China Housing Market (Boom or Bust)

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Mainland China Buyers Shopping for Luxury Homes around the Globe

20 May 2011

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May 19, A growing number of home buyers from mainland China are rushing into property markets in Hong Kong and overseas to buy luxury units, indicating growing wealth and uncertainties over the domestic real estate market.

Last week, 28-year-old mainland buyer Li Jiamin became the owner of a HK$345 million luxury unit in the Arc de Triomphe building, the most expensive residential site in Kowloon, Hong Kong.

Hong Kong real estate agent Centaline Property categorizes any unit that costs HK$120 million or above “luxury”.

Li’s purchase, which was widely reported by Hong Kong and mainland media despite her low profile, points to a rising trend of cash-rich mainland Chinese buyers prepared to lavish vast sums to acquire luxury homes in the city.

Luxury Buying Spree

Mainland Chinese home buyers are not stopping at Hong Kong -- Canada, the U.S., Britain and Australia are all targets.

Mainland millionaires and billionaires are sparing no expense in snapping up Canadian luxury houses, as seen in a deal involving two luxury units recently bought by the same person, who claimed he has a dozen more houses in Shenzhen, according to local media reports.

According to a Guangzhou Daily report in April, a Fujian-based buyer, known as the Fujian version of Hong Kong tycoon Li Ka-shing, spent less than five minutes in a luxury unit in Vancouver before deciding to buy it for CA$22 million. The paper said the person had already purchased 10 luxury homes in Western Vancouver.

Similar stories are being reported in Australia, where mainlanders are eyeing investment opportunities in the local property market where housing prices are steadily going up.

Transactions priced at more than AU$10 million are mostly being made by Chinese buyers, including one unit that recently went for AU$32.4 million, according to local Australian media.

Growing Wealth

Wealthy mainlanders started buying up more property abroad last year after the central government began rolling out a long line of properly measures.

The New York Times reported last September that more and more mainland buyers were buying luxury units in London without inspecting the houses in person, the first time mainland speculators had outnumbered their Russian and Middle Eastern counterparts.

The strong demand for upscale real estate implies not only a growing trend for luxury home-buying, but also says something about the rising wealth of mainlanders, most of whom have to pay for their luxury units in cash due their difficulties in getting mortgages in overseas markets.

Sensing changes in the home market, these rich home buyers are choosing to put their investments in foreign homes that would otherwise be made in either property or stocks in the mainland.

Mainland Market Uncertainty

These investments may turn out to be more valuable than ones made back home, where anxious government officials, spooked by runaway prices and public unease about inflation in general, could introduce even stricter property measures that could freeze the real estate market.

Since January, the Chinese government has introduced a raft of property curbs, including home-buying restrictions, price growth controls, interest rate hikes, tightened bank lending and potentially more land auction reforms, to contain skyrocketing prices.

The situation has become so sensitive that senior government officials have publicly talked for the first time about the need and their determination to bring prices down to a “reasonable” level and to build more affordable houses, all of which could negatively impact the market.

Although some of those measures have been dismissed by critics as administrative tools that are not supposed to stay in place too long, some market watchers believe that the government will do more to control the market if prices don’t begin to stabilize.

Progress on that front appears to have been limited so far. In April, new commercial home prices rose in 56 of the 70 major cities monitored by the National Bureau of Statistics (NBS), up from 50 in March. But price growth slowed, with no city reporting a rise of more than 1% last month, the NBS said in a statement on May 18.

On a yearly basis, prices of new homes in Beijing rose 2.8% in April, easing from a 6.8% year-on year rise in January, while Shanghai, Tianjin and Chongqing all showed similar patterns of slowing price gains. Year-on-year price growth remained high in some southern cities, however.

Secondhand home prices in 41 of the 70 cities rose last month, compared with 44 in March. Nationwide sales by floor space in April fell 9.9% from a year earlier, the first decrease in nine months.

Some analysts have been saying that China’s home prices will eventually fall this year, citing some developers’ discounted offerings, a trend that may continue if their sales slow and cash flow issues mount.

Predicting the direction of the property market in the mainland is notoriously hard, but the uncertainty surrounding it means that many investors see overseas investments as safer, especially in mature markets, where the luxury real estate is typically less volatile.

Driving Prices Up

While luxury home sales have been growing thanks to mainlanders’ active buying, home prices in those markets are also surging in part due to bigger demand for luxury units. Housing prices in Vancouver are being pushed up by mainland buyers, and prices in Hong Kong are at risk from almost continuous increases.

Even though mainland buyers are spreading around the globe, Hong Kong remains a major target for high-end real estate investments. Prices of units of 100 square meters or more have grown 17% since 1997, when the Asian financial crisis hit the city.

According to Centaline Property, in the second half of 2010, mainland buyers accounted for 28.8% of the luxury home buying population in Hong Kong, compared to only 9.7% in 2007, an indication that buyers from north of the border are getting richer and home prices in mainland cities are becoming unacceptable.

Home prices in the city may continue to rise as developers attempt to build more upscale properties.

Three plots of land made available for residential use by the Hong Kong government to ease demand last week were snapped up by Sun Hung Kai Properties Ltd. (0016.HK), the world’s largest developer by market value, Cheung Kong (Holdings) Ltd. (0001.HK), controlled by Hong Kong’s richest man Li Ka-shing, and China Overseas Land & Investment Ltd. (0688.HK), all at a price above market estimates.