The Chinese Markets Are In Turmoil, So What Does This Really Mean for Puget Sound Real Estate?

On August 29th, King 5 News reporter Ted Land interviewed Dean Jones, President & CEO of Realogics Sotheby’s International Realty (“RSIR”) and RSIR broker Lili Shang, to get their views on the Chinese stock market correction and whether that signals the end of overseas investment in the Seattle/Bellevue metro area.

“Ultimately, I believe these fluctuations in the Chinese markets are going to drive further interest in diversifying global wealth in the US, especially with real estate and immigration,” says Jones.  “Insecurity in the equities markets within China, and somewhat arbitrary moves by state government like the currency devaluation, are reasons why sophisticated investors have had a wandering eye outside China for years.  When these dramatic events happen it’s only a reminder that you can’t count on market forces to calibrate your financial security in China.  The flight of capital to the US is happening because it’s viewed as stable, safe and prosperous - and that’s not going to change.”

Shang agreed, saying that the recent stock market turbulence isn’t going to substantially alter the trajectory of foreign direct investment in the region. “They are nervous to stay in China,” stated Shang.  “But they are very confident to come here.”

Sotheby’s International Realty recently contributed to editorial coverage on the topic with Business Insider, agreeing that the market chaos of the past few weeks is likely to lead to an acceleration in the rate of real estate purchases by Wealthy Chinese buyers in the US and elsewhere.

Meanwhile, the Washington State China Relations Council (WSCRC) hosted a timely and insightful roundtable discussion on August 27th, with thought leaders in international business at the Seattle Metropolitan Chamber of Commerce. All eyes were on the volatile Chinese stock markets and recent moves by Chinese leaders to devalue their currency, as the panelists debated whether this was going to have a prolonged impact on the local economy. After all, Washington is the most trade dependent state in the union, and as a key gateway to Asia, it’s not going unnoticed by business leaders and members of the media.

(From Left): Dean Jones, Realogics Sotheby's International Realty; Holly Yang, Kidder Matthews; Kristi Heim, Washington State China Relations Council; John Spear, Tigeroak Publication; Marc Berger, Nyhus Communications; and ZhaoHui Tang, adSage

The panelists included Olive Goh, Director, Citi Private Bank; David McHardy Reid, Professor of Global Business Strategy and Co-Director of the Albers Center for Global Business, Seattle University Albers School of Business and Economics; Amy L. Sommers, Partner, K&L Gates LLP;
ZhaoHui Tang, Chairman, adSage; and Thomas Taylor, SVP & Manager, PNW Region, East West Bank.

Above & Below: More than three dozen thought leaders converged at a roundtable discussion last week with the Washington State China Relations Council to discuss the likely effects of recent market turbulence in China

Goh remarked on how China appears to be trying to “internationalize” their currency, while Tang compared the Chinese stock market to a “casino” and suggested that many investors follow each other into markets rather than evaluating core company assets and market capitalized value. The general sentiment was that China, the world’s second largest economy, is slowing relative to its prior unsustainable growth rate, but that it remains a powerhouse generating incredible wealth. The move to a “new normal” of a more consumer based economy vs. a manufacturing hub will require other adjustments that have been described as both “painful” and “necessary,” but only time will tell.

From a more macro perspective, the recent 3-percent devaluation of currency seems rather insignificant given that the currency gained 14-percent in value over the last year alone. Likewise, the Shanghai stock market lost an estimated 43-percent of its value from peak to trough but that’s only about a year’s worth of gains. The reality is that the Shanghai Composite Index is very volatile, especially when compared to the Dow Jones Industrial Average in the US.

Briggs Freeman Sotheby's International Realty recently compared the historical activity of the US and Chinese stock markets to illustrate that volatility in China is "business as usual"

“This is deja-vu all over again,” Jones added. “When the turnover of Hong Kong from the UK back to China occurred in 1997 there was a tremendous movement of investment and emigration from the region in anticipation of changes ahead – just look at how Vancouver, BC benefited from this. Today, the ongoing lack of transparency, market manipulation and general fear of putting all your eggs in one basket has motivated Chinese to find alternative investment vehicles. There’s little point stockpiling cash or leaving reserves in a bank account earning next to nothing. Moreover, if you worry about the currency being further devalued or new policies placing more restriction on your money, that’s also going to motivate you to explore alternative strategies to the status-quo.”

Ben Briggs, Vice President of Greater China representing Dallas-based Briggs Freeman Sotheby’s International Realty, released a video concerning these trends and echoed a similar sentiment to Jones:

Adding further fuel to the fire, the Qualified Domestic Individual Investor program being deployed by Chinese leaders is providing a much greater opportunity for legitimate individual stakeholders to make more substantial investments in foreign equities and real estate, much like larger investment funds.

“Much of the wealth that was created in the Chinese miracle these past two decades was in real estate,” said Jones.  “That opportunity is well understood and the Seattle/Bellevue metro area is on the map. I believe the most sophisticated investors are the first responders who know what’s behind them – a tsunami of investment that is finding its way into the market.”

To be sure, there has been plenty of activity with large land investments by Chinese-based firms in recent months, which Jones believes is in anticipation of what’s to come.

Juwai.com, a real estate portal, estimated the total could reach US$660 billion if they allocated 10 percent of their assets to real estate. That is almost 60 times the amount of Chinese capital that flowed into global real estate last year, based on data from consultancy CBRE.