Adaam Dahill saw promise in the three-story brownstone on a quiet street in the Bedford-Stuyvesant neighborhood of Brooklyn, New York, despite its weather-beaten facade, crumbling front steps and broken windows. However, he needed nearly US$1.3 million to buy it and turn it into the sort of Brooklyn dream home for which the city’s lawyers and bankers pay big money.
No problem. For funding, Dahill borrowed money from a new and eager group of international financiers: middle-class Chinese investors.
“I don’t discriminate if someone wants to finance the property we developed,” said the 36-year-old Dahill, who works as a mortgage broker by day. “Chinese? Great. American? Fine. I don’t care as long as they’re interested.”
Illustration: Mountain People
China’s wealthy people have long bought up properties around the world. Now, technology is opening the door for the small-timers.
A new generation of smartphone apps and online lending platforms in China and around the world are helping small investors leap legal and language barriers to put their money to work globally. This informal lending network — which allows Chinese investors to fund overseas projects and buyers — largely bypasses banks and other traditional sources of funds, bringing money to places as varied as a sports center in Illinois and apartment blocks in Tennessee.
However, it also adds to the fire hose of money pouring into flush places such as New York and the San Francisco area, where foreign investors are among the reasons property prices are high and rising. That includes Halsey Street, which is only blocks from big developments like Brooklyn’s Atlantic Yards, which have long received funding from China. Money is transforming the neighborhood, raising property values, but worrying longtime residents about getting priced out.
“It’s causing a lot of resentment,” said Angelo Richardson, a 45-year-old self-described entrepreneur who lives nearby.
Richardson, who has lived in Brooklyn for 24 years, said his monthly rent had nearly doubled from US$900 to US$1,500 in just two years.
The digital flow of money from China’s teeming cities to Brooklyn’s brownstone-lined streets is part of an exodus of wealth outside the nation, as people in China look to diversify at a time of worries about the slowing economy and growing political and social challenges. However, China heavily restricts the flow of money out of the country and the new technology represents undefined territory.
‘GRAY AREA’
These new financial platforms “hire really good lawyers,” said Zhang Xiaochen (張曉晨), a cofounder of the advocacy group CrowdFund China Society. “This is still a gray area, so lawyers play a big role.”
Zhang Xiaoben (張小奔), a 36-year-old serial entrepreneur from Jiangsu Province, put up about US$4,500 that Dahill tapped on an online lending platform. The deal promised a quick 13 percent return that — crucially, for Zhang Xiaoben — will be paid in US dollars. Zhang Xiaochen initially invested Chinese yuan, meaning he is effectively moving part of his wealth offshore.
“Otherwise, transferring money out of the country can be so difficult,” he said.
The new routes to get money out of China show how the country’s fast-moving technology scene once again has leaped ahead of regulators. An array of apps and services give average Chinese consumers new ways to spend, transfer money and even invest, sometimes in ways that surpass what people are able to do in the US.
China cracked down on money flowing abroad this year after investors began shifting funds out of the country at an alarming rate, contributing to a sharp drop last year in the nation’s foreign-exchange reserves. Last month, China took new steps to stop the outflows, increasing scrutiny of big foreign deals and requiring clearance for transfers of US$5 million or more.
So far, the new investing channels have largely been unaffected. Mobile apps like Niuniu, Jimubox and Tiger Stocks allow investors to buy and sell foreign stocks from their smartphones. Online portals allow them to pool their money to buy a piece of international real estate outright, or to fund buyers abroad like Dahill in New York.
Unlike other ways China’s wealthy invest abroad, these new services are often priced for ordinary people. Micai, a “robo-adviser” app that also provides online investment services, has an investment threshold of US$5,000. Wealth Migrate, a South African crowdfunding platform that was introduced in China this year, is experimenting with US$100 real-estate investment products.
“The Chinese people have the same needs as other investors,” Wealth Migrate chief executive Scott Picken said. “They want wealth preservation and peace of mind.”
Zhang, the investor who partly backed Dahill’s property, made his investment through the Web site of Haitou360, a New York-based investment service with offices in China.
LIMITS
Haitou360 — the Chinese portion means “to throw into the sea” — then aggregated investments from clients to buy loan packages from well-known US crowdfunding platforms like RealtyMogul and Patch of Land.
China limits Chinese currency transfers abroad by individuals to no more than US$50,000 per year, but Haitou360 structures its investments so that a legal entity essentially acts on behalf of individual investors, bypassing those limits.
“We solve multiple problems — we manage the risk of overseas real-estate investment, and we overcome the capital control limits everyone has,” Haitou360 chief executive Jerry Wang (王金龍) said.
The structure puts the onus on individual investors to make sure they comply with China’s capital controls, he said.
Through these channels, Chinese money has found its way into real-estate projects far beyond a few Brooklyn brownstones: homes in New Jersey, medical facilities in Georgia, motel chains. Oversea Crowd, a Chinese private equity firm, has used crowdfunding to raise investments starting at US$10,000 from Chinese clients to help fund several luxury student apartments near public universities in Georgia and North Carolina. Their latest apartment complex financed through crowdfunding will soon open near Harvard’s business school.
For investors, the returns depend on the period of investment — sometimes up to five years, other times, only 30 days. On average, longer-term investments have returns of 9 percent to 11 percent. The company collects an upfront fee, usually equal to a percentage of the investment. Investors receive returns in foreign currency, usually US dollars.
Before he helped fund Dahill’s loan for the Brooklyn brownstone, Zhang Xiaoben invested a small amount of money online as a test. Two months later he received a return of a little more than US$6, a tiny amount, but one that won his trust in online investment.
He is now considering a “study abroad” investment product that would allow him to begin investing in US real estate immediately. Future returns would be directly transferred monthly to his son, now a child, to pay for tuition and living costs if he were to attend college in the US.
Some on the receiving end of that money flow are looking for ways to deal with it. In Bedford-Stuyvesant, Halsey Street is in transition. Down the street from Dahill’s house, city notices and plywood affixed to brownstones denote more homes under construction. Another house nearby had a “for sale” sign.
Block associations are asking local homeowners to let them know before listing a home so that they can tap nearby residents to find potential buyers.
“We are seeing international investors who are spending money and moving on properties here. It is changing the complexion of the community,” said Tremaine Wright, chairwoman of Community Board 3, the representative body for Bedford-Stuyvesant.
She is a lifelong resident of Bedford-Stuyvesant whose parents and grandparents have also lived in the neighborhood.
“Bed-Stuy has long been a community of people who owned their homes and resided in their homes,” she added. “Now it’s being changed into a place where a lot of people are investing money and not making a longer-term commitment.”
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