By Rocky Chan, CPA, CFP
When it comes to a luxury investment product, many people will naturally imagine a luxury mansion on top of the hill.
Luxury apartments, single family houses or great mansions symbolize the value and boost the ego of the Chinese investors. Among the best images are New York Manhattan apartments, London courtyard mansions, or California Beverley hills properties. However, high value does not automatically equate to best value. As savvy investors, we should be looking for potential value appreciation.
Today, I would like to suggest the real properties in Silicon Valley possess the best value in offshore luxury investment. In fact this prime location already calls homes to millions of Chinese.
Silicon Valley (or San Francisco Bay Area in a broader sense) gets its nice reputation mainly from the huge selection of greatly successful high tech companies. The well-known household names include Apple, Cisco, Oracle, Facebook, Yahoo, Twister, E-bay, Hewett Packard, and Applied Materials and so on. The abundance of successful companies has everything to do with the highly skillful workforce, entrepreneurship spirits and venture capital funding. It boasts some of the finest universities such as Stanford University and University of California at Berkeley. It also attracts millions graduates from top universities and colleges around the globe. In addition, Silicon Valley is also a home to a good number of top high schools in the nation. One recent insanity phenomena was created by Jeremy Lin, who is the proud product of Palo Altos High, one of the top Silicon Valley high schools. No doubt that Silicon Valley presents one of the finest places on the planet to realize youngster dreams and it should grab your attention by now.
New Chinese immigrates to US find out very soon the degree of importance of high school scores and rankings on the housing value. If you are lucky to own a single family house in one of these schools districts (Monta Vista, Fremont mission, Palo Altos and west San Jose Lynbrook high schools) over the past 5 years, you would find out that the value of your house dropped the least during 2008 financial crisis and rebounded the most during the past 3 years. In fact, in some of the high end markets, home prices have gone up sizably even comparing with the peak in 2005. A few good examples include Saratoga up 23% from 2005 peak and Los Gatos up 8% during the same period.
Even though the real property prices today in San Francisco Bay Area have been up significantly from their low points in early 2009, I still believe it has more room to go up in the short term and long terms. It should still be one of your top picks in oversea luxury investments. Here are some of the key reasons to invest in Silicon Valley properties, in addition to the good fundamental cultural, liberal and infrastructural supports offered in this prime location.
1. The 30-year fixed mortgage in the US has reached a new low, at 3.36%, providing the good backdrop of housing affordability.
2. Stronger economy in US and lower unemployment rate (a recent indication of 7.7%) will continue to fuel the rebound of housing markets.
3. The median price of single-family homes showed gains of 14-21 percent in all five counties of San Francisco Bay Area, compared to the previous year. This momentum may still have legs.
4. A market with low inventory and active buyers creates upward pressure on prices. The following three points explain why the inventory is low and the demand is high.
5. Relaxing US immigration policy attracts more Chinese buyers and investors of US properties. The recently extended EB-5 immigration policy allows foreigners with as little as $500,000 investment money to apply for US immigration with the entire family. The money has to be invested in qualified development zones. One number of big projects is recently approved in the center of San Jose and other places in Silicon Valley. For the year of 2012 so far, at least 80% of the total EB-5 immigration applications were filed by Chinese citizens. This easy immigration policy opens the gate for the flooding Chinese. Meanwhile, on the contrary, the Canada government recently has closed the door to Chinese immigrants due to the fact that Chinese immigrants has i-jackedthe Canada house markets. The huge demands in Canada real properties (especially in Vancouver and Toronto) from Chinese immigrants pushed the housing prices to a record level, totally out of reach for the local Canadian residents. Because of this reason, more Chinese are expected to switch their immigration focus to US.
6. Returning expatriates are also picking up steam, buying properties in US recently. For the past decade, emerging market countries such as China, Thailand, and Vietnam, Philippine and so on, are the desirable destination of choices for American citizens to travel, find jobs and settle down. American found it extremely affordable to live in these countries. The notions of loosening rules and abundance of jobs are also appealing to them. However, the time has changed and the tides have gone the other way. US dollar has been depreciating gradually; the ultra-high inflation in emerging markets is eating up their income and savings; increasingly catch-up or competitions from local workforce talents are pushing them to the edge. Alarming number of American expats found out lives are not easy in these countries, not to mention other annoying issues such as the culture shocks, unacceptable health standards and tougher foreign rules designed to rip them off. Besides, both domestic and foreign companies in these emerging countries found it increasing expensive and not practical to continue to hire American expats to run and manage the local operations. As a result, many American expats are forced to quit the job or sent back home unwillingly. When they return, the first issue on their mind is of course housing.
7. Most of the Chinese (no matter originally from mainland China, Taiwan or Hong Kong) in Silicon Valley are working in the high tech related industries such as internet, computer, biotech semiconductor and all kinds of engineering. The Skillset requirements in these industries are relatively high and the associated pays are relative noble. A study in 2003 has showed that the median salary in Bay area is around $70,000, far exceeding the nationwide average of $35,000. For high skilled engineers, the based salary easily tops $100,000. Nowhere in the world can beat that. Even so, great salary alone is no good enough to explain the high prices of Silicon Valley real properties. The true reason behind the noble price is company stock options, which is truly the wealth making machine. It could be in the form of restricted stock (RS), employee stock purchase plan (ESPP), incentive stock option (ISO), cashless grants or other kind of compensation programs. The jackpot comes the day when your employed company goes IPO. If a Chinese software engineer, for instance, joins Google well before it goes IPO, he has a good chance to become millionaire the day after Google go public. In fact, tens of thousands of Chinese became overnight millionaires when the IPO, M&A and other financial buyout schemes of their associated companies become a reality. These get-rich-quick models attract a tremendous number of Chinese to the Bay Area.
8. The 2008 financial crisis has made a huge crash in home prices all over the US. Over one third of the properties see the home market value go below the mortgage owed. As a result, foreclosure (the banks control the sale process) and short sales (the homeowners control the sale process) sizes becomes common scene in the neighborhoods. Silicon Valley is not an exception, however. Most of the foreclosures and short sales happened in San Jose area, which accounts for half of the shorts sales deals in Silicon Valley. During the past year, wee seen short sales overtake the foreclosure process as the procedure of choice to deal with homeowner distress. That may change after New Year because the temporary ebt forgivenessfeature in the tax code is set to expire as part of the so-called iscal cliff In light of this, more homeowners are rushing short sales to the deadline and less short sales are expected over next year or so. This action will be likely to further reduce the inventory supply of the housing, leading to an increase in housing prices in the near future.
9. Silicon Valley is the place to incubate the most startup companies. It is the true leader of setting the tone over technological trends. All of its achievements cannot make possible without the great engines angel, venture capital (VC), private equity (PE) or other kinds of funding. A great number of well-known and influential VC and PE companies locate at the heart of Silicon Valley, named Menlo Park or Palo Altos. Sequoia, IDG and Andreessen Horowitz, just names a few.
10.The home prices in most of the Silicon Valley areas have rebounded significantly over the 2009 low, while majority of other housing markets in US are still suffering great loss, comparing to the peak of 2006. At this juncture, are you willing to bet on the continuous success of Silicon Valley and its property value or invest some other regions where prices are low but the markets are dead? It is your choice. Don forget the lesson we learned from our marketing class in college: location, location, location.