The death of the all-cash Chinese buyer – and what it means for NYC banks
Late last year, Steven Ho saw alarm bells on social media: The Chinese government was gearing up for a major crackdown on foreign investment, and on messaging platforms such as WeChat and Line, Ho’s friends told him they were concerned that money would be tighter. In January, those worries became reality, as the government imposed exacting new capital controls that required Chinese citizens to disclose the purpose of their foreign investments.
In the days that followed, numerous callers told Ho, a senior loan officer at Queens-based Quontic Bank, that they were unable to get their money out of China to finance real estate investments in New York.
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“They’re saying, ‘What’s the max I can borrow?’ and they’ll figure out other means [for repayment] later,” Ho said.
Even before the latest rule took effect, China capped overseas transfers at $50,000 in an attempt to curb the massive amount of overseas investment taking place (though many Chinese investors found a way around those limitations by diverting money into business accounts or through a network of banks in Hong Kong). But since the January regulations, local banks are seeing a wave of interest from buyers who want to invest in New York real estate, but whose funds are stuck in mainland China. As a result, the Chinese investment market in New York City, which for years was defined by splashy all-cash purchases, has morphed into one grounded by more traditional financing. The shift offers a growing opportunity to a handful of lenders such as Quontic, HSBC, Guardhill Financial, Cathay Bank and Abacus Federal Savings Bank.
Between April 2015 and March 2016, Chinese buyers paid all cash in 71 percent of U.S. real estate deals, compared to just 20 percent who obtained mortgages from a U.S. lender, according to the National Association of Realtors. (About 6 percent received a mortgage from a Chinese lender.) But that’s changing, and industry sources said it’s changing quickly.
Most large retail banks don’t lend to foreign buyers because it’s harder to comply with “Know Your Customer” regulations, but also because they already command so much market share. Sensing an opportunity, smaller banks have made lending to nonresident – especially Chinese – buyers their specialty.
And while it’s too soon to measure, several New York City-based bankers said traditional lending to Chinese buyers is up since the January rules went into effect.
“They had the ability to pay cash, and they paid cash,” said Alan Rosenbaum, CEO of Guardhill, who said the bank lends about $100 million per year to Asian buyers, up significantly from five years ago. “Now, it’s more difficult to move money.”
Astoria-based Quontic will finance 65 percent of a purchase if the buyer has a green card. Without a green card or passport, the figure drops to 50 percent and the bank requires employment documentation and proof of local funds. To mitigate the bank’s risk, Quontic also requires foreign buyers to open an account holding at least six months worth of mortgage payments.
Ho said he recently had a client who was prepared to pay more than $700,000 for an apartment in Flushing, but had to slash her budget by $200,000. She still wound up borrowing 60 percent.
“She wasn’t able to get that much [money] over, so getting a mortgage was her option,” he said. “Unfortunately, it was her only option.”
Investors who hadn’t already moved significant wealth out of the country before the January regulations are now struggling to close deals.
Cindy Morin, marketing director for Xin Development, an arm of Chinese builder Xinyuan Real Estate , said one buyer recently backed out of a deal for a $1.4 million apartment at the developer’s Oosten condominium in Williamsburg. “They couldn’t get the down payment out,” she said.
Elizabeth Lee, a senior vice president of Cathay Bank’s Eastern Region, said she’s seen fewer mortgage applications from Chinese buyers this year as a result of the new regulations. While Cathay’s loan volume doubled between 2014 and 2015, loan volume only grew around 8 percent in 2016, signaling the buying frenzy had “stabilized,” she said.
“If they can’t get money out, they can’t finance with us either,” Lee said.“They do need a minimum of 35 percent down payment.”
Geovanna Lim, founder of brokerage Park Avenue International Partners, said one of her clients, an attorney with assets in China, recently received financing to buy a $1.3 million one-bedroom at the Sofia, a condo at 43 West 61st Street. The buyer put 50 percent down and closed in February, Lim said.
Though that client is paying a relatively modest interest rate, Lim said some hard-money lenders ask for seven points and 13 percent. “Considering the circumstances, it’s either lose all your down payment or get it closed and then spend seven points on the deal,” she said.
Some banks, like First American International Bank, founded by Chinese immigrants in Brooklyn in 1999, have begun to offer what they call “portfolio loans” to grab new customers. Those mortgages don’t require tax returns or pay stubs, and instead the bank requests a letter from the borrower’s employer certifying how much the applicant makes. Buyers are required to put down 40 percent. The bank had $382 million in residential mortgages on its books as of Sept. 30, 2016, up from $296 million a year earlier, due in some part to such loan programs.
“People pay; it’s a tremendous thing,” CEO Mark Ricca told The Real Deal last year.
Despite the Chinese government’s increasingly onerous capital flight controls, demand for real estate investment hasn’t slowed, and lenders in the Big Apple are likely to continue seeing high demand from Chinese buyers.
According to JLL, Chinese investment in real estate reached a record high of $33 billion last year, up 53 percent from 2015. And in its 2017 Wealth Report, brokerage Knight Frank said Asia has the highest concentration of ultra high net worth individuals. About 100,000 new Chinese millionaires are minted each year. “This is market-moving levels of wealth,” Liam Bailey, the firm’s global head of research, said.