investment into Vancouver, like the wave from Hong Kong 25 years before, has caused intense public outcry against what many Canadians believe is speculative real estate investment by wealthy Chinese that is contributing to bubble-like conditions of inflated home prices and pricing out many local residents. Moreover, there are some legal concerns about the origin of Chinese funds; protestations that nonresident, property-owning Chinese evade Canadian taxes; and allegations of empty investment homes exacerbating the housing crisis. The same sentiment is seen in Sydney and Melbourne and is even translating into more difficulty in the lending market for Chinese to obtain loans from Australian banks. Australia enacted new regulations to drive investment into new, instead of existing, stock, while Canada has made onerous changes to its immigrant investor program. However, some locals have acknowledged the benefits of increased investment, highlighting that without it many projects would not be viable, while an Australian parliamentary report concluded that the regulations to encourage investment in new supply were a net positive for the economy and stimulated needed new supply.

There’s also the issue of concentration.  Again, the target markets for Chinese investment are gateway cities with large Chinese populations.  However, Vancouver, Melbourne and Sydney aren’t exactly NY or London:

The relatively small size of some of these cities magnifies the impact that external investors, regardless of nationality, can appear to have on a market. Consequently, the backlash to increased levels of investment, whether warranted or not, has driven some Chinese investors to invest in the United States. The sheer size of the real estate market, coupled with the openness of the investment culture, makes the United States particularly attractive in a global context.

So, there you have it: a big part of the reason that this investment is headed towards the US is because we have an “open for business” sign out and haven’t yet experienced the foreign investment backlash that other countries have. Local realtors are taking note which is why you see more and more who cater exclusively to Chinese buyers.  In addition, the number of millionaires in China is projected to increase from 1.2MM to 2.3MM people from 2015 – 2020, a whopping 74% increase with potentially a lot more to come when the Chinese economy inevitably recovers at some point.  There are already some early signs of recovery in the domestic Chinese housing market (although they could be in a glut later this year). So what happens if many of these newly minted millionaires want to move cash out of their country while other traditional target real estate markets are antagonistic to foreign investment?  They are going to park it right here in US gateway markets.  That’s great news for current homeowners as well as developers and builders who focus there. However, it’s not necessarily great news for growing affordability and supply concerns unless the Chinese buying activity translates into job and wage growth.The bright side of this is that a larger portion of the investment of this investment is likely to come from institutional developers:

While Chinese individuals are driving investment through residential purchases, Chinese homebuilders are increasingly active in the U.S. market and are a growing source of investment. Until the past year, much of the activity was focused on small-scale construction, building a handful of new homes on small sites and targeted primarily at Chinese buyers. However, large-scale builders are beginning to enter the market and, like their commercial development counterparts, build a trusted brand as a U.S.-based builder catering to U.S. buyers. Residential construction has not been exclusively limited to condos, with Chinese developers increasingly looking toward single family housing development in the United States. Large-scale residential development took off with Landsea’s 2014 announcement that it would invest $1 billion into the U.S. housing market over the coming years.31 It was the first significant entry of a Chinese homebuilder into the U.S. market, with condo projects in Boston and New Jersey as well as single family developments in California, each with more than 100 homes. The company, which builds approximately 12,000 homes per year in China and is also active in Hong Kong and Germany, has publicly indicated its goal to become a mainstream U.S. homebuilder, as it uses local labor and materials and targets U.S. buyers. The slowing domestic Chinese housing market is providing some impetus to diversify and portends even greater investment from Chinese builders going forward. Other developers have entered the market or have considered investments in the United States. One such firm planning large developments is Starryland USA, a subsidiary of Fuxing Huiyu Real Estate, with a planned 100-unit project in the Bay Area and 200-unit project near Seattle.32 Lelege USA, led by Beijing-based businessman Zhang Long, is building 99 mini-mansions near Dallas, although these are largely targeted at Chinese buyers. Despite the entry of larger Chinese homebuilders into the U.S. market, the market remains dominated by small-scale Chinese builders, which are numerous and difficult to track. For example, in 2015 Bohong Inc. started its first U.S. real estate development project in Fremont, California; the project is located on half an acre, with 12 townhouse units approved.33 While some of these smaller-scale builders are targeting Chinese buyers, most Chinese builders, large and small, are focused on U.S. buyers. The design, materials, and amenities of homes they are building are intended to appeal to U.S. buyers and to compete in quality with homes built by U.S. firms.

This part of the story is a welcome change.  While Chinese investment in individual residential properties helped prop up the real estate market through the downturn in cities like San Francisco and Irvine it often served to bid up prices on limited housing supply and didn’t necessarily create many new jobs.  If this coming influx of new builders and developers leads to more home starts and jobs while providing some much-needed supply in tight markets, I’m all for it regardless of the pricing issues that private investors might cause at the high end.


Leaving the Door Open: Minutes from the FOMC’s April meeting indicate that most participants are open to a June rate high…..if the data supports it.

Growing Pains: Births and fertility rates tend to rebound after falling during recessions. However, both have rebounded only modestly after the Great Recession.  The US is experiencing a baby lull that isn’t ending anytime soon with negative implications for the US economy in general and housing in particular.

Money on the Table: States are losing out on billions of dollars of tax revenue by keeping pot illegal.


Hoke Poke: The success of Poke restaurants has retail operators clamoring to sign them as tenants….despite the parking nightmare that seems to follow them everywhere.

High Demand: E-commerce is driving a surge in demand for Class-A warehouse space near major population centers in the US.

Not Speculating: Office developers are holding off on speculative construction despite strong office hiring and growing rental demand for the past 26 months, citing the need for even higher rents to offset soaring construction costs.


Hot Garbage: It’s virtually impossible for Venezuela to get worse at this point short of a zombie apocalypse or outbreak of cannibalism.

Too Much of a Good Thing: Online lenders made play several years ago to target Ivy League grads in a big way.  Their business plan was simple: Ivy grads are a better credit risk than the average college student because they typically make more money when they graduate meaning less of a chance of default.  The lenders often accepted lower interest rates in exchange for safer borrowers.  Sounds simple but it hasn’t gone well and not for the reason that you might think.  It turns out that the lenders underestimated just how savvy and debt-averse Ivy League graduates are and they aren’t getting very good returns since their borrowers are repaying the loans so quickly.  But See: For-profit student borrowers aren’t faring very well.

Last Resort: Millionaire vacation home owners are battling it out with billionaire hotel owners over the use of resort amenities at Hualalai on Hawaii’s Big Island.  See Also: Country club members are bearing the brunt of the “Golf Recession.”

Chart of the Day


The Stranger: A 64 year old Massachusetts man was the recipient of the first-ever penile transplant performed in the US.  I hope that this guy is single because the pick-up line potential is virtually limitless.

Paging Mr. Darwin: A West Virginia woman died last week from complications resulting from a procedure called a Brazilian Butt Lift which is a fancy way of saying she paid a doctor to inject fat from her stomach into her butt to make it bigger.  I blame the Kardashians 100% for this.

Video of the Day: Road rage incidents are always fun to watch.  This is one of the best I’ve seen.

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