New restrictions on cash transfers from China will temporarily slow, but not stop the flow of funds to the U.S. for purposes of real estate investment and immigration. This is good news for Seattle and the Eastside, which have witnessed increasing purchases from foreign buyers. The Asia Services Group (ASG) at Realogics Sotheby’s International Realty (RSIR) is a team of over a dozen professionals who are qualified to assist Asian buyers through a diverse assortment of attributes, including fluency in language, shared culture, and experience overseas. Dehlan Gwo, a broker with RSIR, is one of the founding members of the ASG.
A Broker’s Journey
For a month in late 2016, Gwo traveled to China, Taiwan, and Hong Kong, returning with observations on the current demand for Seattle real estate among Chinese buyers in these and other regions. From there, he journeyed to Cambodia, Thailand, and Bali, which are popular vacation destinations among the affluent of China and Australia.
Bringing along a portfolio of individual properties, new projects, and Seattle market information, Gwo came to reconnect with colleagues and clients, past and present, and to meet new ones. Although born in the U.S., Gwo is immersed in Chinese culture and speaks the language fluently. His clients, including new families as well as real estate development groups, benefit from the cultural acumen Gwo brings to projects and transactions.
In Hong Kong and Taiwan
Although the swelling tide of buyers from Mainland China has captured much of Puget Sound sellers’ and brokers’ attention of late, the broad spectrum of Chinese investors also encompasses Taiwanese and Hong-Kongese nationals. These investors already had been active in U.S. real estate and investment for decades before Mainland buyers began to move the needle. Purchases come easier to them than to Mainland buyers due to the lack of restrictions on purchases from these regions and to their comparative ease of transferring funds. Hong Kong, historically and still Greater China’s financial and commercial window to the world, naturally acts as a hub for many “alternative” transfers of capital from Asia and Mainland China to the United States, and many of Mainland China’s most affluent residents operate companies out of Hong Kong.
While in Taiwan, Gwo visited Taiwan Sotheby’s International Realty offices in Taipei and met with James Lee, the affiliate’s manager. “It’s a testament to the power of Sotheby’s® International Realty truly ‘international’ network,” Gwo recalled. “I saw property brochures from Sotheby’s affiliates from New York to San Diego to France (and now, Seattle). Visiting that office and receiving such warm hospitality, it was truly a proud moment to be in the Sotheby’s® International Realty family.”
Taiwan has its own foreign investors who, according to Lee, typically purchase homes priced between $1.0 and $1.5 million. In addition, some funds from Mainland China historically have been funneled through Taiwan, but this channel faces disuse due to recent capital controls and today’s chilly political climate between Taiwan and the Mainland.
In Mainland China
Before joining RSIR, both Gwo and RSIR Research Editor and Publisher William Hillis worked for different employers in Shanghai to connect qualified EB-5 investor visa projects and residential properties to investors in Mainland China. The EB-5 program is capped at an annual maximum number of visas to be granted. Gwo was still engaged in this work in August 2014, when the program first hit its annual cap of 10,000 visas. In the following year (2015), the program reached this cap in April as the stream of applicants surged. Eighty-five to ninety percent of the applicants that year were from China. Hillis recalls an event hosted in Shanghai by his former employer, Deloitte, to provide information to parents seeking education planning assistance on behalf of their school-age children. “Parents brought 12-, 11-, and 10-year-old children to get their questions answered,” Hillis said. “One young couple was making plans for their two-year-old daughter. These were all very serious inquiries, all from parents convinced that education and life in North America was the best choice for their children.”
It was shortly afterward that RSIR formed the ASG in response to increasing demand for a structured approach to meeting the needs of foreign buyers. The numbers of these buyers had been steadily growing since the onset of the global financial crisis in 2007.
That crisis saw businesses in North America and Europe expand their footprints in China, shifting talent and resources there in order both to enlarge sourcing operations that were already well-rooted, and for many larger companies, to boldly enter China’s ebullient consumer markets to establish their names there. Especially in Mainland China, wealth-building processes related to foreign direct investment, privatization of state-owned companies, and domestic real estate finance, and development interacted in these years to exponentially increase the number of high net worth (HNW) and ultra-high net worth (UHNW) households from their figures achieved during the Presidency of Jiang Zemin, and the early years of Hu Jintao’s Presidency.
Increasing Challenges to the Transfer of Funds
In those earlier years, despite the formal non-convertibility of the renminbi,[1] HNW and UHNW persons and families were able to convert or transfer funds abroad without much trouble; and in time, even middle-class Chinese found the means to do so. These approaches ranged from complex transactions involving overseas businesses to piecemeal transactions engaging multiple friends and family members. Later, domestic Chinese retail and commercial banks formed relationships with overseas banks like China East-West Bank to facilitate overseas loans for their customers purchasing real estate in their target countries. However, the Presidency of Xi Jinping has brought change—notably, a widespread and widely-publicized anti-corruption campaign, including steadily tightening capital controls that have become more effective since 2015.
According to Gwo, “For years, those who moved their assets to the U.S. had no problems in converting funds for purchases. A couple of my clients who have only recently begun to look for overseas investments are now scrambling to find ways to transfer funds in the wake of even tighter restrictions from Beijing’s effort to limit capital flight. Moving money out of the Mainland has become increasingly difficult.”
The vast majority of Chinese individuals and families who have made purchases overseas using funds from China simply have intended to improve their fortunes—to enjoy a better quality of life, or to send their children to superior schools in the U.S. and other foreign countries. Yet, in recent years, as the economy inside China reached stall speed, the Chinese government began seeking to keep funds available for investment from leaving the country. To that end, the Chinese government currently requires proof of purchases abroad to ensure that funds are not being spent on investments overseas. Those trying to exchange renminbi-denominated funds for U.S. dollars at Chinese banks are regularly interrogated about their intentions.
While in Hong Kong, Gwo met with Sam van Horebeek, Director for East-West Property based in Hong Kong. He works closely with wealth managers for HNW families in China.
Van Horebeek said, “As the [renminbi] has been under pressure for some time, Chinese regulators have been trying to prevent capital outflows by implementing a range of mechanisms. The most recent were announced on January 1, 2017, and basically require a Chinese citizen to complete extra documentation around the anticipated purpose of a foreign exchange transaction. Purposes of overseas real estate investment are no longer allowed.” He reported that since a previous round of forex controls was announced in early 2016, Chinese have frequently taken more than six months to complete a purchase of real estate in the U.S.
However, Gwo and other ASG members regard these and other restrictions as short-term impediments rather than roadblocks to what has now been established as an ongoing trend. The constraints on the Mainland are largely connected with the anti-corruption campaign, whose scope and duration are limited; and Chinese buyers will continue to find ways to diversify and seek financial safe harbor.
Desirability of Puget Sound Real Estate
Gwo returned with prevailingly positive news for Seattle and Eastside sellers. Despite the current challenges to investors from Mainland China, the Puget Sound is growing in eminence as a destination for buyers around Chinese-speaking Asia. “My time in Hong Kong and Taiwan confirmed that Seattle is on the map in a big way. Seattle was previously looked upon as a secondary market, but it’s now one of the most preferred destinations for Chinese buyers. The amount of ‘viral’ WeChat content I have seen about Seattle alone is impressive. Eastside neighborhoods—Somerset, West Bellevue, Clyde Hill, and Medina—have traditionally been the hotspots for Chinese buyers (especially for purchases as a primary place of residence in the U.S.). But in the past few years, and in 2016 especially, I’ve seen that Chinese investors are increasingly looking past the confines of the Eastside.” Gwo finds that his clients are now looking at Renton, Bothell, South Seattle, and exurban markets peripheral to Seattle, which he attributes to buyers becoming more informed about markets throughout the region. Several of RSIR’s record-breaking sales in 2016 included sales in alternative neighborhoods; Juanita, Bridle Trails, English Hill, and Fall City. Each of these set new benchmark values and all were sold to Mainland Chinese buyers.
Van Horebeek has similarly noticed growing interest in Seattle among Chinese buyers, especially those—as described by Hillis above—with plans for education of their school-age children. “Chinese buyers remain strongly interested in Seattle, in particular because of the good schools and universities, easy access from China, its favorable climate and [cultural] diversity,” Van Horebeek observed.
As for foreign buyer preferences, there are no distinctions between these buyers and others in the Puget Sound region. Gwo explains that despite most often leaving behind high-rise apartments when moving to the U.S.—or perhaps for that very reason—Chinese buyers often prefer to “own dirt,” buying a single-family home on a lot. For most, ownership of such a home in China is out of the question.
Yet Gwo also has seen growing interest in downtown condominiums. Overseas investors have observed how Seattle’s high-tech industry is driving in-city demand for condos. Once factoring in homeowner’s dues, condos often represent a lower-maintenance investment than a single-family residence, and city-dwellers from Beijing, Shanghai, and Hong Kong feel quite comfortable living or investing in condominium units. Last year, Gwo assisted in the sales of reservations at The Burrard Group’s NEXUS to several Chinese clients. Construction on NEXUS, which will be a 41-story high-rise tower in downtown Seattle, began last month. By December 2016, 80 percent of its units already had been reserved.
Interestingly, foreign buyers represented a very insubstantial percentage of the buyer demand, with most of it being local. This is perhaps an indication that the growing demand from overseas is merely an accelerant to an already robust local economy—unlike that found in Vancouver, BC, where housing demand and corresponding home values have seemingly relied upon international investment. In August 2016, the BC government imposed a surprise 15-percent transfer tax on purchases by foreign non-resident buyers in the City of Vancouver. This was met with an immediate and substantial reaction from the global real estate market. In the month following the enactment of the tax, sales of detached homes were 51 percent lower in Vancouver West, 80 percent lower in Vancouver East, 67 percent lower in Richmond, and 69 percent lower in Burnaby.[2] Meanwhile, year-over-year prospective buyer interest in Seattle at Juwai.com, a leading property search portal in China, rose sequentially in the following months.[3]
Patience Will be Rewarded
In the immediate aftermath of the worldwide financial crisis, some real estate sellers and their agents began to view foreign buyers with cash as “white knights” available to rescue sales in a market slump. Since then, as these buyers have continued to enter the market, expectations have been raised in respect of price and time on market in those areas seeing them in the greatest numbers. Gwo believes that U.S. real estate brokers, while continuing to solicit sales from all qualified buyers, may now need to caution sellers to be patient, considering potentially longer selling contracts and financing contingencies. “I believe U.S. brokers should expect that dealing with Chinese buyers will become more of a game of patience in the indefinite short-term. We will be seeing more inquiries to purchase real estate, but many of them will carry a measure of uncertainty regarding the transfer of funds into the U.S.”
Nevertheless, the uncertainty regarding the closure dates of individual transactions do not tally up to a broader doubt about this market and these buyers going forward. Firstly, a significant volume of Chinese-originated funds and assets already have been accumulated in safe havens around the world, from Singapore, to Australia, the U.K., and elsewhere in the U.S. as well. To be sure, much of the global wealth that might have originated in Greater China has been invested outside Asia for decades, accelerated further by growing prosperity and a need for financial safe harbor in international markets where economies, real estate, and governments are perceived as being stable.
In any case, capital controls are neither perfect nor permanent.
“People will find alternatives,” Gwo says. “My anecdotal observation has been that all-cash offers by Chinese are becoming less common, especially for properties at higher price-points. Because fewer funds can transfer at one time, loans for real estate purchases have increased significantly.” Reporting that banks dealing with Chinese clients continue to see good business, he adds: “I think we will see more and more creative ways to move money out of the Mainland.”
Thirdly, as long as China’s integration into the world’s economy proceeds, even if irregularly, a key waypoint along that route will be full renminbi/yuan conversion into global currencies. “Perhaps in five or ten years there will be no problem transferring money. If we do indeed see a slight slowdown in Chinese purchases this year due to tighter restrictions, it may just be a hiccup phase.” The Greater Seattle region should remain in the spotlight for Chinese buyers. “I do not see Chinese investment in Seattle or in the U.S. at large slowing down over the long run. China has millions of citizens with the intentions and financial resources to invest abroad, and interest in Seattle is at an all-time high.”
Regardless of the motivation, global wealth ultimately finds its way into the healthiest, most attractive markets. Seattle and Puget Sound have taken center stage, through intrinsic qualities of the region and its residents that will always magnetically draw those with fortunes to make, and those with fortunes made abroad.
[1] The domestic currency of the People’s Republic of China
[2] Sam Cooper, “Seattle housing market white hot with Chinese demand as Vancouver’s market freezes,” Vancouver Sun, 13 September 2016.
[3] Chart data provided by Juwai.com.