I’ll Take the Guaranteed Loss Please

I’ve said for years that you could sum up the motivations of many mainland Chinese buyers of U.S. assets – in particular residential real estate – as “if you could provide a guaranteed 10% loss they’d invest in a heartbeat”.

From FT Alphaville, a piece about how “art” and investment vehicles are used to transfer assets.

Companies with offshore sister companies find it easiest to launder cash. Strong if not obviously bloated valuations are not signs of a naive buyer, as analysts often conclude, but evidence that the acquisition is constructed to move as much cash as possible.

Overpayment is analogous to a tax or, alternatively, an investment in and of itself. You’re buying access to strong property rights and diversification, not to mention a foothold for the kids in a prestigious educational domain and a place to land if the dàbiàn hits the fan.

More generally, certain markets cannot be understood using simple fundamentals. The motivations and interests of market participants must be considered. For example, don’t look at historical real estate valuations for guidance in real estate markets with high mainland Chinese cash buying. And if you hear about any new locales they’re getting ready to hit, let me know 😉

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