New capital controls aim to curtail overseas spending
The Real Deal - E.B. Solomont - 21 February 2017
When real estate agent Geovanna Lim’s client went into contract on a $3 million new development condominium in Midtown Manhattan more than two years ago, the pad was an easy get for the Chinese national. He agreed to put $300,000 down and even decided against a mortgage contingency.
But late last year, when the developer obtained a temporary certificate of occupancy and began closings, Lim’s client entered crisis mode. Faced with China’s strict new capital controls — which took effect Jan. 1 — the buyer scrambled to find a way to move $2.7 million out of mainland China and into the U.S. in order to pay for the apartment in full. After successfully stalling for a few weeks, the period around Chinese New Year was spent doing everything possible to line up a hard-money loan, according to Lim, a broker and founder of Park Avenue International Partners. “He didn’t have time to get his money out,” she lamented. “We signed a no-mortgage contingency contract. We didn’t know we’d need financing two years later.”
Designed to curb the massive amount of Chinese investment abroad, the Chinese government’s rule is changing the way investors are looking at New York City real estate — long seen as a safety deposit box for investors from around the world. Less than two months into life under the new Chinese policy, brokers in New York said buyers are moving away from trophy pads in ultra-luxe condos and are instead focused on value-oriented deals. With less cash on hand, they’re also turning to a handful of banks and private lenders willing to provide loans.
“They still have quite a bit of buying power,” said Bond New York’s Terence Hsu. Buyers are getting creative when it comes to financing deals, but overall he’s seeing fewer “new” investors in the market. “If they’re already established here, then they’re able to purchase properties,” he said.
Brokers said the shifting strategy is partly because many uber-wealthy buyers got their money out of China early, and already parked large sums in high-end condos over the past few years. In 2016, Chinese buyers invested a record $33 billion in real estate worldwide, including $14.3 billion in New York, according to JLL Global Capital Flows.
Late last year, the Chinese government said that starting in 2017 citizens who purchased real estate abroad would be required to sign documents stating the property wouldn’t be used for investment purposes. (Buying real estate for travel or education, however, is permitted.)
The news has caused more than a few hiccups in New York.
The Corcoran Group’s Tamir Shemesh said some of his big-ticket transactions nearly fell through this winter as a result of Chinese buyers who “[couldn’t] bring large amounts of money here to spend on ultra-luxury apartments.” And Anne Chang, principal of JadeStone Real Estate Consulting, spent a frenzied few weeks at the tail end of December dealing with some buyers who were pulling out of deals while others drastically accelerated their purchases to complete them by the end of the year. “They were more determined to move money here and buy,” she said of the eager buyers.
Brokers said the current wave of buyers — the ones who can still get their money out, that is —have more moderate fortunes to protect. By and large, they want to invest in the $1 million to $5 million range.
Corcoran CEO Pam Liebman said the vast majority of inquiries her firm gets via a partnership with Chinese listings site Juwai.com are on the lower end of the price spectrum.
“The real sweet spot is $1 million to $2 million,” she said. “For people who aren’t super wealthy, but have enough money to transfer funds here to diversify their assets, it’s a number that makes sense.”
Chinese buyers also have a sophisticated understanding of New York’s condo market — which has softened considerably in the past year. Sotheby’s International Realty’s Nikki Field said she’s still seeing high-end buyers — but even ultra-wealthy Chinese clients are focused on value. “They identify that our market has softened and they’re looking for good value, strong opportunity and immediate returns,” she told The Real Deal this fall.
Attorney Edward Mermelstein, a partner at Rheem Bell & Mermelstein, agreed. “They tend to be much more value-driven and opportunistic, so if they’re not seeing a great deal, they’re heading in a different direction,” he said. “They’re making lowball offers.”
And some Chinese investors have also shifted their attention to secondary markets in the U.S. or London — where the luxury market has fallen following the Brexit vote.
In order to circumvent Chinese policy, buyers in New York are getting creative with financing. One broker at a major residential firm said all of her Chinese clients paid in cash last year, whereas so far this year about 50 percent have mortgages.
Danny Fishman, managing principal of Gaia Real Estate, said some Chinese buyers have offered to put 10 percent down and spread the rest of the payments out over 12 months. “We’re not doing it [across the board],” he said. “But in some cases, we can work with them.”
At the same time, banks like East-West Bank, Bank of China, the Industrial and Commercial Bank of China (ICBC), Guardhill Financial and Abacus Federal Savings Bank have responded with a surge of loan products geared toward foreign buyers. Abacus rolled out its foreign national loan program last year, according to loan officer Wendy Wang.
“More people are looking for loans to purchase investment property,” she said.
The U.S. remains a popular destination for Chinese flight capital. Some investors, fearful that the Trump administration’s foreign policy could further depress their economic prospects at home, are more eager than ever to safeguard their money in U.S. real estate. “Their factories are going to have a slowdown because of the threat of tariffs, so they’re determined to come to the U.S. and establish [a business] here,” Lim said.
That, plus a desire to educate their children in the U.S., has kept demand strong. “The desire is there,” Lim said. “But to execute their plans they’re going to face headwinds they’ve never seen before.”