Asia: The Pivotal Puzzle Piece
From the ascent of the BRIC countries, to the rise of luxury in Central and South America, to Europe’s traditional mega-luxury locations, we’ve followed international real estate around the globe this year. In this last installment, we focus on the most pivotal piece of the international puzzle: Asia.
1 and 146 — just these two numbers could easily tell the story of real estate in Asia and how, in little less than a decade, buyers from the region have become one of the — if not the — most influential in international real estate.
In 2001, China could claim only one billionaire and India four, while the U.S. was home to 269, Japan 28 and Hong Kong 14. By the time the Forbes 2011 billionaire list was published, China’s number had risen to 115; India had 55, followed by Hong Kong with 36 and Japan with 26. Jump ahead six months and China’s count shoots up to 146, a pace equal to the creation of one new billionaire a week between March and September, explains Michael Silverstein, one of the founders of The Boston Consulting Group, in “The $10 Trillion Prize, Captivating the Newly Affluent in China and India.”
Although the fallout from the troubles in Europe, stock market machinations and government efforts to cool markets have caused some Asian economies to stutter recently, the pace of economic development remains brisk compared to the U.S. and Canada. By 2050, India and China are projected to have the world’s largest economies. Estimates also call for Singapore, Hong Kong, Taiwan and South Korea to have a per capita GDP greater than the U.S. Already, Beijing, Shanghai, Singapore and Hong Kong number among the top 10 cities most important to high-net-worth individuals, according to global real estate consultancy Knight Frank.
Although wealth creation in Asia slowed in the last year, few other regions are churning out newly minted millionaires and billionaires at the same pace. While they might represent only a fraction of the overall population, the sheer numbers, along with projected rapid growth, make these consumers in China and India important upscale markets.
“China’s and India’s super-rich will spend on modern houses, fast cars, complete luxury wardrobes, financial advisers, and servants to prepare their meals and clean their homes,” Silverstein explains. Additionally, he says, they will travel and educate their children abroad.
U.S. architects are in great demand in Asia. After one of his books was translated into Chinese, Los Angeles architect Richard Landry gained a following among Chinese architects. He says he gets inquiries from Asia every week. “What clients are looking for is exactly what we are doing here in high-end residential design,” he explains. “All our clients have visited the U.S. and viewed homes we’ve done. They are looking for well-built properties with good attention to detail and beautiful finishes.” Typically too they are looking for traditional designs that draw inspiration from classic architecture. “They have a vision and they are trying to bring that vision to the amazing market over there,” he explains.
Landry’s current work in China ranges from commercial to residential, and his current residential projects give a clue to the breadth and depth of China’s luxury market. One project’s design is for 10 different 25,000-square-foot homes, and, he says, the client plans to build four ofeach plan. “That’s almost a million square feet, and each house will be completely custom.” Another project involves almost a hundred 10,000-square-foot homes.
Investment potential, stability, transparency and excellent educational opportunities are must-have attributes for international buyers, especially those from Asia. Australia, New Zealand, Hong Kong, Singapore, Vancouver, as well as New York, Beverly Hills and London are all prime markets for Asian buyers. “Also,” says Bob Hurwitz, owner of the Hurwitz-James Company in Beverly Hills, Calif., “I am seeing substantial inquiries from Asian buyers on my Panama and Costa Rican estate properties and developments.”
Although top brokers such as Hurwitz or Joyce Rey, executive director of Coldwell Banker Previews International in Beverly Hills, say buyers today hail from a number of Asian countries, including Indonesia and Korea, China and Hong Kong still account for the greatest number. Adding to interest in international real estate are recent measures on the part of some Asian governments to cool markets and also reduce second-home ownership.
Speaking of a $78.8 million listing in Bradbury, Calif., Hurwitz says, “Of the dozens of showings I have had on this property, all of whom had verification of funds, and a number of them to billionaires, all but one was to buyers from China.”
Hurwitz sums up the appeal: “The very wealthy Chinese buyer is looking for trophy residential property. In some cases, the property serves a dual purpose: a place to live in amazing grandeur and comfort and a destination for making money from a business. Additionally, the most magnificent estate speaks volumes about the success of the owner, and visitors are going to see that. You can’t drive up to a mega estate and not believe the owner is very successful, substantial, far above the norm in terms of wealth and definitely someone to do business with. I have heard this expressed on numerous occasions directly from the buyers touring these properties.”
Prices and potential opportunities are big draws offered by U.S. properties. Compared to global ultra-prime locations such as Hong Kong, London or Swiss cities, U.S. prices are very compelling. “People are spending huge amounts of money for an apartment in Hong Kong. Here, they can get the most beautiful estate for the same amount of money, so the comparison is quite attractive. The same is true for London, where $100 million is not an extraordinary price for something beautiful,” says Rey. Additionally, America is perceived as safe and secure. Compared to Americans, who are focused on doom and gloom of the economy, Chinese nationals talk about the great possibilities they expect if they come to the U.S., Hurwitz says, describing the contrast between the two perceptions as “a small culture shock.”
Equally important to prospective buyers is the presence of other Asian homeowners. “Although many come to look, those who actually buy are the ones with a reason for being here,” explains Rey. “They have family members who have moved here; they have family members who have businesses here or they have family members who are in school here.”
The recent flush of media reports might make it seem that Asian buyers buy out of passion, but quite the opposite is true. “Each buyer is, of course, an individual. In broad terms, the Russian and Chinese buyers tend to be very different in how they operate. Chinese buyers are tougher negotiators; even the mega wealthy ones are more discriminating in price and like to negotiate. They will walk away. Many super-affluent Russian buyers decide on a property and then pay what it takes. Obviously, there are exceptions to this rule, but it is a rather accurate observation based on many years of dealing with both cultures,” shares Hurwitz.
“Just the beginning” is the way many experts describe China’s appetite for luxury goods. Present estimates place the number of individuals in China with a net worth of $1.6 million at more than 1 million and, according to some forecasts, nearly all experts say China’s middle and upper classes will grow exponentially in the next two decades. By 2020, 68 percent of Chinese households will be considered middle and upper class.
Although Shanghai and Beijing are traditional centers for affluence, rapidly growing pockets of wealth can be found all across the country. China is under rapid urbanization with millions of people moving to bigger cities such as Shanghai, Beijing, Hangzhou and Shenzhen in search of more opportunities, better education and infrastructure. Prices in large cities range from more than $3,000 per square foot in the upper end to $100 per square foot in the lower end in smaller cities. Expectations are that 12 cities will have more than 2.5 million middle class and affluent consumers by 2015. Already there are 93 cities with a population of more than 5 million people, compared to only one city of similar size in the U.S. According to some reports, approximately 85 percent of urban residents currently own their own homes, which is a stark change from the 1990s, when owning your own home was the exception.
“In major cities, there are more and more wealthy people, and these urban residents have a strong demand for luxurious properties,” observes Yunchang Gu, vice president of the China Real Estate Association. And, as fortunes increase, a move into larger, better residences is not uncommon. Also, most affluent Chinese have several homes, either in the center of the city or in desirable areas such as by the Huangpu River in Shanghai or near the hills and lakes on Beijing’s west side. Typically, according to Gu, the primary home would be a luxurious condominium in the center of the city, while a second home would be in a suburb close to mountains or rivers.
“In addition to owning a home in major cities and one in the suburbs, the wealthy also purchase properties in other parts of China,” observes Gu. One example is Hainan Island, which has been designated as an international tourism island and has been compared to Hawaii.
However, these patterns may be changing. In 2011, the Chinese government enacted restrictions on second-home purchases, requiring a higher down payment and high interest rates on these purchases.
As important as homeownership is, ensuring a top-notch education for their children is an even higher priority for middle and upper class Chinese. “Most Chinese families only have one child, so they try to obtain the best education possible, including sending them out of the country, even in middle school,” explains Gu, noting that rental costs and home prices are much higher in districts with better schools.
“Many Chinese want to invest abroad, particularly because of the monetary returns, but also very much for safety purposes,” says Alex Ahlstrom, director of sales for Hurwitz-James Company in China. And safety extends beyond investment. He says a number of Chinese buyers also cite heath concerns and believe America is healthier.
Travel is another offshoot of wealth accumulation. Looking ahead, most expect to see more interest in international properties as more Chinese nationals become acquainted with the West.
From the up-end malls to European luxury cars, to luxury villas and condos throughout the country, Thailand’s new affluence is noticeable everywhere. The devastating floods of 2011 haven’t stunted economic growth, which is pegged at 5.5 percent to 6.5 percent for 2012. Thailand boasts the 19th largest manufacturing economy in the world, and the World Bank considers the per capita GDP to be upper middle class. “Demand for high-end luxury properties is greater than ever. Affluent Thais all want second condos or homes in a resort community. Europeans are flooding in to Thailand, with affluent Russians leading the way. The demand is great and growing,” explains Nancy Suvarnamani, who is president of
Century 21 SGR Chicago and former president of the Chicago Association of Realtors.
In demand are resort properties in Phuket and South Pattaya. Here, a super-luxurious home, over 500 square meters, fetches as much as $2.2 million, while a more modest two-bedroom, 2.367-square-foot villa home with a pool will be roughly $247,000. In addition to Phuket and South Pattaya, affluent Thai buyers also look to the moderate climate in Chiang Mai in the north of Thailand.
With some of the highest prices worldwide, Hong Kong is one of luxury’s iconic cities. A modest 1,000-square-foot condominium in a mid-level residential area in Hong Kong can easily cost above $1.5 million, while newly built residences might claim twice that amount. “In the luxury segment, tight supply will continue to fuel demand and prices,” especially for new residential properties in the luxury sector, says Ricky Poon, executive director of residential sales for Colliers International, Hong Kong.
After some adjustments in the second half of 2011, prices began to recover in 2012. It is important to understand also that mainstream prices increased 102 percent between 2006 and 2012. Buyers from mainland China account for a good portion of the increases in luxury purchases and, according to Knight Frank, make up 25 percent of high-end purchases in Hong Kong.
Prime locations include the traditional luxury districts of The Peak, South Side and Mid-levels. New developments in West Kowloon, Central and Kowloon Tong districts are particularly well liked by these buyers.
Demand at the very top of the market has softened as the result of an additional stamp duty on foreign buyers. The number of foreign buyers dropped by 76 percent at the end of 2011 and the first quarter of 2012. In the second quarter, foreign buyers accounted for 22 percent of sales, according to Knight Frank. Transactions to Chinese buyers dropped to 19 percent of foreign buyers, while Malaysians accounted for 26 percent, Indonesians 20 percent and Indians 13 percent. Overall sales edged up over the lows at the beginning of 2011, and prices for private property increased a mere 0.4 percent in the first quarter of 2012.
As is the case in other countries in the region, demand for properties in 2012 eased back. A luxury tax introduced in 2011 to curb speculation and overall global uncertainty continues to constrain sales. “We think the luxury market may experience some difficulty in the short term because of the existing crisis of the European and U.S. economy,” says Jack Huang, president of ERA Taiwan Master Franchise.
However, many high-net-worth individuals see this as a short-term adjustment and believe the luxury market “presents a bright future in the long run, even though the overall economy may not be doing well because of the negative effect of the financial crisis since the beginning of the year,” comments Huang. “Compared with Hong Kong and Shanghai, we believe the luxury properties in Taiwan still have space to grow due to the advantages of financing, interest rates and pricing.
Wealth creation is underway here, although government limitations, including a tax on upscale properties, put a damper on the fledgling market for upscale homes. Prime areas around Seoul include Gangnam-Gu, Pyeongchang-dong and Bukchang-dong, according to Dr. Eric Park, a professor at Korea Cyber University in Seoul. Chinese buyers are also showing interest in resort properties here. For example, last year a resort in Jeju sold 192 units to foreign buyers, and Chinese nationals accounted for about 90 percent of this number.