As Chinese nationals flock to coastal cities like Los Angeles, San Francisco, Seattle, and New York, the broker-owners and agents at California-based Teles Properties have naturally become experts on the Chinese buyer segment. They’ve even seen more Chinese buyers than local buyers in some areas of Southern California, says Teles Properties president and founder Peter Hernandez.
Indeed, on a national level, Chinese buyers have surpassed Canadians in U.S. real estate purchases, spending $28.6 billion last year compared to $11.2 billion, respectively, according to the National Association of REALTORS®’ 2015 Profile of Home Buying Activity of International Clients. They’re seeking not only safe monetary harbors but also better educational opportunities for their children, Hernandez says.
He specifically pointed out the Los Angeles suburb of Arcadia as an example of where “Chinese millionaires have created their own Shangri-la.” The Chinese population of Arcadia was 44 percent in 2010, and it has only continued to grow each year since. It has been dubbed the “Chinese Beverly Hills,” he says.
Hernandez, a forty-year industry veteran, offered his candid market insights in REALTOR® Magazine’s Broker-to-Broker Q&A:
Like most everything today, the Chinese economy is settling into a new normal. Some might argue that with the economic growth rate slowing to 7 percent, China is heading for the abyss. But in most any other country, that rate would actually be considered quite high. Take the U.S., for example: The rate of economic growth for 2015 was about 2.5 percent. In Japan, the average growth rate from 1988 to 2015 has held steady at roughly 2 percent annually, and in France, it has been consistently averaging 3.33 percent since 1950. The U.K. reported 2.2 percent growth last year, and Germany advanced only 1.7 percent in 2015. Therefore, in reality, China’s 7 percent trumps the top five economies in the world by a landslide.
The actions taken by the Chinese government to stimulate economic growth over the last six years kept the country awash with cash. The government also made policy changes that eased restrictions on individuals who wanted to move large sums of money out of the country. That provided a kind of slush fund for investing abroad. With the market destabilized, that has, of course, created some fear and anxiety, particularly in those holding so much cash, and they’re seeking out greener pastures. Many Chinese investors see this as an opportunity to broaden their horizons beyond the real estate market.
From a Hollywood perspective, we are seeing the Chinese entering the entertainment world and other westernized industries with increased investment. Western film companies are starting to wise up to China’s movie market, and, let’s face it, they have 8.2 billion reasons to do so, since that’s the amount of revenue (in U.S. dollars) that Citigroup research expects will be spent in mainland China box offices in 2016. That 28 percent year-over-year increase means China is closing in on the U.S., the world’s largest film market, which is expected to see approximately $11 billion of box-office revenue in 2016. With this huge potential market in mind, Western movie companies have been offering more parts to Chinese actors and actresses as well as featuring mainland locations prominently in their biggest recent releases. Chinese companies are also funneling investment into film studios, with particularly active firms such as Dalian Wanda and Hony Capital. So there are these behind-the-scenes scenarios playing out as a byproduct of the current conditions in China.
All we hear about is the gloom and doom of the stock market. But China has fast become a country of opportunists no longer shy about integrating with the West. India did it long ago. So rather than seeing China heading for disaster, I view it more like a restructuring — a market correction.
How will the U.S. housing market benefit from China’s market woes?
Considering that China has never been so large and so powerful until now, these are uncharted waters for all of us. Depending on your sphere of influence, it can be seen as favorable or unfavorable. Here is how I view it as a real estate professional who has lived through three U.S. recessions: When a big giant falls, there is a domino effect. China may or may not have been part of a recession that began in the U.S. in 2007–08 and spread to Europe, Greece, etc. We have been through our correction, and China will likely go through theirs as well.
Could it be very bad for the global economy? Sure, but China’s stock market is in its infancy, and the banks in Europe and the United States are tied together and very strong right now. China being primarily a manufacturing country and not a superpower of the financial world may be the defining factor — and one that keeps the rest of the world relatively stable while funneling more money into the U.S. housing market.
In many ways, China’s market woes have actually been a catalyst for a nation and culture that historically rejected Western society. In fact, the world’s largest source of international students in 2016 will likely come from China, where competition is fierce for university seats and top positions in the workforce. The allure of a Western education is secondary to what Teles refers to as the “flight to safety,” which will always play a key role in Chinese and other international buyers investing in U.S. property.
Chinese buyers looking to offshore their investment capital are doing what anyone with wealth would do when their country’s economy begins to shake and rattle. It’s in our human nature to seek greener grass and focus on the preservation of self and wealth.
There’s no arguing the fact that Chinese buyers have been our biggest spenders, spending more than double two years ago. Chinese purchases in overseas commercial real estate jumped 49 percent last year, according to Jones Lang LaSalle. China’s market woes have provided impetus for more Chinese to invest in the U.S. housing market. The housing prices, the quality of education, and the quality of the environment all increase the magnetic pull to the U.S.
How do housing prices in the U.S. compare with housing prices in China’s largest cities?
By the third quarter of 2015, the housing price index in China was 699.8 compared to the U.S. HPI of 400, making the U.S. look like a bargain.
Are most Chinese buyers in the U.S. purchasing to occupy or for investment?
Like big cities in Japan, the price of real estate in Beijing is extremely high, and there are not many options for investing like there are in the West. The entertainment industry is a good example. Right now, real estate seems to be the panacea. Some Chinese buyers are purchasing homes purely as investments, capitalizing on surging rents in many parts of the U.S. Others are trying to move their money beyond the reach of the Chinese government. Then there are those who have their children’s education and future in mind, picking up homes in good school districts or close to universities. At the upper echelon, the wealthy are hoping for green cards, joining with developers to take advantage of a federal program that puts them on the fast track for residency. So it’s truly a combination of buying to occupy and to invest for the future.
How do real estate professionals break into this niche?
The key word is “professional.” First and foremost, I would say deep experience is a necessity, followed by a willingness to adapt to the buyer mindset. This includes having or developing foreign-language skills or partnering with an agent who does. Then it is critical to travel abroad to trade shows, advertise on foreign websites, and invest in other media. Finally, it takes developing a personal database one client at a time and focusing on areas where international buyers are buying.
How did you become experts in working with Chinese buyers?
Working with Chinese buyers requires a different mindset, such as taking into account cultural beliefs and traditions, in addition to local market expertise. Combining intelligence and insight, Teles has gained a competitive advantage in working with Chinese buyers, as well as international buyers. And here’s how we did it: Our CEO and Chairman Peter Loewy, who was the managing partner for Fragomen, Del Rey, Bernsen & Loewy — the largest immigration law firm in the world — understood early on that international sales requires a personal and targeted approach. So he created a database of international relationships with advisers representing attorneys, business managers, architects, notaries, emissaries, and other professionals around the world who receive our property offerings, and they pass them along to their clients when relevant. Since curating this international gateway network and database, Teles Properties has facilitated more than $1 billion in listings and direct sales to overseas clients in just the last four years.
What percentage of your deals come from Chinese clients?
While statistics for the market at large show 7 percent of all sales in California are from international buyers, our sales are higher by approximately 10 percent. Buyers from mainland China, Hong Kong, and Taiwan made up 43 percent of international purchases in California in 2015.
What are some common purchasing hurdles, and how can U.S. agents and brokers help?
The language barrier, of course, is an obvious and significant hurdle, yet many affluent Chinese buyers are highly educated and either speak English or have the means to provide a translator. More proactive real estate brokers and agents, however, anticipate the need for meeting Chinese buyers on their level and, therefore, take the initiative to either develop language skills or use interpreters to bridge the communications gap.
There are also common cultural practices one should observe in order to avoid situations that may cause a Chinese buyer to back out. In addition to understanding the principles and importance of feng shui, lucky numbers, auspicious dates and years, it is critical to understand rank, seniority, and Chinese attitudes regarding personal space. For example, Chinese people typically do not greet with a hug. They go out of their way to show respect to elders and avoid causing feelings of shame or embarrassment. In other words, they are tactful in declining an offer of any kind.
Financing issues can also pose serious setbacks. Brokers and agents who have a firm grasp on foreign monetary restrictions, barriers to qualifying for financing, and U.S. tax implications and tax withholding requirements are the most well-positioned to see transactions through to the close. Above all, agents and brokers must innately understand their buyers and have good relationship with their advisors in order to avoid purchasing hurdles and successfully navigate the complexities of real estate in today’s global market.
Have you seen an influx of Chinese builders in the U.S.? If so, what sorts of real estate projects are they taking on?
Here in Southern California, everyone is talking about Landsea Holdings Corp., the private subsidiary overseeing U.S. development for one of China’s top 100 builders. The Chinese homebuilder moved its headquarters to Orange County from Pasadena in early 2015 and acquired the bulk of the 95.5-acre Portola Center South project in northeast Lake Forest for an undisclosed amount. They are set to build up to 569 homes — 313 detached single-family homes plus a 256-unit multifamily development.
On the East Coast, we’ve been selected as the marketing agents for a large luxury project in Manhattan, at 118 E. 59th by Neo Que Yau, a world-renowned Hong Kong real estate investor and founder of Euro Properties. This is a distinct honor, particularly for a West Coast brokerage to be selected by an Asian-based group reputed for its global outlook and international reach. It’s a modern urban escape consisting of 29 state-of-the-art single- and multifloor homes. The building was designed by SCDA Architects with an impressive 40 stories of glimmering glass walls. The one-, two- and three-bedroom condominiums — listing from $5 million to $18 million—include 10- to 20-foot ceilings, opulent master baths, and resplendent multiple exposures that capture extraordinary light and cityscapes, including spectacular views of Central Park and midtown Manhattan. These are the kinds of projects we have some significant involvement in.