The Fall of the Maple Leaf

Whoosh! That’s the sound the Chinese made this week when they overtook Canada to become the largest foreign buyer of US real estate. That’s in terms of units, dollar volume and price paid. Or, in other words, the whole kit and caboodle.

According to the Financial Times, in the 12 months to the end of March, that’s US$28.6 billion in hard numbers and 30% up on the previous year. They’re mostly buying residential property, in the same way as they are in Canada, New Zealand and here.

Here’s why. From the FT:

Houses in English-speaking democracies with good education systems, excellent quality of life, strong rule of law and strong property rights are regarded by Chinese buyers as excellent stores of wealth.’

This is not your average Chinese punter though. These buyers are spending on average US$831,800 per property. That’s three times the amount the average American pays. What’s even more telling — 70% of these transactions were reported as all cash.

This trend is only going to get bigger around the world. The Wall Street Journal reported yesterday that Beijing is preparing to launch a new pilot scheme later this year. It’s called the Qualified Domestic Individual Investor (QDII2).

This scheme will allow individuals from six cities to invest in overseas assets such bonds, real estate and stocks. Anyone part of the scheme won’t be limited to the $50,000 cap China has on sending money out of the country.

Of course, the existing limit clearly doesn’t stop money getting out of the country anyway. But no doubt Beijing, and the world, will be watching to see how much money heads out the door under the scheme…and where it goes.

The early guess is already in. The WSJ reports:

Analysts at Chinese brokerage China International Capital Corp., believe QDII2 will boost buying of real estate rather than stocks, because channels to buy overseas equities already exist, and Chinese investors tend to prefer buying hard assets…The U.S. and Australia were the top two targets of Chinese real estate buying overseas.

Currently the QDII2 is restricted to investors with at least one million yuan of net financial assets, excluding their residence. Can you imagine how much money might come out of China in the next ten years if they make the yuan fully convertible for everybody? It could be staggering.

The risk for cities in the West where the Chinese desire to own property is that so much money will be funnelled into them, property prices will explode further than they already have. This is one reason why my colleague Phillip J Anderson expects the biggest boom of all time in the next decade. Get the full story here.

Don’t forget there’s already plenty of demand for US property from…you guessed it…Americans! Our friends over at the Rude Awakening Pro pointed out this week that the number of building permits issued in May rose to the highest level since August 2007.

As we reported in our last issue of Cycles, Trends and Forecasts, the US needs 1.5 million housing starts per year. That’s because the US generates 1.2 million households every 12 months but 300,000 houses are made obsolescent and abolished in the same time frame.

You can compound this on top of the fact the US has been underbuilding homes for seven years. The downturn in 2007 wiped out a lot of builders and developers.

Those that survive face a tough economy with tight credit and high unemployment. That means the houses they do build tend to cater for the wealthy, the only market with money and access to credit.

As the population continues to grow, and as the economy slowly improves, it pushes up rents for establishing buildings. Home prices in the US have gained 25% nationally since early 2012. Eventually this process entices the builders and developers back into the market.

But until the developers meet the demand and catch up, there’s a large rental market to cater for. This is an area Wall Street is increasingly moving into.

Institutional investors are ploughing money in. Just this month Bloomberg reported that Cerberus Capital Management made the rental industry’s largest ‘bulk purchase’ of 4,200 homes in a private deal.

Cerberus is following the path Blackstone Group blazed when it began buying up depressed properties all over the US on its way to becoming the largest real estate company in the world. Another example is American Homes 4 Rent [NYSE:AMH] which bought 1,300 properties in July 2014.

From Bloomberg:

Both equity and securitization markets have opened up to the largest operators, helping them expand and providing leverage to increase returns on their investments.’

This real estate cycle isn’t over by a long stretch. In fact, it’s just getting started.


Callum Newman+,
For Markets and Money, Australia

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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