Are Chinese and Russian investors about to exit the real estate market?

If you look at some of the strongest real estate markets around the world they have one fact in common, they seem to be attracting significant overseas investment. The vast majority of this overseas investment is coming from China and Russia with investors looking to reduce exposure in their home country and expand into new areas. This has played into the hands of many international investors who have benefited from this ever increasing demand from China and Russia but it is dangerous to expect overseas investors to support your local real estate market.

We will now take a look at some of the factors coming into play now and in the future and how they may impact your local real estate market.

Chinese investors

It is no secret that the Chinese economy has been the engine room of the worldwide economy since the mortgage crisis of 2008. There has been massive demand for natural resources, which has benefited Australia more than many, and the ever-growing need for investment has opened up new markets for international investors. As a consequence, many wealthy individuals and companies in China have also been looking to expand their investment portfolios and safe havens such as London have been very much top of the agenda.

Quote from PropertyForum.com: “Are sensible investors suffering because of historic risky lending?“

We’ve also seen Chinese investors looking towards property in Spain, Portugal and Greece where not only is there potential long-term growth opportunities but there are also certain visa carrots being dangled. Indeed residency now comes with some of the larger real estate investments in Spain, Portugal and Greece and this certainly has an added value for overseas investors, particularly from the likes of China and Russia.

Russian investors

The ongoing issues in the Ukraine perfectly illustrate the long-term problems often associated with Russia and its political elite. Whichever side of the Ukraine fence you stand on there is no doubt that this is impacting the country’s economy, it’s standing on the worldwide stage and some people actually fear conflict between Russia and the US. Against this background it is not difficult to see why economic growth in Russia is stalling, with recent forecasts suggesting the economy grew by 0.8% in the first quarter of 2014 and is unlikely to show any further growth in the final three quarters. Indeed, there is a chance that the economy could actually contract during at least one quarter of 2014.

When you also bear in mind that inflation is currently in excess of 7%, although expected to fall to around 6% by the year-end, it is difficult to see how the Russian economy can show any significant real term growth in the short to medium term? There is also the potential for trade restrictions, restrictions on movement of funds and assets and indeed Russia could be set adrift by the international investment arena.

Conclusion

Over the last four or five years we have seen significant investment flows from Russia and China into many of the world’s leading real estate markets. Some, such as London, have been pushed to uncomfortable levels by foreign investment and indeed the likes of Spain, Portugal and Greece have sweetened the deal by offering residency visas for those investing large amounts of money into real estate.

If overseas investment from the likes of Russia and China was to fall significantly in the short to medium term there is growing concern that this will have a detrimental impact upon many of the world’s leading real estate markets. When you also take into account the fact that base rates across Europe will eventually rise we could be facing a potential pincer movement in the short to medium term.

Against this background, would you be investing in London at skyhigh rates? Would you feel safe picking up Spanish, Portuguese and Greek real estate without the backing of Russian and Chinese investors? Whether or not these doomsday scenarios do play out remains to be seen but it does show how dangerous it is to depend on overseas investors to support your local real estate market.