Last week, I wrote about how (and why) the majority of wealthy Chinese are planning their exit strategy out of China… or at least considering it.
The top destination? The U.S. Five of the six top target destination cities are all in the U.S. So the Chinese are increasingly buying real estate in the U.S… but they’re not the only ones.
A recently released report from the U.S. National Association of Realtors found that in the 12-month period ended March 2017, foreign buyers (and recent immigrants) bought US$153 billion worth of residential property in the U.S.
This is a 49 percent year-on-year increase from the year ended March 2016, where foreign buyers bought US$102.6 billion of residential property. And it shattered the previous record set in 2015 of US$103.9 billion.
In all, foreigners purchased 284,455 properties, an increase of 32 percent over 2016.
To the surprise of nobody, the Chinese were the largest buyer of U.S. property by dollar value, responsible for a record high US$31.7 billion (up from US$27.3 billion a year earlier).
Expect the trend to continue
The Chinese government might be reining in the foreign acquisitions of its “financial crocodiles”, but individuals are still able to buy overseas property with few issues. Chinese buyers bought 40,572 U.S. properties in 2016 and 2017… that’s over 110 a day, and around 11,500 more than in 2015 and 2016.
And two-thirds of Chinese buyers paid in cash – no mortgage, just cold, hard cash.
This is especially interesting when you consider that by law, Chinese individuals are only allowed to remit (that is, transfer out of the mainland) US$50,000 annually. Yet if you divide the total amount of property sales in the past year by the number of properties, you get an average property price of US$780,000!
Of course, the average can be skewed upwards by ultra-luxury purchases that run into the millions or tens of millions of dollars. The median overseas property purchase price for all foreign buyers was a little over US$300,000. Either way, that’s still six times the annual Chinese remittance limit, and these are primarily cash purchases, not debt-financed with a mortgage.
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But China is still hugely underrepresented when it comes to ownership of overseas real estate and other assets as a proportion of its gross domestic product (GDP). China ranks 18th in the world on that metric, with just 12 percent of GDP equivalent holdings. By comparison, the average is 42 percent, according to the Organisation for Economic Cooperation and Development (OECD). So China still has a lot of catching up to do.
Buying this trend
The most straightforward way of investing in this theme is to buy into the broader U.S. homebuilding industry. Supply of residential real estate has declined continually for the past two years, and builders can’t keep up with demand.
Despite rebounding following the collapse in construction activity after the global financial crisis, new housing starts are still running below the long-term average. This suggests that price pressure will continue until more supply can come onto the market.
One option for your portfolio is the iShares U.S. Home Construction ETF (Exchange: NYSE; Ticker: ITB), which holders a basket of U.S. homebuilding stocks.
Cash-rich Chinese spend at home, not just abroad
The increase in overseas residential property purchases by the Chinese, along with the amount of money involved and the fact that two thirds are bought with cash reiterate one thing: the Chinese have a LOT of cash at hand.
China’s household savings rate, measured as a percentage of disposable income, runs at 30 percent. This is easily the highest in the OECD. For comparison, Americans save around 6 percent of disposable income, and the British save none at all.
But the Chinese aren’t just spending their money on overseas real estate, they’re also consuming locally in China as well.
We believe the rise of the Chinese middle class, along with their consumption habits, is one of several major reasons to be bullish on Chinese equities. You can learn more about this trend – including how to profit – right here.