New rule in China may affect overseas real estate purchases

China is a country of opportunities — and also of regulations.

As reported by Reuters, China’s foreign exchange regulator announced a new policy on January 1, 2017, that affects all individuals who are looking to buy overseas real estate. Chinese citizens will now have to fill out an application form stating the purpose of their foreign purchase.

As reported before, the Chinese regulator recently implemented measures to monitor institutions to acquire overseas real estate assets.

It has now become clear that China is so worried about its falling currency that it is hoping to monitor the purpose of every individual Chinese citizen who is looking to transfer money overseas.

Over the last several years, China has had the policy in place that Chinese citizens could transfer up to U.S. $50,000 legally out of mainland China.

The new directive keeps the same threshold, but individuals will now each have to fill out a form that describes the purpose of their foreign currency purchase.

The purpose cannot be real estate investment, but it can be done for purposes such as travel, education and so on.

Impact on the U.S. real estate market

The impact on the overseas real estate market is not immediately clear, as it will depend very much on the ability of China’s State Administration of Foreign Exchange (SAFE) to implement this new directive.

Also, we can have a look at the range of controls that China had put in place so far:

• Some China banks were already monitoring the purposes of foreign exchange purchases in 2016.
• The U.S. $50,000 per person per year limit has been in place for several years.
• Over the last 12 to 18 months, the average purchase price of the inquiries that we have seen through eastwestproperty.com has been U.S. $870,000 — much more than the U.S. $50,000 per person per year limit.

Based on the above factors, it seems that Chinese investors continue to find ways around the controls. A large number of inquiries that went through our platform successfully closed, and some member agents reported that deals were all cash.

Conclusions

• We do expect demand for overseas real estate to increase, as the Chinese upper class is getting increasingly nervous about both the currency weakening and the massive undertakings from the government to stop this depreciation.
• We also expect demand for overseas real estate to increase because many Chinese investors are looking for diversification and property investments remain the No. 1 choice for many Chinese.
• We do expect that the average purchase price will decrease in the next few years as more middle income class Mainland Chinese are looking to invest in overseas properties, and more second-tier cities and third-tier cities are being targeted (due to budget and capital controls).
• The capital controls are indeed becoming stricter on Chinese investors. The ongoing controls and monitoring are lengthening the time it takes to complete an overseas property purchase (our study indicates it takes more than six months to get to a close).

The number of Mainland Chinese investors interested in overseas real estate is expected to increase, but it will take more time to complete any overseas real estate deal.

For American real estate agents, it will become even more important to maintain a good relationship with a Chinese buyer — communication with partners in China and use of WeChat are key tools.

Sam Van Horebeek is a director at East-West Property Advisors, a U.S. real estate platform based in China. You can follow on Facebook and Twitter.

Email Sam Van Horebeek.