08 Feb 2018
Mainland Chinese demand has significantly shaped property markets globally, eliciting a response from both professionals and policymakers. This has been particularly true for mainland Chinese purchases of overseas housing, which has reshaped residential property markets across Asia Pacific and beyond.
We recently hosted a round table between researchers and practitioners to understand recent dynamics of mainland Chinese demand in overseas housing markets, and how these are affecting property markets and broader macroeconomic environment.
The roundtable, which combined a broad spectrum of senior industry practitioners with central bank researchers, gave a holistic view of recent market trends.
Demand for overseas property has increased rapidly
One of the most remarkable trends in recent years has been the rate of growth in outbound Chinese investment.
A UBS Evidence Lab survey of Chinese consumers across tier-one to tier-four cities showed a growing trend in mainland Chinese ownership of residential property abroad. The survey found that the greatest density of overseas homeowners resided in large, tier-one cities, such as Beijing, Shanghai, Shenzhen and Guangzhou.
Southeast Asian destinations are growing in popularity among mainland Chinese buyers
Participants attending the round table highlighted the increasing demand for properties in Southeast Asia as one of the more recent trends.
Demand has been particularly strong for properties in Thailand and Malaysia, which was attributed to their popularity as vacation destinations and the connection to government policy via One-Belt-One-Road investments. The Philippines was highlighted as an area where demand could next shift to, for similar reasons, while destinations, such as the US, Canada, the UK, Australia and Hong Kong, remained popular.
Buyers have several motivations, but ROI remains number one
There were a number of motivations cited as to why mainland Chinese citizens look abroad for homes, but return on investment (ROI) was deemed the most important. This is likely attributable to a lack of domestic investment opportunities for Chinese households, as the financial system has yet to fully develop. Mainland Chinese homebuyers have become increasingly sophisticated and are very sensitive to fluctuations in currencies and yield.
There was the thought that overseas properties were a safe-store of value for mainland Chinese residents and, as such, they are more willing to leave them vacant. The UBS Evidence Lab survey corroborates this to an extent — 15% of respondents who have bought a property in the past five years said that they left it vacant.
Beyond investment, educational considerations are another factor driving home purchase decisions overseas. The US, which attracted US$30 billion worth of inbound home purchases from mainland Chinese buyers in 2015, was popular in this regard.
In the past, buying for educational purposes has been concentrated in university towns — parents buying homes where their children attend post-secondary school. However, in recent years this has shifted to second-tier markets, particularly in the northeast, as sending children to overseas boarding schools has become more popular.
Finally, a home remains an aspirational purchase for many young people in mainland China, where 70% of millennials own a home versus ~35% and ~30% in the US and the UK respectively. As property values in tier-one cities rise, some younger people have looked to purchase homes in overseas markets, where home ownership is less of an issue.
Mainland developers are also interested in overseas market
Despite having a large domestic market — the entire stock of Australia’s housing market is built in China every year — mainland developers have become increasingly active overseas. Some felt that this was due to a prestige factor; having an overseas development was seen as a mark of prestige (and could prompt mainland developers to offer a premium on purchases that overseas developers would not be willing to match).
There was also the idea that mainland firms had been using overseas markets for experimental purposes. As China’s domestic market matures, developers dabbled in overseas markets to get a taste of what the Chinese market would become.
Developers have recognised the demand from their own client base for overseas properties and have tapped their own customers as a conduit for sales. Chinese consumers are highly brand-conscious (something also found in the UBS Evidence Lab surveys), and prefer to buy from a mainland developer they know rather than an overseas developer they don’t.
Capital controls have had some effects, but haven’t been overly restrictive
Capital controls by the mainland Chinese government have been one of the most hotly discussed topics since restrictive measures were imposed last year. Although participants did note that the controls would have some effect on Chinese homebuying abroad, the general mood was that these concerns have been largely overblown.
Most mainland Chinese purchasing high-end properties had already moved capital abroad prior to the imposition of these restrictions. As for the mass-market buyer, there was the sense that the Chinese government would allow some flexibility for residents to move capital overseas to purchase homes, as capital controls were mainly aimed at corporates rather than households.
Furthermore, settlement issues appear to be largely overblown by the media, particularly in Australia, where banks have slightly more exposure to this. This risk was seen as minimal in most markets, and project-specific rather than systemic. Due diligence practices have also been improved upon and buyers need to show some proof of funds before a purchase is approved.
Chinese homebuyers are characteristically cash-rich and quick to close. In the US, the time from first contact with an agent to closing on the property is usually less than sixty days, with only one visit to the property. If there is financing involved, it is usually done through the overseas branch of a mainland Chinese bank rather than a local lender.
Mainland buyers don’t pose a systemic risk to overseas housing markets
Mainland Chinese homebuyers are not seen as a systemic risk to foreign residential markets. In addition to the above, loan-to-value (LTV) ratios tend to be quite low, with the UBS Evidence Lab survey finding that the average LTV for mainland purchasers was 65% after adjusting for top-up loans.
However, top-up loans are an area of concern. Although the absolute level of these remain low, they have risen at a rapid pace in recent years. Additionally, foreclosure laws are still unclear on the mainland. A formalised and enforced bankruptcy code would go a long way to resolve this issue.
Residents of mainland China have become increasingly important in providing liquidity to international housing markets. Although capital controls may dampen the flow of funds from China to foreign residential markets, it is unlikely to stamp it out completely. The tastes of mainland Chinese homebuyers are going to become an increasingly important factor in shaping global housing markets.
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