New frontiers

Chen Wanhui just returned from the US where he was looking at properties in the San Francisco area. The Shanghai resident – who asked that his real name be withheld – wanted to find a comfortable living space, possibly a condominium, both as an investment and to provide housing for his daughter if she gets accepted into a US university.

"My daughter is applying to the University of California, Berkeley next year and I want her to have a place to live if she gets in," Chen said. "Rent is high in San Francisco – it makes sense to invest in a place so that we will always have a home America."

Many Chinese people looking to buy US real estate are doing so for their children. Chen’s take on the situation is fairly typical: American universities are better than their Chinese counterparts in encouraging students to be more open- minded and creative, and the opportunities that come from exposure to the English language and US attitudes make the financial outlay worthwhile.

Daunting obstacles

Julia Jiang of Prudential Douglas Elliman Real Estate in New York works for many wealthy Chinese executives interested in US property investment. She said her clients come from a variety of industries – from manufacturing and finance, to hotels and nightclubs – but they tend to have one thing in common: university education that includes stints at the likes of Harvard, Yale and Princeton.

Chen fits this mold to a certain extent, having studied in the US as a young man and then worked in the country for a few years before returning to China. But even he admits that the investment process can be "scary."

Still, with the current run-down state of the US economy, now would seems to be the ideal time to invest in property.

Jiang believes the New York market is ripe for buying because prices have reached an all- time low. Luxury service condominiums took a particularly heavy hit following the global financial crisis and developers have begun advertising throughout Asia in the hope of capturing the new class of nouveau riche.

"Luxury condominium prices have decreased 15-25% depending on the location," Jiang said, adding that the number of international Chinese buyers (from mainland China, Canada and Taiwan) has increased while domestic buyers have decreased.

Likewise, in California the luxury condominium market has gone down significantly. Greg Noonan, a San Diego realtor for Prudential California Realty, said prices have slipped about 20% from the 2006 peak, while the number of buyers is down by about 50%. "It is a situation that presents an extraordinary opportunity to able buyers today," he said.

Lower prices in prime locations in San Francisco, which has a large Chinese community, may be especially attractive to Asian investors. Luxury serviced condominiums, such as One Rincon Hill and Millennium Towers, offer all kinds of comforts to ease the transition from China to the US – from gyms, spas and yoga rooms, to privately-owned wine bars.

 "San Francisco is a world-class city and an Asian gateway city. A sizeable Chinese community has always existed here and its influence is everywhere. That is certainly a draw to Chinese nationals," said Spencer Moore, sales director of One Rincon Hill Condominiums.

Streets of status

According to the National Association of Realtors, Chinese buyers accounted for 7.5% of international buyers in the US in 2007 – and 41% of Chinese residential property purchases were in California.

On the other side of the country, New York is attracting its own share of Chinese investors, who are drawn to its flashing lights and international reputation for the best in art, business, restaurants and schools.

Jiang of Prudential Douglas Elliman said her clients like new condo developments with river views and a higher level of finishes and amenities. Contemporary styles are also a must. "All Chinese want the same thing: new buildings, modern and contemporary art and furniture, glass structures, ceiling windows, and so on," she said.

As for location, the Upper East Side and the Upper West Side are popular. According to Rob Kelley, a writer for real estate magazine The Real Deal, Chinese buyers seek New York neighborhoods with long-established value such as Central Park and Midtown. "For Chinese buyers who may not be familiar with the New York market, brand names like ‘Trump’ or ‘Central Park West’ count a lot. It is a status symbol that Chinese can have confidence in," he said.

While status plays a role in investment decisions, capital appreciation remains the top priority. Jiang notes that in many cases the rental value on a property won’t cover the mortgage, but investors aren’t put off because they see New York real estate as a financial "safe harbor" that can generate substantial profits.

Things are rarely that easy, however. Chinese investors unfamiliar with the US market are often surprised by the high monthly maintenance fees paid by American homeowners. There are also a lot of taxes attached to real estate transactions: transfer taxes, capital gains taxes as well as the buyer’s and seller’s closing cost, which can be 2-5% of the gross depending on the circumstances.

"This is not Shanghai where it is possible to buy a place one month, sell it the next month and make US$1 million in profit – the US market is more stable and the fees and charges can build up, making the whole process very expensive," Jiang said. "Also, the system is set up so that you can’t cheat it. You have to obey rules, you have to pay your taxes and contribute."

In addition, Chinese buyers must deal with the many legal and financial challenges that come with investing money overseas. Individuals are prohibited from taking more than US$50,000 out of the country in a calendar year, which makes it difficult to stump up a down payment on a US$3 million condo, for example.

There are, inevitably, various ways to circumvent these restrictions. A Chinese lawyer surnamed Zhang, who has spent much time in New York, said one popular approach is to set up a company in China, which allows better access to foreign capital.

Another equally popular but less formal solution is to divide the burden among friends and family, each one leaving China with the maximum US$50,000 and pooling the funds for investment once they reconvene in the US.

Window shopping

While there is much interest in US property among Chinese investors, few actually make the leap. Many are what realtors call "Lookie Lous" – they want to assess potential, but don’t buy. Jiang said only 50% of her clients are genuinely looking to invest.

The sums at stake might not be as huge as the hype suggests, but this doesn’t signal a lack of interest in US property or a lack of faith in the market to deliver solid long-term returns. "Historically, the US has always been desirable," Zhang said. "There is cleanliness and order – it’s safe, fun, and has many good education and work opportunities. Chinese people still see a lot of value in the US."