By Sean Mei, Founding Partner, Partners Trust China.
Most Chinese were as surprised as the rest of the world with the US Presidential election results. However, unlike in most parts of the world, the reaction has been markedly less negative and in some cases very positive. In an earlier blog just before the elections, this author and our office in Shanghai noted a slight preference for a Clinton presidency by individual Chinese investors driven by a desire to see continued stability and growth in the market.
However, as reported by Forbes, in a survey last week of 500 mainland Chinese citizens conducted by Eastwestproperty.com, “53% are now more positive about U.S. Property,” which mirrors the feedback that Partners Trust China has received since the election.
Were we wrong in the pre-election assessment or did investors change their minds? From the post-election discussions it now appears that market watchers in China are looking to be opportunistic and expect a slight dip in real estate property sales in California, especially between now and until at least the first few months after President-elect Trump’s inauguration. The assumption is that there may be a temporary post-inauguration downturn in the local investment climate particularly in blue states such as California. This combined with a potential interest rate hike by the US Federal reserve may cool the market.
Chinese investors stand ready for such a slowdown. Having learned from the post-Brexit sudden drop in prices and therefore an increase in investment opportunities, Chinese investors have already demonstrated that they are more than ready to pounce on any post-Trump panic by local or international markets.
If you further add the fact that Chinese currency controls, restricting wealthy Chinese on moving their wealth out of China, have started to loosen since October, there are strong indications that from January and February 2017, coinciding with Chinese New Year when many Chinese plan their overseas travels, we may see a sudden increase in real estate purchases by investors from mainland China.
To prepare for this anticipated increase, Partners Trust China will over the next two months provide suggestions how to best get ready.
For many of you who have already had experience with investors from China, this may serve as a refresher. For others, we hope that this will be helpful to attract this growing investor class to your properties and close sales.
Why has the median purchase price for Chinese investors hovered around $900,000 an will this trend continue?
Chinese citizens officially are limited to a maximum of USD 50,000 per year that they can exchange from Chinese Yuan (also called “RMB” or Renminbi – which translates to “the people’s currency”). Over the years, Chinese have found creative ways around this restriction, however since February many loopholes were closed by increasingly strict government policies. Even before these strict policies, it took significant effort, time and a large number of friends and relatives in order to put together sufficient foreign currency to buy overseas property. This put artificial restrictions on the types of homes that even some of the wealthiest Chinese could buy. With the policies loosening since October, the expectation is that not only more Chinese funds will flow into US real estate in 2017, but also that Chinese will be able to purchase more of the type of luxury homes that Partners Trust represents.
What do Chinese look for in a home?
It depends on why they are making the purchase, whether it is for investment and hedging purposes or for their own use. Juwai.com has also an interesting method of differentiating ethnic Chinese buyers that is helpful to provide additional context. Some factors that make a home attractive to a Chinese buyer are universal regardless of the purpose:
1. Good value: everyone loves a good deal and Chinese high net worth are no exception. Have a list of comps ready to show how values have risen and why you are presenting your Chinese client with a terrific deal. Similarly, if you can show a property that other brokers cannot (better market intelligence, off-market listings etc.) you have a distinct advantage. Show everything you can about the potential in growth (economic growth in the area, job growth, historical growth, anticipated yield), however do not make it a ‘hard-sell’. High net worth Chinese by definition have high business acumen and trust their intuition. They will figure out on their own that the property is of high value. To them, the broker’s job is to provide and focus their attention on factual numbers and data.
2. School district & Education: related to good value, many Chinese investors may have an eye towards sending their kids to school in the US. Or alternatively, they may know other Chinese who are planning to do so. This makes any property located within an excellent school district a high value target either for their own use or for future re-sale. What does an ‘excellent school district’ means for Chinese? Provide a list of which universities high-school graduates are accepted to and show the rankings of those universities. Furthermore, highlighting the distances to nearby renowned colleges and their respective rankings will increase the attractiveness of your property.
3. Convenience: many buyers will not reside at the property or if they intend to perhaps years down the road. What services can you provide to make their remote home ownership more convenient? Can you introduce resources to manage or rent out the property? How about maintenance? How easy is it to make occasional visits? Are there direct flights, nearby hotels? The more this is thought out and presented, the quicker the buyer will make the purchase decision. If the buyer intends to reside at the property, then provide the nearest amenities and include amenities that cater to Chinese, grocery stores, size of Chinese community etc. If a family decides to reside at the property, they will often have relatives visit or even stay for extended periods of time. The buyers themselves may speak English but most likely their relatives will not. Presenting the context of the property, especially if it has businesses in the vicinity that cater to the Chinese community would greatly increase the attractiveness of the property.
4. Cachet: is there something unique to the property? Has it belonged to a celebrity? Has the former owner gone on to bigger and better things? Does the location have some unique quality? Or is it particularly close to landmarks that Chinese will recognize? Has something auspicious happened on or near the property? All these are important aspects as it relates to the property’s ‘Qi’, translated roughly as ‘Air’ or ‘Atmosphere’ of the house and adds tremendous intangible value and has direct correlation to the next factor.
5. Feng Shui and numerology: most Chinese will pay attention to this but it is not a deal breaker if there are inauspicious circumstances, since almost any situation can be mitigated. However a basic knowledge of what matters to Chinese buyers is helpful to close the deal. Some guidelines are presented here, there are numerous resources online for more in-depth information. Properties directly at the end of a street are not desirable and certainly the front door directly facing towards incoming traffic can be a deal breaker. Properties located adjacent or very near to graveyards also are extremely undesirable. Know the history of the property. If someone passed away inside the home, it is a situation that will need to be addressed. Conversely, if children have grown up in the home and have gone on to successful careers or renowned schools that would be something to highlight. South-facing master bedrooms and living rooms are desirable. As are having running water on or adjacent to the property. In terms of numbers, the number 4 is undesirable, as its pronunciation sounds similar to the word ‘death’, while number 8 is desirable as it sounds like the word for ‘prosperity’. Numbers that ascend are preferred over numbers that descend, for example one of the best address numbers would be “168”, which literally translates to “forever prosperous” and ascends in value, whereas “94” would be bad which translates to “long death” and descends in value. While the younger generation may care less about numerology, some of these biases have been passed on for so many generations that even subconsciously, Chinese buyers may be turned off by such numbers. Again, there are things that can be done to mitigate and if a buyer really likes a property and the only thing ‘wrong’ with it is the street number, it could be helpful to try and change the number or get some advice from a Feng Shui expert to close the deal.
6. Interior & Design: most Chinese tend to be uncomfortable moving into a ‘used’ residence. They of course realize that the majority of the homes in the US are not new. Most Chinese therefore will remodel the interiors, even if it has been recently remodeled already. If the previous owner has done remodeling before the sale, highlight which remodeling was done after the previous owners moved out and therefore have never been used. Have resources available that can help with interior design and remodeling and make that process as convenient as possible. Also, many features in US homes may be different or not common in Chinese homes. Take the time to show features, even those that seem commonplace. In-sink garbage disposals for example are a convenience that most Chinese have not seen before. Closet dividers and specific storage solutions can also be a big hit. However, also be aware that luxury homes in China often have more state-of-the-art technologies built in than existing properties in the US, just because they tend to be new construction. Do not assume that the features in US homes are more advanced, they are just different.
7. Communication: last but not least, most Chinese investing overseas have some understanding of English and many are quite fluent. Nevertheless, having a Chinese speaking resource is highly valuable. While English proficiency is increasing with each generation, high net worth Chinese may not be as comfortable speaking in English. In China, these individuals have great confidence in their status and ability to express their requirements and are used to the respect that their achievements have brought them. When they are in the US, they are outside their comfort zone. Rather than risking to appear not knowledgeable or even insecure, they may just decide to not communicate much at all. If you have access to a Chinese speaking resource, the level and depth of communication will be greatly enhanced and you may arrive at a ‘buy’ decision quicker.
What can you do to attract potential Chinese investors to the properties you represent or the area that you cover?
Here is where Partners Trust China can help. Our office in Shanghai is set up not as a brokerage firm but rather as an advisory and consulting company providing advice in the areas of real estate, education, immigration, tax planning and wealth management to high net worth Chinese planning to buy property overseas. In China we do not have a brokerage license and as a result we develop partnerships with top level developers, luxury brokerage firms, and private banks whose clientele have proven means to purchase luxury properties. In the next month, we will roll out a program whereby Partners Trust Associates and Partners can feature their property listings or areas through this channel directly and get exposure for their listings directly to more than 300,000 high net worth Chinese families. Stay tuned for further information on this program.