Summer 2012

REAL ESTATE: China’s rich want to leave

ArmchairWith political risk increasing, many rich Chinese are moving their familes and money out of the country. Stefanie Eschenbacher finds that properties in locations with defined and protected ownership rights are the most sought-after. China’s blind civil rights activist Chen Guangcheng received international attention for his dramatic escape in April from house arrest, where he sought refuge at the US embassy in Beijing before leaving there shortly afterwards. The fact that some 14% of rich Chinese have already turned their backs on China, or are in the process of obtaining a foreign passport, went largely unreported. Another 46% of rich Chinese told the Hurun Research Institute, which publishes China’s rich list, that they are considering leaving. Political risk has increased ahead of the National Congress of the Communist Party of China in October, which will see a leadership change. It remains unclear what China’s new generation of leaders will have on their agenda so some Chinese may indeed be moving their families and money out of the country as a result. The Shanghai branch of real estate service provider, Colliers International, recently published its assessments of global real estate markets and highlights an increasing number of Chinese buying property overseas. Scott Girard, chief executive officer of PRUPIM Singapore, says protection of ownership right is always one of, if not the most important, factor when it comes to investment decisions. Paper assets
“In terms of the movement of capital from the mainland to the Hong Kong residential market, diversification has also played a role,” Girard says. Chinese investors have limited opportunities when it comes to investing their wealth and the Hong Kong residential market is one of the few asset classes that provides for some level of diversification. Though effectiveness of the diversification is declining as Hong Kong and China become increasing aligned economically. Peter Brooks, head of behavioural finance, Asia Pacific, at Barclays Wealth in Singapore, says the market in Asia is generally geared towards tangible assets, not just property. “There is a demand for property in politically stable countries where ownership is defined and rights are respected,” he says, adding that paper assets are only “attractive with suspicion”. When advising clients about their investment decisions, he says his most common recommendation is to diversify wealth. Depending on the risk level, many clients choose to allocate about 10% of their wealth in property. “We often see concentrated assets, which is not necessarily a sensible risk/return trade,” he says. Brooks and his team advise their clients to diversify geographically as well as across types of property. “We recommend against concentration, unless the client knows and understands risk,” he says. “Almost everyone overestimates their skills. If things go against them, they consider it down to bad luck.” But Brooks says owning property is not just about investment but also about maintaining lifestyle – such as the holiday home in Bali – and choices. Property is still the biggest area of wealth for people appearing on the Hurun 1000 Rich List, with 23% counting it as one of their main industries. The cut-off to make the property rich list, a listing of the top 50 wealthiest individuals with holdings in property, has risen to $1 billion, the highest on record. Xu Jiayin is the new “property king”, Hurun states, listing a property wealth of $6.7 billion. Most of the conversations Brooks has with clients centre around Hong Kong, Singapore and India. Outside Asia, locations in London and Paris are in demand. According to the Shanghai branch of real estate service provider Colliers International, Vancouver, Toronto, London and Singapore will become the most popular destinations for Chinese property investors. Between 20% and 40% of foreign investors in these four cities are already Chinese. As a result, prices of residential properties in Vancouver have increased by 9% and in Toronto by 7%. The real estate service provider witnessed an emerging trend of younger buyers, purchasing bigger apartments or luxury property. Chinatown
In London, about 20% of the newly-built properties in downtown areas were purchased by Chinese and Hong Kong investors. Colliers International predicts that, pushed up by Chinese, the property prices of core areas in London and other high-end residential districts will increase by between 5% and 10% this year alone. In Singapore, nearly 30% of private residences are owned by Chinese. Demand for property has pushed up prices, mostly because there are constraints on the supply-side but rising demand. This has added to the heat of the market, causing fears of overheating and asset bubbles. Governments in Hong Kong and Singapore have been trying to temper demand for property and cool market speculation, for example by raising the stamp duty or settling a ceiling on loan-to-value ratios for mortgages used to acquire second homes. Girad says the strong pricing growth in the Singapore and Hong Kong residential markets coming out of ­the financial crisis has been “a confluence of a sharp recovery in demand mirroring strong economic sentiment”. Cheap bank debt and low deposit rates making the yields available on real estate attractive relative to other asset classes. Girard argues while Chinese investors contribute significantly in driving the house prices and providing increased liquidity in the market in Hong Kong and Singapore, strong levels of population growth and interest from foreign buyers have contributed to rising prices. Apart from China, property buyers also come from India or Indonesia. Yet, he says, domestic factors remain key. “Cultural preference to own a property, supported by rising household income and solid economic performance, has lead to strong underlying demand for residential real estate,” says Giraud. Policy risk
Though he acknowledges rising prices, Girad says markets such as Singapore or Hong Kong offices often see see pricing move in wide ranges. “I would not call such movement as market boom and bust,” he says, adding that they are more attributable to characteristics of small open markets with volatile capital flows. As the Chinese government seeks to make housing more affordable and limit the amount of speculation in the market, selected residential markets have seen price declines. For Girad and his team, however, there are still investment opportunities in Asia. Japanese markets, for example, make an interesting investment case. He highlights structural changes in the Tokyo office market and selected sub-retail segments.  In Japan, however, there is a different type of policy risk. Structural issues such as an aging population, deflationary environment and high public debt relative to domestic output will have to be addressed at some point, he says, but political conviction to do so does not seem to be evident as yet. ©2012 funds global

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