I have many Chinese clients. In fact, over 50% of my buyers are either from China or are of Chinese descent. I have come to understand the Chinese culture quite well and how Chinese behave in real estate transactions.
I also have come to understand the motivations of Mainland Chinese buyers and why they want to move their families to Vancouver. Aside from low crime rates, good schools, low pollution, and high quality of life, I wanted to shed some light on 3 major factors that will influence Chinese buyers to purchase in Vancouver in 2016.
1: FEE SIMPLE
The concept of FEE SIMPLE ownership in Vancouver compared to Mainland China is literally foreign. In China, “The land belongs to the state and the collectives.” This is very similar to a leasehold where you lease the rights to the property but never actually own the property out right or Fee Simple. This also restricts foreign investors to purchase land in China.
In Canada, most of our property is FEE SIMPLE meaning that we own our property outright with freedom to dispose it at will.
The concept of Fee Simple is one of the reasons why Chinese homeowners purchase second, third, fourth, and even fifth investment properties. They don’t really care about CAP Rates or rental returns. They feel that Fee Simple real estate in Vancouver is a very good and safe investment for their wealth.
2: EXCHANGE RATE
“VANCOUVER IS ON SALE!” This is a term that I joke about with my clients who are buying investment properties. With all the news of real estate bubbles, prices up XX percent, and unaffordability in our market, one of the main drivers of our real estate price increases sees the market in a different light.
Currently, one Chinese Yuan can purchase $0.21 Canadian Dollars. Back in 2011, the Chinese Yuan could only purchase $0.145 Canadian Dollars. The buying power of the Chinese Yuan has increased significantly over the last 4 years. With the weak Canadian Dollar, Mainland Chinese Buyers are taking advantage of the exchange rate and heavily investing in Vancouver Real Estate. When the Canadian Dollar recovers, these investors will have made money on the exchange rate gains and the property value appreciation.
3: CHANGE IN CHINA’S INDIVIDUAL OUTBOUND INVESTMENT RULES
Lastly, this is coming down the pipeline. The QDII2 (Qualified Domestic Individual Investor 2) is a pilot program in China. This is a second rendition of the program that was created in 2007 that allowed Chinese asset managers to sell foreign mutual funds comprised of stock and bonds to domestic investors.
Apart from the QDII, Chinese investors were only able to convert up to $50,000 of Chinese Currency into foreign dollars per year. In reality, many investors have used both programs to exploit open loopholes and were able to move much more money to foreign nations such as Canada.
Now, comes the QDII2 pilot program. The pilot program will be tested in Shanghai Trading District, Tianjin, Chongqing, Wuhan, and Wenzhou before the end of 2015. Individuals with net financials of at least $161,000 US will qualify for the program. If an individual qualifies, they will be able to invest up to 50 per cent of their individual net assets.
What this means for Vancouver real estate is unknown. However, qualified Chinese investors will be able to move money into Canada and, in turn, Vancouver real estate investment. We could see a very interesting market in 2016 and something to follow in early 2016.