Local Market Not Expected to Catch Asian Flu
Shock waves from the economic explosions in East Asia won’t roil the recovering commercial real estate market in Southern California any time soon, industry watchers say, even though some properties with Asian owners will probably end up on the market.
Much of the buying in recent years has been done by Chinese, Hong Kong and Taiwanese investors whose stock market and currency have been left virtually untouched in the recent financial debacle.
These investors purchased trophy properties in the heart of downtown Los Angeles such as the Westin Bonaventure Hotel & Suites and the 1100 Wilshire office building at fire-sale prices during the economic slump, when few American investors could raise sufficient cash to compete. With the local economy surging and commercial vacancy generally declining, these properties, in many cases, now pay for themselves.
That means most will likely hold onto their purchases, said Gregory J. Karns, an attorney with the law firm Cox, Castle & Nicholson who represents Asian investors in their real estate dealings.
“I haven’t seen any sales prompted by what’s going on in Asia over the last few months,” Karns said. “And I haven’t seen any deals fall through.”
In fact, although prices have surged substantially in the last year, driving returns down, many overseas investors are still bullish on California real estate. They consider it a solid investment, almost like a bond fund in their global investment portfolio, said Allan Lui, executive director of acquisitions for Rancho Cucamonga-based Tone Yee Investment & Development, an investment advisor for wealthy Taiwanese investors.
“The perception is that the American economy is stable and has a lot of room to grow,” Lui said. “We still think there is a lot of opportunity here, and we plan to acquire significantly more property in the next couple of years.”
Lui’s clients have purchased smaller office buildings and apartment complexes throughout Southern California over the last few years, properties too small to be coveted (and bid up in price) by major U.S. companies.
Asian investors purchasing glossy high-rise office buildings and four-star hotels have faced more intense competition in the last year as deep-pocketed real estate investment trusts and American pension funds have shelled out more for properties, expecting a lower return.
“In 1995 and 1996 the overseas Chinese were the highest or the only bidder,” said Dominic Ng, president of East West Bank. “In 1997 quite often they come out second-or third-best.”
With California perceived as less of a value, many Asian investors are beginning to consider purchases in Europe and Japan, areas where the real estate is still greatly depressed.
“Commercial real estate values have fallen 60% to 80% [in Japan],” said Mark K. Sullivan, director of the Asia Pacific unit of Price Waterhouse, which is investing its clients’ money in pools of nonperforming Japanese loans collateralized with real estate. “The opportunity to invest there has never been this good in recent years.”
That means a greater share of capital may be shifting from the U.S. to Japan, which is considered another one of the largest and most stable economies in the world.
The infusion of capital into Southern California from South Korea’s conglomerates and from wealthy Indonesian families is all but over, analysts say. In fact, many could begin disposing of their assets to cover debts back home, analysts say.
“A lot of [these investors’] net worth has been tied up in their company or the stock market. Their sense of well-being has eroded and many have begun worrying about how to shore up their economic affairs,” said Jack Rodman, director of E&Y; Kenneth Leventhal Real Estate Group’s Pacific Rim practice.
About 13% of U.S. commercial real estate is foreign-owned, according to Urdang & Associates Real Estate Securities Inc. Koreans, Thais and Malaysians represent only a small part of that percentage.
California’s largest wave of overseas buyers was the Japanese, who poured an estimated $72 billion into mostly prime real estate here in the 1980s. These glossy properties, many of which were built or bought near the peak of the market, have been disposed of in increasing numbers over the last few years. Analysts say it is the sell-off of these properties that will have the greatest impact on Southern California’s real estate market. An estimated $50 billion of Japanese-owned real estate is expected to be sold in California over the next three to five years.
But even if Asian investors dispose of properties at double the current rate, industry watchers say they don’t expect that to pull down prices, especially with the flood of U.S. public companies looking for properties in which to invest their large reserves of cash.
“REITs have to buy property. They need a place to invest their money. I don’t think it’s going to spark any precipitous decline in the [market],” said Stephen Cauley, associate director of the Center for Real Estate at the Anderson School at UCLA.
