Why the Chinese Love Australian Real Estate

Until something cataclysmic happens, off shore investment into Australian real estate may be here to stay.

Last financial year, about $12.4 billion flowed from China into our residential property market, making up about 15 percent of all new home sales. That’s an increase of over 400 percent in just five years.

Some say the current flow of Chinese capital into Australia is only a trickle. According to Credit Suisse, the Asian giant could be gobbling up as much as 25 percent of all new Australian home sales by 2020.

Where’s all of this money coming from? For the last 15 years, the People’s Bank of China has been on a massive money-printing spree. Subsequently, the Chinese have amassed the largest money supply in the world.

All of this wealth had to flow somewhere, and that somewhere has primarily been into real estate and shares. But now that China is coming off an enormous bubble in their stock and property markets, many Chinese investors are liquidating assets and seeking investment in off shore, “safe haven” markets.

However, don’t get the impression that their money creation is slowing down. In the last 12 months, China has lowered its interest rate six times, and substantially decreased bank reserve requirements. All of this monetary easing has promoted a culture of excessive debt and speculative investing.

Just weeks ago, one of China’s biggest lenders began offering zero-deposit home loans for off-the-plan apartment purchases in Melbourne and the Gold Coast. This means the Chinese middle class who have no cash in hand can jump on the Aussie property bandwagon.

The Chinese middle class aside, there remains a massive number of potential upper-class investors. The top one percent of the Chinese population currently owns about one-third of all residential real estate in the country. This group of economic elite amounts to 13.5 million people, which is more than half the population of Australia.

Chinese investors are clearly drawn to the Australian real estate market. Here are three reasons why:

1. The Money Pipeline From China To Australia Is Wide Open

Earlier this year, the Chinese government took steps to ease capital controls, lifting the limits on the amount of money that investors can transfer overseas. Now it’s much easier for investors to get money out of the country.

Chinese officials are purposefully encouraging as much outward investment as possible. Having massively increased their money supply, they need to get some of that cash out of the country to ease inflationary pressure.

China also benefits by gaining political influence overseas. The more of the world their people own, the more international power China will eventually have.

At the same time, Australia has rolled out the red carpet for overseas investors. Since Aussies love debt and hate to save – and who can blame us with interest rates so low – we need the injection of foreign capital to supplement our aversion to savings.

This foreign investment offers banks much needed capital, which means they can lend more to households and businesses domestically. Our indebted national and state governments also benefit by the increased tax revenue.

In essence, we’re importing China’s inflation to boost our own economy. It’s kind of like taking steroids. The initial benefits are huge, and you look like a stud for a while, but then the natural processes switch off, and you spend your later years facing impotence. Fingers crossed, some other nation can be our Viagra.

2. Australian Real Estate Is Cheap And Luxurious

For many Chinese, the idea of owning a piece of Australian real estate is a dream. Most of these investors aren’t crunching the numbers to ensure the deal stacks up. It’s purely an emotional decision.

Many Asian investors are looking for a holiday home or a place to retire. These are lifestyle assets first, investment assets second.

Besides, compared to property in Shanghai and Beijing, Sydney real estate is not that expensive.

Although we’re pushing an income to asset ratio of 12 to one in Sydney, and 10 to one in Melbourne, Shanghai and Beijing are upwards of 25 to one. From their perspective, our property is dirt cheap.

Their Yuan also goes a long way here. The RBA has devalued our currency by 25 percent in just over a year. Even in light of the recent devaluation of the Yuan, our dollar remains highly attractive to the Chinese.

Not only is our real estate a bargain, it’s also luxurious in comparison. As this article reveals, a modest 30-year-old, two bedroom apartment in a densely populated area of Beijing would cost about $700,000. It’s no wonder a plush apartment in Docklands that’s going for $550,000 sounds like such a great deal.

Many Australians scratch their heads, wondering why a Chinese investor would buy a high-rise apartment in Melbourne, and then leave it sitting vacant. But they have a completely different frame of reference. To them, an empty high rise in Melbourne represents a safe storage of wealth, and perhaps a future holiday or retirement home.

Besides, yields back home are ridiculously low. The average household income in China is about $15,000 per annum. People can’t afford to pay much in rent. Investors may pay millions of Yuan for a property, but only get a few thousand in rental income back per year. If that’s what you’re used to, little is lost if your Docklands apartment sits empty.

3. When You Buy An Australian Property, You Actually Own It

Why is Australia perceived as such a safe place to invest? One of the major reasons is our ownership laws. Many Chinese live in fear that the state could take their assets. While China is making significant strides toward free market capitalism, it remains a communist nation.

As a result, China lacks true ownership rights. When you buy a home or apartment in China, you legally obtain only a land use right, not the land, the dwelling, or any resources in or below the land. All property ultimately belongs to the state.

This land grant contract issued by the government technically has a limited lifespan. Currently, the contract length for a residential property is 70 years. Technically, it is nothing more than a long-term lease.

Nobody knows for sure what happens when that 70 years is up. The common assumption is that the lease will be automatically renewed without any cost to the owners, but it could just as easily be taken away and resold to someone else. Time will tell.

In Australia, when you buy a property, you get a title. As long as you pay your property tax, it’s yours until you die, then it passes to your heirs. We take this for granted; however, the Chinese do not.

Will Chinese Investment In Australian Real Estate Last?

How long the floodgates will remain open is anyone’s guess. In closing, here are three economic and regulatory shifts that could someday hinder the flow of Yuan into Australia:

1. Chinese Investment Capital May Dry Up

Someday, China’s hyper-growth economy will slow down. We’re already seeing signs of the end now. Many economists believe the worst is yet to come.

If China experiences a severe correction in asset prices, namely real estate and shares, China’s investment capital will completely dry up. When that happens, you’ll hear nothing but crickets at the Shanghai property expos.

2. The Chinese Government Could Tighten Capital Controls

Currently, the Chinese are happy to export their inflated Yuan, but this too will pass. Amidst tougher economic times, capital flight could be damaging to China. If their banks get into trouble, the government will go into currency lock down mode, just like Cyprus and Greece.

3. The Australian Government May Close The Door

If the perception grows that Chinese investors are damaging our economy or making housing unaffordable, our politicians may come under increasing pressure to close the door to overseas investment.

Through the Foreign Investment Review Board (FIRB), we already regulate the terms under which foreigners can invest. The aim is to steer all foreign capital towards new development, which boosts employment, but there are loopholes.

Concerns are also increasing about exactly where all this money is coming from. The FIRB says the origin of capital is not its responsibility. While financial planners are required to report suspicions of corruption or money laundering, property professionals are not. Any new anti-money laundering regulation could stem the tide of Yuan flowing in.

What Do You Think? Is Chinese Investment in Our Property Market Here To Stay? Share Your Opinion In The Comment Section Below.

Edit: Link added to statistic on last financial year’s new homes sales

By Jason Staggers

Jason was a personal mentor working with Steve McKnight's Property Apprentices. He helped hundreds of investors apply Steve's teachings in the real world and achieve greater results on their journey to financial freedom. Jason now lives in Perth, WA where he leads Neuma Church.