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Real Estate Matters

Chinese stock market woes, the RMB devaluation's impact on Silicon Valley real estate

The recent turmoil in the Asian stock markets, most notably in China, and the devaluation of the Chinese currency have evoked many questions about the likelihood of continued investment in Bay Area real estate by Chinese buyers. Coincidentally, we were attending meetings with some high-level government officials in Beijing during the height of the Asian stock market free fall in July. Upon our return, we started to receive a string of inquiries from the press and clients alike. Those same questions persist three months later.

The source of the concern

The Shanghai Stock Exchange Composite Index was at 2,083 on Jan. 3, 2014, and it soared to 5,166 by June 12, 2015. However, since that date, it retreated back to 3,155 by October 2015. This was still a net increase of over 50 percent in less than two years, but it was certainly a huge drop from its heights.

In addition to the stock market turmoil, there has been a good bit of currency instability in China. In October 2005, one U.S. dollar could be exchanged for 8.1 Chinese yuan renminbi (RMB). By July of 2008, that ratio was reduced to one U.S. dollar equaling 6.8 RMB, which — much to the chagrin of trading partners, including the United States — remained pretty consistent until June 2010. From June 2010 until December 2013, the rate fell to one U.S. dollar equaling 6.06 RMB, which gave Chinese buyers a lot of power to purchase U.S. real estate.

However, on Aug. 11, 2015, China's central bank announced that they would devalue their currency and, by Aug. 26, the rate had changed to one U.S. dollar equaling 6.42 RMB. While the reduced buying power could discourage some Chinese buyers from purchasing property in the United States, fears that the devaluation trends could continue or accelerate may actually encourage some buyers to act more expeditiously.

That brings us to today. We have a Chinese stock market that is down significantly and a weakening Chinese currency, leaving the open question of whether Chinese buyers will continue to buy Silicon Valley real estate as aggressively as they have during the past three years.

Although it may be unwise to look to a local real estate agent for prognostication of global economic trends, our extensive outreach to the Chinese community and our strong network, both here and in China, give us a significant amount of real-time data on what is actually happening in the marketplace. What we are seeing is a stratified market that is responding very differently.

Impact on local real estate

We have seen a moderate decrease in interest from Chinese buyers of lower-priced properties, which, in Silicon Valley's rarefied air, includes properties valued at under $2 million. Some Chinese buyers have indicated a desire to wait until their stock holdings rebound before moving money to the United States.

However, we have also seen an increased demand from the extremely wealthy portion of Chinese buyers. By way of example, we recently sold one of our listings for approximately $7 million to a Chinese billionaire who wanted to diversify his portfolio in light of the economic turmoil in Asia. Similarly, we have experienced an uptick in interest from affluent Chinese buyers on several of our listings in Atherton, and another Chinese billionaire has expressed an interest in a very aggressive buying campaign.

The fundamental factors that have attracted international buyers to Silicon Valley have not changed. We still enjoy a remarkably strong business environment and an educated workforce that is unrivaled. Additionally, the stability of the United States and its legal system, which includes very predictable property rights, attracts many people from around the world. While it is too soon to conclude whether the interest from Chinese buyers will continue at the same pace as we have seen in recent years, we expect to continue to see a "flight to safety" mentality for at least 18 more months.

Michael Repka, CEO and general counsel for DeLeon Realty, Palo Alto, formerly practiced real estate and tax law in Palo Alto. He formerly served on the Board of Directors of the California Association of Realtors. He can be reached at Kim Heng is director of International Operations for the DeLeon team. She is based in Palo Alto and makes frequent trips the the DeLeon Team's Beijing office. She holds and MBA from the University of Texas.

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