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CEO Mark McLaughlin quoted by Wall Street Journal on overseas investments

How Chinese Buyers Abroad Offer a Lesson on Capital Controls

Individuals have longed faced curbs on overseas investments, but have figured out ways around such limits

Global commercial real-estate participants keen to know the impact of Beijing’s capital controls might not need to look much further than the cat-and-mouse game that is being played in the residential markets for years.

Chinese individuals have long faced limits to overseas investments equal to about $50,000. But for years, Chinese home buyers have been figuring out ways to work around these restrictions. As a result, they have become a major buying force in the U.S., U.K, Australia, Canada and other major global markets.

To be sure, the Chinese government from time-to-time has tightened restrictions to curb outflows and often these crackdowns have had short-term impacts on deal activity in global markets. Indeed, new regulations that went into effect earlier this year have had a dampening effect on some markets, brokers in numerous U.S. and European cities report.

Starting late last year, the Chinese government began imposing new capital controls on overseas commercial property investment. Institutional investors wary of getting caught in the crosshairs of officials in Beijing have become more selective in their investments and are steering clear of splashy deals.

But market participants say these slowdowns typically don’t last. “People will find alternatives,” said Dehlan Gwo, a member of Realogics Sotheby’s International Realty’s Asia Services Group, in a recent report. “I think we will see more and more creative ways to move money out of the mainland.”

Chinese buyers remained the top foreign buyer of residential real estate in the U.S. in the 12-month period ended March with a $31.7 billion share of the $153 billion in total sales, according to a report by the National Association of Realtors. In the previous 12-month period, the tally was $27.3 billion, the report said.

In Australia, about 90% of foreign demand is from China and there is little sign of it ebbing, according to an October report by Credit Suisse. “There are now 1.6 million U.S. dollar millionaires in China,” the report said. “We think these individuals dominate the buying of Aussie property.”

Many people familiar with the restrictions say they don’t affect China’s wealthiest, many of whom already hold diversified assets outside the country and have moved enough money out of China, often to accounts in Hong Kong or Singapore, to continue buying overseas.

“At the high-end, I’m seeing Chinese buyers that are here already, have already purchased one house, and they’re coming back and upgrading to more expensive real estate,” said Anna Riley, managing broker for West Bellevue Partners, a luxury residential firm in Washington state.

Ken DeLeon, founder of DeLeon Realty, has noticed a similar trend around Silicon Valley. “We’ve never seen the demand stronger for properties $10 million and over,” he said. The firm aggressively markets luxury homes to the Chinese; Mr. DeLeon said roughly 50% of his listings priced $10 million or higher continue to sell to Chinese buyers.

Still, other brokers—especially those who deal with lower priced properties—saying the most recent intensification of restrictions are having an impact. “There are a lot of people coming over, very interested in buying, and then they can’t get the capital out,” said Kerry Lynn, a residential broker with Douglas Elliman, who has spent four years building her business with Chinese buyers in New York.

Mark McLaughlin, chief executive of Pacific Union International, Inc., said that across California, sales volume from Mainland Chinese buyers in the first half of 2017 is 50% less than the prior year. His firm, he said, has started searching for “the next international buyer,” kicking off digital marketing campaigns in cities such as Mumbai.

The most recent restrictions amped up the $50,000-per-year currency exchange quota with regulations requiring overseas investors to disclose how they plan to use the funds, according to David Ji, director and head of research for Greater China for the global property firm Knight Frank LLP.

Parties making a yuan loan to an overseas entity must now register the loan with the State Administration of Foreign Exchange, and must keep the loan within a certain limit. The new rules also close a loophole to the $50,000 limit by banning individuals from pooling funds with family and friends.

China’s foreign-exchange regulator also has broadened the clampdown to both domestic and multinational companies, instructing banks to clampdown on overseas remittances by companies.

For the Chinese buyers who haven’t moved enough money offshore, “it has been a challenge,” said Brad Henderson, chief executive of Sotheby’s International Realty Canada.

A report by Juwai, a website that connects Chinese buyers to overseas property listings, estimated that outbound real-estate investment by Chinese companies and individuals would drop by as much as 20% this year to $80 billion, down from $101.4 billion last year. Still, investment for 2017 is predicted to rank among the top three years in history, according to Juwai.

According to Ms. Lynn, buyers who would have traditionally paid cash for New York properties are now seeking mortgages. “But they’re still having trouble getting enough for a deposit out, if it’s a $7 million apartment,” Ms. Lynn said.

She has instead directed potential buyers to rental apartments. This summer, she rented six apartments to potential buyers from China “who realized how difficult it was to get the money out, decided to rent for one year, and start slowly moving money,” she said.

Mr. Henderson noted that it is common for incoming buyers to borrow or pool money with family already settled in Canada. “How the money gets out of China is something we’re not always aware of,” Mr. Henderson said.

Mr. Henderson said he hasn’t seen a significant downturn in investment in popular Canadian markets such as Toronto and Vancouver, adding, “where there’s a will, there’s a way.”

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