Will Chinese Investors Stop Buying Aussie Real Estate?

One of the biggest investors into Australian assets is China. It’s not just infant formula that China is demanding. Newly rich Chinese are eager to increase their wealth by means of Australia property.

The Chinese government has been encouraging citizens to invest in stocks, bonds and real estate overseas. Why would they want citizens to invest overseas? It could be seen as an indirect way to control spending. Let me explain, too much spending is bad, as it creates inflation. One way a country can reduce inflation is for the central bank to increase interest rates.

Now China doesn’t want to do this because it could reduce the growth of their economy. China wants to keep inflation high, but manageable. Therefore the Chinese government have come up with an easier way to reduce inflation. They told Chinese citizens to invest overseas.

This was the government’s view early last year. My guess is that there were no drastic signs of the Chinese economy slowing, so no reason to encourage spending. There were concerns of an inflated housing market in China. Yet things seemed manageable, as China told citizens to focus stock market to create their fortunes. China also seemed to be handling the economic transition from an industrial one to a consumerist one.

Yet now China is forcing citizens to spend less abroad. The government has decided to limit capital leaving the country. And Chinese banks have responded, starting to block some foreign transactions.

Why has China done this? Because of economic turmoil. The situation in China isn’t as bad as some think. But economic growth is declining. The Shanghai Composite [SHA:000001] is dropping daily. Signs could be interpreted at unstable. Well unstable if you want to maintain 6%-7% GDP growth.

Will this affect our property market?

Australian property prices are higher than ever. The graph below shows the increase in property prices over 20 years.

Aus property Market Finch

Source: Finch rating

Its obvious Australian real state is increasing faster than the rest. This could be just one reason why Chinese investors like Australian real estate. They don’t have to wait a number of years to make reasonable returns.

But wont Aussie property underperform if Chinese investment is expected to decrease?

Developers can’t pass up a good investment

Chinese residential developer, Aqualand, will shortly begin a $1billion apartment pipeline. The company has already submitted plans for a residential complex, consist of nearly 12,000 units. And these are just the new projects.

Aqualand is already building 46 luxury units with Sydney waterfront views. And they aren’t the only ones.  Some of China’s richest government backed corporations are all in on Australian property.

Nerida Conisbee leads the research team at the international realtors Colliers. She believes ‘China now dominates in terms of investment into real estate.’ She also referred to Australian property returns being too good to pass up. ‘I think it just comes down to their investment metrics and perhaps the comparison of returns elsewhere’ she said.

And Australia real estate has had a major boost form Chinese investors in a relatively short period of time. China only committed $2.3 billion into Australia real estate as of 2010. But today, Chinese invests as much as $12.4 billion into Australia’s property sector. That is more than double the amount invested into mining.

Why would developers look anywhere else than Australia. We have clean air and good schools. Chinese developers can’t pass up on such a good investment.

If you’re interested in investing in property it’s worth checking out Real Estate Investment Trusts (REITs) first.

REITs are companies that own income-producing real estate. The property held by these companies ranges from office apartments to residential homes. The advantage to REITs is you can buy into their property investments by buying their shares.

And because they are shares, they usually have liquidity. This is a huge advantage over physical property which doesn’t have immediate buyers and sellers. But not only are they liquid, REITs can also provide good returns.

Last year S&P/ASX 200 A-REIT [ASX:XPJ] increased 5.32% (blue line). In the same time the S&P/ASX 200 [ASX:XPJ] dropped 1.83% (red line).  If we compare both, REITs is the clear winner.

ASX XJO Google finance

Source: Google finance

By holding REITs investors can exposed themselves to property risk. With this added exposure, an investor’s portfolio can be well diversified. And being diversified means offsetting risk, that which resides in the equity market. Keeping this in mind could help your portfolio returns in the long run.

Härje Ronngard,

Junior Analyst, Money Morning 

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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