The current massive wave of cashed-up investors from China throwing money at Australian residential property is not primarily motivated by immediate rental returns or eventual profits.
A study by Hong Kong-based equity brokers CLSA, including data from more than 50 meetings with industry contacts, says the phenomenal investment will continue for at least another three years.
As this chart shows, China is now the number 1 source of foreign-capital investment in Australian real estate. CLSA says anecdotal evidence indicates that foreign investment from China has continued to increase in 2014.
“There are a number of drivers behind the growing interest – the most important of which have little to do with simple investment choices,” CLSA says in its report, The Magic Dragon – Chinese Investment and Oz Housing.
“A key reason is increasing emigration options, by having property in the preferred destination country.
“Diversifying investment portfolios is another important motive. This is perhaps a euphemism for getting capital out of China as a mechanism for wealthy Chinese to mitigate the perceived economic and political risk of living in, and having wealth tied up in the PRC. Both these sit ahead of simple investment returns.”
CLSA says analysis of state-based foreign investment data confirms what we know anecdotally, that New South Wales (NSW) and Victoria have become the overwhelming destinations of choice for residential property investment.
Chinese residents want to emigrate to English-speaking countries, where there is a strong common law process, says CLSA. A good education system is essential and, as China’s pollution problems escalate, a clean environment is becoming more important.
About 45% of the 70 million people in the top-income bracket in China express intentions to emigrate.
Building investments outside of China is an important step in keeping open emigration options. And given the obsession with property investment, it is only logical that the purchase of property is key to that strategy.
Australia is the number 2 destination behind Canada, which in February this year implemented restrictions on foreign investment and immigration.
The main driver for new property purchases is apartments, either newly constructed or off the plan.
The local real estate industry is capitalising on the new wave.
Sydney-based real estate agent John McGrath, which sold $7 billion of residential property in 2013, recently established a China desk and now publishes a Chinese language version of the McGrath Magazine.
The Reserve Bank of Australia (RBA) is concerned about the level of investor lending but there are signs that the wave of money from China will be long lasting.
CLSA compares the current wave of Chinese investment with the Japanese real-estate investment in the late 1980s.
In the late 1980s and early 1990s there was a large and rapid buildup of Japanese investment into Australian property which was followed by an even more rapid decline and exit from the investments.
Japanese investment in Australian property rose from close to zero in the 1980s to $65 billion, only to collapse by 70% in 1992.
“Our conclusion is that this time there are marked differences, the most obvious being that individuals are driving the Chinese investment cycle, where the motivating factor is not financial, but for asset diversification and potential emigration,” CLSA says.