For the past five years, Chinese investors actively targeted U.S. real estate in major coastal markets like New York City and San Francisco, but a shift in preferences has emerged as these markets fail to produce significant returns.
A second wave of savvier buyers has new motivation for acquiring real estate, which has altered their investment strategy. Through greater access to data and information, foreign investors have discovered that higher-yielding real estate assets are located far from the iconic cities they once coveted.
When the first wave of Chinese investors entered the U.S. market in 2009 to the tune of $4.1 billion, they targeted these primary markets for a variety of reasons: they are familiar tourist destinations or they had relatives or friends who resided in these metros. Foreign investors were also motivated by the desire to “land grab” in renowned American cities, so they acquired properties for vacation use, to bequeath to their children, to establish a foothold in the United States, or as a flight to safety when the Chinese economy sputtered into a recession in 2008.
As U.S. median home price values rapidly increased starting in 2012, and the primary markets were saturated after institutional investors went on a buying spree, single-family rental yields dwindled. This prompted foreign investors to focus on alternative locations and Chinese nationals began seeking out “smart” investments in alternative locations, rather than “prestigious” investments in first-tier cities.
Big Data Fuels Foreign Investment Decisions
Greater access to big data and information via the Internet has empowered this new cohort of foreign investors. Websites like Zillow, RealtyShares and mine, HomeUnion, provide investors across the globe with data and analytics on millions of homes, as well as insight into real estate investment market conditions, as well as supply and demand conditions in the United States.
Armed with this extensive and detailed information, Chinese investors are actively searching for properties with better returns in markets they previously may not have known existed, such as Indianapolis or Birmingham, Alabama.
Four years ago, a Chinese investor would have more likely opted to acquire a large home in a prestigious Seattle neighborhood like Mercer Island, but today he would profit far more by acquiring housing or portfolios of homes in emerging neighborhoods like Thornton Park in Orlando.
Some savvy investors are even exploring SFRs in tertiary metros like Cleveland; Columbia, South Carolina; Birmingham, Alabama, Pittsburgh; and Milwaukee, where yields ranged between 8% and 11% annually as of mid-year 2016. Comparatively, yields for SFRs in New York City, San Francisco and Seattle, ranged between 2% and 3% during that same time period.
The second wave of Chinese investors appears to be targeting markets nationwide, at least based on the record amount of capital flowing into the U.S. real estate market. During this same period, the volume of Chinese investment capital entering the States surpassed all other foreign investment capital, according to the National Association of Realtors. Chinese buyers acquired $27 billion worth of U.S. real estate assets, followed by Canadian buyers at $9 billion and Indian buyers at $6.1 billion.
Global capital markets conditions have also sent Chinese investors flocking to the United States in search of safe investment havens. Australia recently passed new regulations that make it nearly impossible for Chinese nationals to own properties in that country, primarily because that the government’s claims that foreign investors have bid up real estate prices so high in cities like Sydney that they are now beyond the reach of the Australian residents.
The June Brexit decision also appears to be having an impact. Initially, the vote attracted foreign investment capital to the United Kingdom as buyers attempted to take advantage of the weakening British Pound. However, ongoing political and financial turmoil in Britain will likely prompt more Chinese investors to park their capital in U.S. real estate assets.
Clearly, Chinese investors favor the safety of U.S. investments, including real estate in secondary and tertiary markets. Over the long term, Chinese investors – and other foreign buyers in Asia, Europe and across the globe – will continue to purchase real estate in these emerging U.S. markets due to improving microeconomic conditions and the knowledge that healthy yields await them.