New York Real Estate Fears China Investment Slowdown

New York Real Estate Fears China Investment Slowdown
The skyline of New York with a few of Central Park and the Hudson River, in this file photo. Reggie Middleton thinks real estate in the U.S. is in another bubble. (William Edwards/AFP/Getty Images)
Sarah Matheson

NEW YORK—The first hint that mainland Chinese money flowing into New York City real estate may be slowing appeared in survey of the Real Estate Board of New York’s (REBNY) Broker Confidence Index released Thursday, July 30.

The survey rates broker confidence in the city’s real estate market for the next six months. While confidence is still considered high, around 10 percent of the roughly 400 brokers surveyed listed concerns about a slowdown in investment from mainland Chinese, the effect of Greece’s troubled economy, and the effect of fluctuations in the stock market. 

The brokers’ concerns lie largely with China’s unstable economic and political situation, and the question of whether or not wealthy Chinese will be able to continue to ferret their money out to the United States. 

Setting aside the enormous instability in China’s stock market of late—with over $3 trillion in wealth disappearing in the space of a few weeks—the ongoing crackdown on corruption by China’s leader Xi Jinping continues to strike hard at the psyches of many of China’s wealthy and connected businesspeople and officials.

For example, in April of this year, China issued arrest warrants on Interpol for 100 officials thought to be in the United States and Canada that it accused of bribery, embezzlement, and fraud. 

Chinese billionaires are well known for hiding their wealth. According to a 2013 Huron wealth report on the super rich, of China’s 8,100 billionaires, 5,400 of them are categorized as owning “hidden wealth.” And as more and more of these high net-worth individuals are targeted by the regime, those who remain are becoming increasingly cautious.

At the same time, getting money out of China legally can only be done in so many ways, and this too is becoming more difficult. 

Tightening in China

Jonathan Miller, CEO and president of Miller Samuel Inc. appraisers, has heard consistently from colleagues over the last year that China has been attempting to tighten outflows of capital from investors. 

China's explosive growth benefited the New York City real estate market but now that China's economy is slowing, brokers are anticipating fewer buyers from China.

“I’ve also run into people who have said that these efforts started a while ago, well more than a year ago, and so the money that is being invested now by Chinese are funds that have already left the country,” said Miller. “And so it’s not clear whether the funds are coming from within or outside [China].

“The volatility of China’s stock market may also make trying to stem the tide of the outflow more difficult for the Chinese government,” Miller added. “There’s not a lot of options for Chinese investors.”

According to Peter Donovan, senior managing director of multifamily at CBRE Group, it is too early to know how the stock market crash will ultimately impact Chinese buyers’ activity in the United States.

The enormous investment in New York real estate by Chinese is a well known phenomenon. Investment in 2014 topped $3 billion, a 43 percent increase over the previous year, while this year investment is already at $3.8 billion in Manhattan alone, according to data from Real Capital Analytics cited by the Daily News.

A number of expensive high profile investments did a lot to cause these numbers top out, such as the purchase of The Waldorf Astoria Hotel for $2 billion in 2014 by Beijing-based insurance company Anbang. 

While many in New York real estate expect Chinese interest in very large investments to continue, for brokers who sell apartments in high priced luxury towers to individual investors, the situation on the ground could look very different. 

“The drop in the Chinese stock market may have two very different effects, either limiting buying activity because of liquidity needs, or spurring buying in the U.S. to be in more secure and predictable investments,” Donovan wrote in an email.

At home the stock market or real estate for all intents and purposes don't look so hot at the moment, so I think the pressure to get funds out and diversify across the globe are not going away anytime soon.
Jonathan Miller, CEO and president, Miller Samuel Inc.

Miller believed the brokers’ survey comments highlight the lack of clarity in understanding what the money flow from China will look like over the next few years.

However, he added, “At home the stock market or real estate for all intents and purposes don’t look so hot at the moment, so I think the pressure to get funds out and diversify across the globe are not going away anytime soon.”

Constricted Flows

The retrogression of the EB-5 visa category for mainland Chinese may also squash the demand for New York City real estate, as China’s most wealthy can no longer obtain a conditional green card with the same expediency as before—nor will they be investing half a million dollars at the same frequency as part of their EB-5 applications.

The waiting time for a conditional green card through the EB-5 program has moved from around one year, to around three years or more, given that only applications with a priority date of September 2013 or earlier are being processed for mainland Chinese, according to the Department of State’s August Visa Bulletin.

Individual Chinese face a $2,000 a day limit on moving funds outside of China, with an overall limit of $50,000 a year. If Chinese want to move more money overseas they have to go through the The State Administration of Foreign Exchange (SAFE) and show that the funds were legitimately obtained, and taxes have been paid on them, according to the South China Morning Post.

If individuals do not want to go through SAFE, usually with the help of their banks, they can enlist trusted friends or family members to also help move their money—each person can also transfer up to $50,000 a year.

Chinese can also take RMB 20,000 or $3,200 out of China physically, and higher amounts could potentially be divvied up between family members.

Other strategies for moving the capital include buying high-end jewelry or fine art inside China and then moving that overseas and reselling it. China does not limit moving personal property abroad.

NYC Demand Concerns

Michael Slattery, senior vice president for research at REBNY, said brokers that expressed concern about foreign buyers in the survey were those operating at the higher end of the market, while brokers that were concerned about inventory specialized in properties at lower prices points, from half a million to $2 million.

He believed brokers were concerned that a reduced pool of buyers from China would cause an overall reduction in demand in the city’s real estate market.

“If you have been dealing with Chinese buyers, and they stop coming or stop investing for reasons that are related to their activity in their home country, that is a concern as well,” Slattery said. “So I think it’s twofold, I think it’s the buyers themselves but it’s also what it does to overall demand.”

Slattery said China’s explosive growth benefited the New York City real estate market but that now that China’s economy is slowing, brokers are anticipating fewer buyers from China.

Nikki Field, one of Sotheby’s International Realty’s highest grossing brokers, has been selling some of Manhattan’s most prestigious apartments to mainland Chinese clientele since 2008.

While a panelist at The Real Deal’s new development forum and showcase in May, Field said most of her buyers “had their funds outside of the country, offshore, already, so it was not difficult to transfer the money here.”

She also said the Chinese clients she was dealing with were looking for brand prestige. “So if you could give them something with a brand or prestige at the higher tier of the market … it is a home run,” she said.

Neither Field, nor Cathy Franklin of Corcoran, who specialize in higher-end Chinese buyers, responded to requests for comment for this article.

Sarah Matheson covers the business of luxury for Epoch Times. Sarah has worked for media organizations in New Zealand, Australia, and the United States. She has a Bachelor of Arts in Anthropology, and graduated with merit from the Aoraki Polytechnic School of Journalism in 2005. Sarah is almost fluent in Mandarin Chinese. Originally from New Zealand, she now lives next to the Highline in Manhattan's most up-and-coming neighborhood, West Chelsea.
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