Why do the Chinese have such high interest in American real estate? I have had many clients from China and the main stories are always the same. The market has grown too fast in China and the stock market has too much volatility, this can only lead to a downside. But really, how fast is it actually growing?
Today I met a client and it was his first time seeing homes in California. His interest: Rancho Cucamonga. The first home we went into was a modest 1,400 sqft home with a 4,000 sqft lot listed at $415k and his response, “wow, this is massive, it’s much bigger than my house in China.” Mr. Shen is from Shanghai, China and if there’s one thing to know about China, it’s that everyone wants to be in Shanghai. No cities are quite as developed technologically, economically, medically and almost every other aspect. As an example, in many cases, people have to ride 2 hours in an ambulance to get to Shanghai for proper medical care. The city is surrounded by water so it provides lots of economic stimulation. The subways are so packed you would think everyday was new years eve. The tycoons continuously buy up high rises, many at a time and auction them out in a lottery system.
So, how different is their real estate really? Let’s use the home we saw as an example: 1,400 sqft house, 4,000 sqft lot, $415k list price.
1)I asked him this simple question. What would this home be worth in Shanghai? His response. Depending on how close to the city, it could be anywhere from $3,000,000-$6,000,000. That’s 7 to 14 TIMES the price in this particular comparison for the same home in a different location. Also, it is important to note that in China, the walls are included in the square footage so the same square footage listed in US vs China would actually be larger in the states.
2)So, how much of a growth has China really experienced? He told me about his home which is a 1,000 sqft condo (most places are high rises in China,) and he bought his place in the year 2000 for $400k. What is his home worth today? $4,000,000. Wow, this kind of home must command extreme rents right? WRONG. You can get about $1,000-$2,000 a month from this property. Even though they do not experience property tax or land tax, this is a horrific return. The investment opportunity is based solely on it’s equity appreciation.
3)When a condo goes for sale how does it work? Hundreds of people will gather and get numbers. The manager in charge will spin a cage similar to a bingo game and pick a number from it and the person with the matching number will get to buy a home. One thing to note is that these homes are not built yet, all they see are 20 pieces of paper laid out on a table and they pick one to buy. These homes are selling for about $3,000,000+ and if you are lucky enough to get picked, you’re going to buy it. In the history of their real estate, by the time the home is built, you can sell the home and make a significant amount of profit, never even having been in or seen the house.
4)The difference with China is that it is powered by globalization. They have such a huge divide between the rich and the poor that they can copy Americans and get the labor and parts for much cheaper. Heck, their imitation game is so strong, they skipped the land line and went directly to cell phones. Everyone is afraid of China becoming the number one world power, however, only China is afraid that it will not.
5)And finally, this is why so many Chinese choose to invest in the American market. The Chinese government are using multiple methods to detract their citizens from investing their money outside of their own country, however, this deterrence has only led to very unique ways in which people are using to get their money into other countries. It should be noted that these methods are not ineffective as it has led to a decrease in the flow of Chinese money into the American Real estate economy.
One last note. Shanghai is only the 4th most expensive real estate market in the world. If this story made you feel uneasy, don’t even bother with UK or Hong Kong.