The great Chinese house hunt

Chinese buyers are underpinning hot spots in the residential market … here’s how to follow the money.

Summary: The number of Chinese investors buying into the Australian residential property market is on the rise, and that represents both challenges and opportunities for local investors.
Key take-out: Research shows that Queensland and the ACT are the prime property targets for wealthy Asian investors, with the Gold Coast the most searched location in Australia.
Key beneficiaries: General investors. Category: Property.

Investors may want to consider one more factor when buying their next residential property, if they wish to harness the optimal amount of capital gains.

Will that investment property offer compelling qualities to foreign investors, particularly the Chinese, thereby driving up its value above other properties in the longer term?

Debate has raged in the past few months over whether foreign buyers of residential property actually impact house prices in Australia, with a number of reports drawing contrasting conclusions from the available data.

National Australia Bank’s first-quarter survey on the residential market for 2014, released last month, found foreign buyers now account for one-in-seven new properties and one-in-10 established homes in Australia – all-time highs.

The bank contends that the outlook for residential property has strengthened over the next two years, with foreign buying activity and supply issues establishing a floor under house prices.

Elsewhere, HSBC research labelled Australia as one of the top investment property destinations for affluent Asians earlier this year (see Australian property lures Chinese buyers). The report highlighted that 9% of affluent Chinese are currently invested in Australian property.

Alice Del Vecchio, head of mortgages at HSBC, told Eureka Report there are a number of reasons why the bank’s Chinese clients seek Australian property aside from as an investment, including our health and education systems, our convenient proximity to Asia, and our lifestyle – for which clean air is often mentioned.

“The research highlighted what we were starting to see – there is a lot of appeal in Australia,” she says.

Against the popular stereotype of the Chinese arriving at an auction with a suitcase of cash, Del Vecchio says HSBC’s clients often take out mortgages to purchase property in Australia.

How much of total foreign investment in housing is attributable to the Chinese is difficult to gauge. The Foreign Investment Review Board (FIRB) doesn’t break down residential and commercial real estate investment by country. In total, FIRB approved $5.9 billion worth of Chinese property investment in 2012-13 – roughly 10% of all foreign investment.

This percentage seems low. However, it’s widely recognised that Chinese investment in Australian property is the fastest-growing segment. FIRB data shows that while purchases from the three other major sources of investment in 2011-12 – the US, the UK and Singapore –declined in 2012-13, purchases from China surged 41.7%.

The Chinese are finding it increasingly difficult to buy property as a valid investment within their own country. In premier cities like Beijing and Shanghai they face various restrictions and property price caps, while in third and fourth tier cities reports have emerged of a large number of vacant apartments amid rapid overbuilding. 

Credit Suisse believes further strong Chinese demand can push house prices even higher. In a March report titled The Chinese property boom down under, the investment firm claims the number of Chinese capable of buying Sydney apartments will rise 30% by 2020, translating into another $44 billion of Australian residential property prices over the next seven years.

As a result, the investment firm highlights several local stocks to benefit from this long-term theme, including construction company Mirvac (MGR), building materials supplier CSR, National Australia Bank (NAB) through mortgages, and Fairfax (FXJ) through its online property site Domain.

But others aren’t convinced. Mathew Tiller, National Research Manager at real-estate agency LJ Hooker, points out total residential sales in Australia were $221.2 billion in 2012-13, of which foreign investment was just $17.16 billion, or 7.8%, based on FIRB data.

When anecdotal evidence of the uplift in activity since 2012-13 is included, Tiller puts the percentage of foreign buyers is at 8-10% – not enough, he surmises, to heavily influence the broader market, particularly since the majority of this spending is focused on inner capital city markets.

But for the Australian property market at a micro level, Tiller says foreign buyers can make more of an impact. Areas with the highest-growth rates are the ones that combine keen foreign investor interest and domestic investors taking advantage of low interest rates, he says.

“It’s that competition that has seen highly desirable areas outperform the broader market,” he says.

At a state level, HSBC’s research indicated that of the affluent Asians looking to purchase a residential property in Australia next year, 25% intend to buy in Queensland, followed by 23% in the ACT.

This corresponds with the NAB survey, which found foreign buyers had bought one-in-four new properties in Queensland in the first quarter – a stark increase on the previous period. It didn’t include the ACT in its survey.

As well as a lower price entry point and higher prospects for growth, Queensland offers Chinese buyers an attractive holiday home. According to Juwai.com, an online gateway for the Chinese to buy international property, the most searched location in Australia is the Gold Coast.

Interestingly, NAB also discovered that there was a big increase in foreign buyers in the established property market. In NSW, their involvement in the market rose to 12.7% from the last quarter’s 7.6%.

Though it’s easier under Australian regulation for foreigners to buy new properties – and the majority of them do – they can buy established houses under certain circumstances once they have been granted approval from the FIRB. One way they can do so is to redevelop a house, as long as it will double the number of housing stock.

Another way is to obtain a significant investor visa (SIV), which was introduced in 2012. Foreigners with SIVs can purchase one established house to live in after they have committed $5 million to Australian assets, not including residential property. Credit Suisse notes that of the 65 SIVs granted in 2013, 59 were to Chinese citizens.

According to Del Vecchio and Tiller, suburbs desirable to the Chinese often have the same qualities local investors would be seeking anyway to drive capital growth and rental yields, such as being close to transport hubs and shopping centres, but they do emphasise certain other qualities.

“Those key fundamentals are at the forefront at any investor’s mind, but what’s coming into it now is that other element where they also look at where foreign investors may drive the market in the future,” says Tiller.

Aside from several quirks (including not living near a cemetery, or having a four in the property’s address, as it sounds like death in many varieties of Chinese), one thing the Chinese prize is close proximity to universities. This makes sense, given around 70% of international students coming to Australia are from Asia.

Council areas that allow higher-density development, where offshore developers can put up new apartments, may be another potential drawcard.

When it comes to specific suburbs, Tiller lists several where Chinese buyers are looking to purchase properties. In Sydney, the CBD, Haymarket, Glebe, Mosman, Chatswood, Ryde and North Shore are potential hotspots, while in Brisbane, the CBD, Sunnybank Hills, Fortitude Valley and Yeronga may be popular.

In Melbourne, buyer’s advocate Frank Valentic emphasises areas with good secondary and tertiary education in the inner east. Recently he has competed heavily with Chinese bidders in Kew, Hawthorn, Camberwell, McKinnon and, most notably, Doncaster East.

Separately, the NAB survey lists a number of other suburbs tipped to receive above-average growth in the next year. Given the importance of foreign buyers affecting house prices in its analysis, these areas are also potential opportunities.

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