The Chinese buying spree in hot coastal markets is cooling off. According to Housingwire.com, these real estate investors are discovering they can get much better returns on single-family rentals in lesser known areas.
Chinese investors have been chasing high-end properties in major coastal markets for the last five years. Their targets have been the more high-profile cities, like New York, Boston, San Francisco, Los Angeles, and Miami. Chicago has also been popular along the posh shores of Lake Michigan.
This land-grab has created a Catch 22 situation – strong demand sent prices soaring, which lowered returns. So now, demand is diminishing, and these Chinese investors are looking elsewhere.
But where? And how will that affect the U.S. housing market?
According to Housingwire, there’s a “second wave of savvier buyers”. The blog says they are making use of real estate data from websites like Zillow and shifting their focus to higher-yielding real estate many miles from the coastal cities that make headline news.
Looking back, Housingwire says the first wave of major Chinese investment started in 2009 with about $4.1 billion dollars. Those investors targeted well-known tourist destinations to shield their money from a sputtering economy back home.
Many also went after property in those cities for personal reasons — as vacation properties or as a future home for their children if they were able to go to college in the U.S.. They were a known quantity in terms of personal appeal and value.
In the last two years, the National Association of Realtors says that Chinese investors have poured money into U.S. properties. NAR says from April of last year through March of this year, they bought 29,295 homes worth about $27 billion dollars. Those are properties from coast to coast, including the hot markets.
But with prices in those hot metro areas now at record highs, Housingwire says Chinese investors are investigating new markets. The blog says there’s a growing wave of Chinese investors who are going after “smart” investments rather than “prestigious” ones.
Housingwire says four years ago, a Chinese investors would snapped up a large home in a nice Seattle neighborhood like Mercer Island. But that today, many Chinese investors are discovering that money would be better spent on homes in secondary markets like our Orlando, Florida.
The blog says that some are even exploring the purchase of single-family rentals in tertiary markets like our Cleveland, Ohio; our Birmingham, Alabama; and our Pittsburgh, Pennsylvania.
These are the same cities that RealWealth has been targeting for real estate investors because of the high yields. It looks like we may be facing more competition now. We know that hedge funds have also been targeting these markets as of late, in chase of yield that can’t be found in the coastal cities.
As I’ve been saying for years, and Housingwire confirms, yields in these cities range from 8% to 11% annually as of mid-year this year. If you obtain financing, the yields can can even come in over 20%.
But if you invest in New York City, San Francisco, or Seattle, your cash flow would be be about 25% of those numbers – around 2% to 3%. Up until now, investors have given up cash flow in trade for appreciation. But now that’s already happened, and price gains are slowing down.
Housingwire says that Chinese investors are drawn toward the safety of U.S. investments and that over the long term, “Chinese investors, and other foreign buyers in Asia, Europe and across the globe, will continue to purchase real estate in these emerging U.S. markets due to improving microeconomic conditions and the knowledge that healthy yields await them.”
As a result of so much demand now in the secondary and tertiary markets, we’re starting to see price gains in those areas. You now have the unusual combination of both high yield cash flow PLUS appreciation in certain key markets.
The window of opportunity is closing, though. High demand will do what it always does. It will drive prices up and yields down.
Of course, the buyers who get there first, will get the best deals. Fortunately, RealWealth has teams in place who are able to find the deals quickly – as soon as they come on the market, or even before they do. They also have contractors on staff so you don’t have to compete for bids. And they offer on-going property management for a REAL turnkey investment.