Crisis in China Has Hong Kong Investors Looking to Southland

For years, many Hong Kong-owned companies have been reluctant to invest large sums in Southern California or elsewhere in the United States, seeing investment returns back home in the colony as superior and fearing being labeled as unpatriotic. But the recent violence and unrest in China is making those few Hong Kong companies that have invested large sums here feel somewhat vindicated.

Take International Landmark Group. The company, which years ago began developing shopping and housing projects in Los Angeles’ Chinatown and Monterey Park, is working on new residential and shopping complexes in Los Angeles and Oakland. Other purchases under study or negotiation: a U.S. real estate holding company, a West Coast financial institution and a five-star New York hotel.

“We have been diversifying in the U.S. and in other countries in the last 10 years, way before the latest Chinese incidents,” says Joseph M. Chan, president and chief executive of International Landmark. “But the recent incidents in China confirmed we have made a wise choice, and we will continue to diversify as planned.”

Chan adds that a friend in Hong Kong who runs a large garment manufacturing firm is looking to acquire or set up some manufacturing operations in Southern California.

These and other examples add up to expectations of a growing presense of Hong Kong companies and individual investors in Southern California in the wake of the recent Beijing massacres and subsequent Chinese government crackdown on dissidents.

Some Hong Kong companies and investors began buying Southern California real estate or setting up businesses here years ago, long before the 1984 agreement by Great Britain to turn over the colony to China, or before the unrest in China. But many others have been reluctant to enter the market here, in part because the Hong Kong economy was booming and because investing here would have been seen as a sign of a lack of confidence in the colony’s future.

Attitude Changed

But the Chinese unrest--coming along with Hong Kong’s rising labor costs, a “brain drain” of talented people out of the colony and attractive prices in the United States--has caused a change in attitude.

Concerns about China already have resulted in an initial spurt of capital flight from Hong Kong into Southern California in the form of savings deposits and other cash investments, bankers report.

Investments in real estate and new business ventures by nature will take longer to develop, partly because it may take awhile for Hong Kong firms and investors to get money freed up. With Hong Kong real estate prices plummeting 20% to 25% since the Beijing massacres, many prospective real estate sellers are finding few buyers.

But in the coming months and years, local experts expect more Hong Kong firms in such industries as garment manufacturing and trade to set up manufacturing, sales and distribution branches here.

Real estate investments by Hong Kong investors--until now relatively small and generally not involving glamorous, high-profile “trophy” properties--may become larger and more noticeable. And they will be increasingly outside communities with large Chinese populations, such as Chinatown or Monterey Park, which Hong Kong investors initially favored.

“We are beginning to see loan requests from people in Hong Kong to purchase property in California,” says Dunson Cheng, president of Los Angeles-based Cathay Bank.

“A lot of my friends are coming to L.A.” to look for acquisitions, says Y. Y. Chan, a Chinese-American businessman in Los Angeles who serves on a California state advisory panel that encourages greater Asian investment here. One such Hong Kong friend, Chan notes, visited Southern California this month looking to spend $5 million on a shopping center, possibly in Los Angeles, Orange or San Diego counties.

Didn’t Trust Pact

To be sure, not all Hong Kong investors think the upheaval in China has really changed things all that much and that the colony’s economy will recover from the initial shock of the Beijing massacres.

“People in China never trusted the agreement between China and Britain anyway,” contended Joseph Poon, vice president of Taico Properties, a Los Angeles subsidiary of Tai Cheung Properties, a Hong Kong hotel and real estate firm. Taico has developed several housing, office and industrial projects throughout Southern California, and the latest events in China won’t affect its plans for others a great deal, Poon says.

“We’ll just keep doing the same thing we’ve been doing,” Poon says. “I don’t detect a knee-jerk reaction from the home office.”

But for others, latent fears that China may renege on its agreement to preserve the free-wheeling capitalist system in Hong Kong after it takes over the colony in 1997 are far more real.

Hong Kong was the largest foreign investor in China, but many from the colony now see the Chinese market as less attractive from a pure economic standpoint.

Manufacturing operations in Guangdong Province in southern China, attractive to Hong Kong firms because of dirt-cheap labor and reliable production, suddenly seem more risky. Possible labor unrest or political instability could jeopardize tight production schedules, says Frederick M. Chan, president of Nu West Cos., a Los Angeles-based real estate firm that in recent days has had discussions with Hong Kong investors about possible joint ventures in Southern California real estate.

Hong Kong also seems less attractive, with experts there predicting an end to the real estate boom while an annual exodus of about 45,000 residents has created shortages of talented workers.

Now Must Diversify

Thus, some of the investment that would have gone into Hong Kong or China may begin to flow into Southeast Asia, South America, Australia, Canada, Mexico and the United States.

“Hong Kong investors in the past had not expressed a strong interest in the U.S. because the returns in Hong Kong were so good,” Frederick Chan says. “But now they feel they have to diversify.”

Investment here from Hong Kong is still expected to trail that from Japan, South Korea and Taiwan, which have bigger economies and more investment money to bring here.

And Southern California is not the No. 1 choice for Hong Kong investment in North America. That distinction belongs to Vancouver, because Canada offers more favorable tax treatment to foreigners and allows Hong Kong nationals to gain immigration visas and eventual citizenship if they invest minimal levels into job-creating activities. Such investment has triggered a real estate boom in Vancouver.

Other Hong Kong natives still prefer investing in the San Francisco Bay Area because of its large Chinese-American community.

Nonetheless, Hong Kong investors are finding Southern California attractive for several reasons.

One is the fast growth of the market here, which is gaining over San Francisco as the U.S. gateway to the Pacific Rim. Hong Kong is the fourth-largest trading partner with the Los Angeles area, with slightly less than $4 billion in goods from the British colony flowing through Los Angeles ports and customs facilities last year, according to the Los Angeles Area Chamber of Commerce. That trailed Japan’s $31 billion, Taiwan’s $10.6 billion and South Korea’s $10.2 billion.

“In many ways, the Los Angeles area is like Hong Kong because we’ve been growing like crazy,” says Jack Kyser, chief economist for the chamber, which lists at least 75 to 100 Hong Kong companies or subsidiaries operating in the Los Angeles area.

Way to Skirt Quotas

Hong Kong businesses also are attracted by the large Asian population here and by the large presense here of industries they are familiar with, such as apparel, electronics and toy wholesaling, Kyser says.

Some Hong Kong clothing manufacturers see the need to set up U.S. production facilities to overcome U.S. textile quotas that limit garment imports, says Y. Y. Chan, the local businessman encouraging greater Asian investment here. Also, he contends, while labor in Hong Kong and China is cheaper relative to that here and there are fewer labor laws and regulations in Asia, manufacturing in the United States can ensure quicker delivery into the market and, in some cases, greater quality control. Also, Chan says, land here is cheap compared to that in Hong Kong and San Francisco.

In addition, many of the younger generation of Hong Kong businessmen have studied in Southern California, are more sophisticated in Western ways and have friends here.

Much of the investment so far has been focused on real estate, the preferred investment for many Hong Kong nationals because of its security and permanence. Total Hong Kong real estate investment here is difficult to measure, in part because investors from the colony often buy through corporations, banks or other entities that obscure the true identity of their owners. Many Hong Kong investors prefer to remain low-key, generally avoiding publicity.

Hong Kong investment here also is difficult to measure because investors have largely shied away from buying high-profile trophy properties such as large downtown skyscrapers or posh hotels. A survey last year by the Massachusetts Institute of Technology Center for Real Estate Development failed to find a single major downtown Los Angeles building owned by Hong Kong interests.

More Value-Oriented

One notable exception to this hesitancy to buy trophy properties was the $100-million 1985 purchase of the Beverly Wilshire Hotel by the Regent hotel firm of Hong Kong.

“Hong Kong investors have been unwilling to pay the premiums that the Japanese pay in order to acquire trophy properties. They’ve been more value-oriented investors,” says Clifton K. Chang, a partner at Altair Investment Co., a Los Angeles real estate firm that works with Hong Kong investors to find properties.

Instead, Hong Kong investors have started by buying single-family homes, small shopping centers, medical centers, apartment complexes or other developments, often in the $1-million to $10-million range and often in Chinatown, Monterey Park or other communities with high Asian populations, says Randal J. Lee, president of Lilly Enterprises Inc., a Los Angeles real estate brokerage and property-management concern.

Hong Kong investors own, built or have proposed at least five shopping malls, office or residential developments in Los Angeles’ Chinatown, according to Kenneth Leventhal & Co., a Los Angeles accounting firm.

But now, some investors who have been here awhile and have learned the ropes are beginning to set their sights on bigger acquisitions--and have the financial wherewithal to pull them off, experts say. And other large investors that previously shied away from this market are taking a second look.

One of the more aggressive of this new breed is International Landmark Group, the Los Angeles-based subsidiary of Park Lane International, a Hong Kong conglomerate that operates the Park Lane Hotel chain.

The firm started in the United States by investing in Chinatown and other Chinese-American centers, says Joseph Chan, chief executive.

Has Branched Out

Plans include building a 100,000-plus square-foot shopping center at Hill and Ord streets in Chinatown, across the street from another shopping mall the firm is renovating. International Landmark is also developing a $250-million retail, residential and office complex in Oakland Chinatown.

But the firm has also branched out beyond Chinese-American communities. It was one of the first Hong Kong firms to develop a U.S. hotel from scratch, when it completed in 1984 the Park 55 Hotel in San Francisco, formerly called the Ramada Renaissance.

Now, more than half of the parent firm’s portfolio is diversified outside Hong Kong in Australia, Canada, the United States and elsewhere, Chan says. Five years ago, the degree of diversification was less than half.

“Everybody’s gone through a learning experience,” Chan says. “At first it’s a little safer to stay in your back yard, which is Chinese, and when you understand the market better, you can then reach out to other markets. We like to think we understand the market a little bit better than we used to.”

Chan says the firm has identified a real estate holding company it wishes to negotiate to purchase as a way of acquiring a group of properties in one swoop. Plans to buy a bank or savings and loan, preferably on the West Coast, will be a natural complement to the firm’s real estate activities, Chan says.

The firm also expects to complete its acquisition of an as-yet unnamed five-star hotel in New York in a couple of months.

“People in Hong Kong will buy trophy things, but not necessarily at the extreme high prices” paid by the Japanese, Chan says. The New York hotel, he says, “is somewhat of a trophy property, but we’re not paying a trophy price.”