Bay Area agents, brush up on your Chinese language skills. Despite expectations of decreasing foreign investments due to the strong U.S. dollar and increased interest rates, Chinese investors in Bay Area real estate are still hard at work.
Chinese investments in residential and commercial properties are steady, with major projects breaking ground as recently as February 2016, when Landsea Holdings dropped $186 million into a development of 450 townhomes in Sunnyvale. The company’s CEO anticipates up to 30% of the townhomes will be purchased by Chinese buyers.
However, diligent Chinese developers don’t necessarily signify an increase in foreign investments. Economic factors in both China and the U.S. still inhibit the rate of foreign investment and urban development in areas like San Francisco, a top target of Chinese investors, due to a weakening renminbi versus a strong dollar. Also, China limits the outward flow of capital for USA investment by individuals, but large families manage to work around these rules.
China’s influence in San Francisco real estate
Chinese buyers are a prominent force in Bay Area real estate markets, with 34% interested in San Francisco property, according to a 2015 survey by East-West Property Advisors. In fact, San Francisco’s appeal is marked among all foreign investors, according to the Association of Foreign Investors in Real Estate (AFIRE). AFIRE’s Annual Foreign Investment Survey ranks San Francisco:
- fifth of the top cities for investment globally; and
- third of the top U.S. cities for investment, following closely behind New York and Los Angeles.
However, urban market conditions compound the process for developers seeking opportunities in San Francisco. Zoning restrictions make it difficult for developers to combat low inventory, driving up home pricing and rental rates for failure of construction starts. Although Chinese investors have many projects underway, building and entitlement often take years, delaying the project’s availability to buyers and tenants desperate for urban accommodations where the good jobs are.
Further, California construction continues to lag way behind demand for lack of a statewide legislative control over development. Single family residence (SFR) and multi-family residence construction starts in February 2016 yielded mixed results, with SFR construction up 15% and multi-family down 3% from one year prior. Scarce supply often spurs buyers into purchasing new housing before construction is completed, and the decline in multi-family units means more renters are left without options — even if they are willing to pay more.
Rising interest rates will come and further complicate markets, pushing prices out of reach for foreign investors and Bay Area residents alike. U.S. properties are already expensive for foreign investors – thanks to the strength of the U.S. dollar and the Chinese stock market crash and currency devaluation of 2015. Higher U.S. interest rates will further limit the number of buyers able to acquire suitable financing for a home purchase.
In the meantime, real estate agents and brokers in the Bay Area can reap benefits from the presence of Chinese investors. Chinese investors and developers intentionally seek development opportunities in areas rife with Chinese buyers as they understand their preferences. Agents need to familiarize themselves with trends among Chinese buyers and investors to expand their business into the community and take advantage of the opportunities they provide. Brokers and agents who rise to the occasion may snag significant transactions even as rising interest rates hinder foreign investors.