DOWNTOWN LOS ANGELES — Last December, Beijing-based Oceanwide Real Estate Group bought the 4.6-acre site of the Fig Central mega-project, just east of Staples Center. The company is looking to build three towers, one with 49 stories and two others with 40 stories, with condominiums, hotel rooms and nearly 167,000 square feet of retail space.
The following month, Shanghai-based Greenland Real Estate Group purchased the 6.33-acre Metropolis site just north of L.A. Live, which had been stagnant for nearly three decades. Already the company is in the midst of construction on a $1 billion, multi-phase project that will create three condominium towers and a 19-story hotel.
Then in August, real estate investment firm Shenzhen Hazens snapped up the Luxe City Center hotel, also across from L.A. Live (just north of Fig Central), and two adjoining lots for $105 million. The company is looking at a $250 million reworking of the site, according to the Wall Street Journal.
That’s three huge Chinese investments in less than a year in Downtown Los Angeles. According to real estate and global market watchers, it may also just be the start of a flood of cash from China into the community.
A couple particular factors are making Downtown ripe for a wave of Chinese investment, according to experts. That includes a growing interest from Chinese firms looking to diversify their investments, along with the familiarity of L.A. to Chinese individuals.
Then there’s the sense that Chinese companies can get in on the cultural and residential renaissance in the Central City.
“These investors are seeing huge opportunities to make a return,” said Michael Soto, an analyst with real estate research firm Transwestern who is tracking Chinese investment in Los Angeles. “But they didn’t come in overnight. These guys have been circling the market for a while waiting to pounce.”
Changing Policy
Downtown is not the only area of interest to an increasingly robust China. Major gateway cities around the globe, including Vancouver, London and Sydney, are all seeing investments from the country.
Last year, the United States attracted $6.4 billion in Chinese investment, of which Los Angeles accounted for $780 million, according to real estate firm Jones Lang LaSalle. The city ranked second domestically in Chinese investment, behind New York City.
Chinese investment into Los Angeles County has doubled over the past five years, making China one of the county’s most prominent investors, according to a report from the Los Angeles County Economic Development Corporation.
More specifically, the outbound cash flow is rooted in governmental policy changes, noted Michael Margolis of L.A. law firm Blank Rome. Margolis has worked extensively with Chinese investors, and said that the leadership in Beijing has altered regulations, making it easier for people to take their money outside China.
“They’re now generally in the direction of making it simpler for entrepreneurs and institutional investors to go overseas. It used to be that big projects needed careful approval from the government, for instance,” Margolis said. “The trend is very clear, and we’re seeing actual implementation of policy changes.”
The visibility of Los Angeles to Chinese individuals has also risen. Tourism from China has nearly quadrupled from 158,000 in 2009 to 570,000 visitors last year, according to the LAEDC, and the number could rise to 2 million by 2020. Additionally, L.A. is the United States’ top trade gateway to China and vice versa, accounting for nearly 45% of trade between the two countries.
Those factors have coincided with the Downtown boom, something that has not gone unnoticed by investors. The residential and amenity surge here bodes well for future returns, experts say, and Downtown has something else that other major metropolises often lack: prime developable property in the heart of the city.
I-Fei Chang, CEO and president of Greenland Group’s U.S. subsidiary, noted in a February interview that land for major projects in a gateway city is prized.
“Look, if you go to San Francisco for the first project, that is only a 10-mile by 10-mile city. You don’t have much space,” she said. “Or New York, look at the prices and the overcrowding. Here, you have such a renaissance and there’s room to grow.”
Large Chinese institutional investors in particular have an appetite to go big, said Jones Lang LaSalle Vice President Rob McRitchie. Although Los Angeles’ notoriously cumbersome permitting process could curb interest, he noted that the previous securing of entitlements at the Metropolis and Fig Central sites made them essentially a “turnkey” operation. All that was required was cash and some slight alterations in plans.
“In Downtown, you can really build to scale, McRitchie said. “Most Chinese developers want to make sizeable projects while they can.”
He also said Chinese investors like Downtown’s central position in the region, and pointed to another benefit, as well.
“The ease of doing business in Downtown is also a factor,” he said. “There’s less neighborhood resistance to development.”
Not Like Japan
The situation brings to mind another wave of Asian real estate investment. In the 1980s and early ’90s, Japanese investors flooded the U.S. as the yen soared in value. That ended disastrously for all sides: Japanese firms hemorrhaged money when the economy crashed, and cash-poor owners let local buildings stagnate until they could be sold. Some Downtown office towers were hit particularly hard.
Experts say the current situation is different. Eric Sussman, a senior lecturer at UCLA’s Ziman Center for Real Estate, noted that the Japanese purchased existing assets, namely office towers, en masse as a way to protect capital without actively trying to grow the investments through tenant improvements and other means. Chinese investors, he said, prefer building new projects or spending to improve existing developments as a way to increase returns, especially with the U.S. economy in recovery.
“That’s why this new wave of investment is much better news and is a totally different case than the Japanese boom and consequent bust,” Sussman said.
Then there’s the issue of competition between Chinese and U.S. investors. The sheer mass of capital that institutional Chinese firms hold makes it difficult for some local players to compete, said Hamid Behdad, president of the Central City Development Group. As occurred during the Japanese boom, Chinese investors are able to pay more than market value if they treasure a particular asset.
“How can local developers compete with the money and speed of investment of Chinese firms?” he said. “I don’t know whether it’s good or bad, but it’s reality. They’re overpaying by a certain percentage, but for the developer it’s safer than just leaving the money in Chinese assets.”
That isn’t to say that there is no ceiling to what Chinese buyers will pay. McRitchie of Jones Lang LaSalle has closely watched the situation, and thinks there may be a pullback from Chinese investors.
“Prices this summer, both for ground-up developments or acquisitions, got to the point where it didn’t make economic sense. I’m hearing prices of $200 a foot in the Historic Core and that’s just not sustainable,” he said. “Developers are keeping their eyes on Downtown but the returns aren’t always there.”
Sustaining the Boom
Even as money flows, some wonder how long the Chinese investment boom in Downtown can last. McRitchie points out that there aren’t any large, already-entitled projects left to tackle in the Central City. Instead, he expects Chinese investors eventually to extend into suburban markets and Orange County, where more open developable land exists.
If the city hopes to keep the spigot flowing, he said, then Chinese developers will need something local business interests have long been clamoring for: a streamlining of the entitlements and permitting process.
Similarly, Blank Rome lawyer Margolis emphasized the need to work closely with Chinese firms to navigate the legal and regulatory waters. Encouraging continued investment, he said, may require offering tax incentives when a developer is considering several cities, or partnering local business and policy leaders with Chinese investors to suss out “legal blind spots” that could prove costly or problematic.
Smaller infill projects could also become more frequent if the Chinese economy begins to cool, as some economists project. These can have complex entitlement processes, but Downtown has the right business and development climate to foster joint ventures, Transwestern’s Soto said.
That’s for the future. Right now, there’s a lot of money that needs to go out.
“The capital reserves in China are huge, whether it’s individual or institutional sources,” said Steve Marcussen, executive director of brokerage at real estate firm Cushman and Wakefield. “These Downtown projects represent the value that some of the biggest investors in the world see in the area, and they’re not alone — these developers were competing with five otherinvestors right behind them.”
That’s why analysts consider Downtown’s current boom to be just the first big wave in a set of Chinese and foreign investment swells.
eddie@downtownnews.com
A Condo Conundrum
Will the Coming Wave of Chinese-Developed Buildings Attract Residents or Investors?
By Eddie Kim
Hundreds of new condominiums will become available once Greenland and Oceanwide finish their respective South Park mega-projects, Metropolis and Fig Central.
Downtown brokers say that demand for homeownership in the Central City is on the rise, but some stakeholders worry that too many residences will be bought by people looking to invest rather than live in and contribute to the community.
The situation has occurred in New York City, Vancouver and other cities undergoing major growth. Investors often rent out their units or keep them as vacation homes or passive assets.
“L.A. is a tourist and vacation center, and cities like that… tend to have more empty homes during parts of the year,” said Steve Marcussen, executive director of brokerage at real estate firm Cushman & Wakefield.
Initial building sales can be affected by the economy, noted Laura Silver, head of the Downtown residential division of brokerage Major Properties. A building owner could avoid selling too many units to investors when demand is strong, but be less discerning in a sales slump.
Homeowners’ associations can institute rules to discourage absentee ownership and renting units. One way is to write bylaws preventing new buyers from reselling or leasing their homes for at least a year, said Coldwell Banker residential broker Kerry Marsico. Some South Park condo HOAs did that prior to the recession, but took off the restriction amid the economic downturn to encourage sales.
A HOA could also include a cap on investor-owners in their bylaws, said Mitch Carricart, a sales agent with real estate firm Douglas Elliman. Usually the cap is 20%-30% of a building’s units, he said, and it is instituted partly to protect financing for resales down the road. Lenders often avoid financing mortgages on condo buildings with too many renters, Carricart said.
“Lenders care about renters because they tend to not take care of the unit as well as owners, don’t take care of common areas and don’t always contribute to the building community,” Carricart noted. “These things can hurt unit value in the future.”
Five Big Downtown Chinese Plays
1. Metropolis: Shanghai-based Greenland Group purchased the 6.33-acre Metropolis site, which had been discussed in development circles for nearly three decades, at the beginning of the year for $150 million. Greenland broke ground in June on a 38-story condominium tower and a 19-story hotel. In July it revealed plans to start work on a second phase, with 54- and 40-story condo towers, by the end of the year. The entire project, just north of L.A. Live, is budgeted at $1 billion.
2. Fig Central: Beijing-based Oceanwide Group snapped up the long-stagnant Fig Central site, across the street from Staples Center, in December for a reported $175 million. The developer is planning to build three towers (one with 49 stories, the others with 40) with a combined 504 residential units and 183 hotel rooms, according to documents filed with the Department of City Planning. The towers would sit on a podium with nearly 167,000 square feet of retail space and 1,444 parking spaces. No timeline or construction budget have been revealed.
3. Luxe City Center Hotel: Shenzhen Hazens Real Estate Group is expected to have big plans for the Luxe City Center hotel and two adjacent parcels, which the company bought in August for $105 million. Shenzhen Hazens could tear down the Luxe and build a larger hotel tower in its place, as well as spend $250 million to build condo and office towers on the adjacent land, according to the Wall Street Journal.
4. BYD Headquarters: In 2011, Chinese electric vehicle manufacturer BYD (or Build Your Dreams) moved into its new North American headquarters at 1800 S. Figueroa St. on the corridor south of the Convention Center. Former Deputy Mayor and current L.A. Times Publisher Austin Beutner led the team that secured the deal. The company has signed electric bus contracts with several transit agencies.
5. Marriott/L.A. Hotel: One of the first Chinese developers to get in on the Downtown hotel scene was Shenzhen New World Group Co., which in 2010 snapped up the 469-room property at Third and Figueroa streets for a reported $60 million. At the time it was a Marriott but currently operates as the L.A. Hotel.
—Eddie Kim
© Los Angeles Downtown News 2014
