Real Investment : Overseas Chinese, Worried About Turmoil at Home, Are buying Property Here

By EVELYN IRITANI

Feb. 11, 1996 12 AM PT

TIMES STAFF WRITER

Financial advisor Richard Alter knows there are good real estate deals to be found in modern-day boomtowns such as Las Vegas, Palm Springs or Phoenix. But he hasn’t had much success selling them to his Chinese clients, who view those wide-open spaces with disdain.

“This looks like Mars,” one incredulous Chinese investor told Alter, the managing director of Los Angeles-based Financial Capital Investment Co., after being shown property in Las Vegas.

What Alter’s wealthy Asian clients are after is the densest, darkest patch of real estate on the California map, a spot revolving around downtown Los Angeles. While others were standing on the sidelines the last three years, these investors and others from Taiwan, Hong Kong and China have participated in some of the biggest property transactions in Los Angeles, including purchases of the Pacific Center office tower, the 811 and 1100 Wilshire office towers and the Westin Bonaventure Hotel & Suites.

The infusion of funds from overseas Chinese--who are also spreading their money throughout Europe and Southeast Asia--is a reflection of turmoil at home. But it is also viewed as a vote of confidence in Southern California and another sign that the state’s battered economy and real estate market are coming back.

This latest wave of Asian capital is still dwarfed by the Japanese investment boom of the late 1980s, when Japan poured nearly $72 billion into U.S. real estate. That sent prices soaring and provoked jitters in Congress and elsewhere about the sell-off of some of America’s crown jewels and a seeming loss of economic sovereignty.

Many of those flashy investments have since backfired on the Japanese, but the Chinese are moving more deliberately and privately.

Alter and others predict a significant increase in this movement of money across the Pacific in the coming year, given the continued political tensions among China, Hong Kong and Taiwan; the growing wealth in Asia; and the widespread perception in Asia that California’s real estate market has bottomed out.

Jordan Richman, regional director of the hospitality services group for Grubb & Ellis in Los Angeles, said the Chinese investors have done their homework before coming to the negotiating table.

“The Chinese are very prudent investors; they kick the tires and check it out to the nth degree,” he said. “The Japanese came in and unfortunately didn’t have the right financial advisors.”

Indeed, of particular interest to overseas Chinese are the properties being unloaded by Japanese investors, whose lenders back home are under pressure to get rid of their nonperforming loans.

Polylinks, a Hong Kong consortium operating from Vancouver, Canada, is finalizing the purchase of the Regent Beverly Wilshire Hotel for about $100 million, according to real estate sources. They estimated that the owners of the Regent, which included a Japanese partner, had invested $225 million to $230 million in the Beverly Hills property. Polylinks declined to comment.

Unlike that of their Japanese predecessors, this wave of Chinese capital has gone largely unnoticed outside U.S. real estate circles. These newcomers have fiercely guarded their privacy, swearing their business contacts to secrecy and passing over high-profile trophy buildings for smaller properties that will attract less attention.

Even when the Chinese have bought well-known properties such as the Westin Bonaventure, there has been little fanfare or flag-waving.

“These are non-ego-based transactions,” Alter explained. “They don’t need an ivory tower. Show me a nice B-class project where there’s opportunity to make money, and I’ll put my assets into it.”

Instead of hiring high-profile attorneys and consultants, these overseas Chinese typically use family connections or contacts in Southern California’s fast-growing Chinese community. Purchases are usually made through shell corporations to hide the source of the money. In fact, the secrecy has made it impossible to determine just how much Chinese money has entered the region.

The reasons for this cult of anonymity are varied, according to Chinese investment specialists. Whereas the Japanese overseas real estate investors were generally major institutions backed by low-cost money from Japan, the Chinese are more often investing family money. They also want to avoid provoking an anti-Asian backlash among people fearful of foreign involvement in the U.S. economy.

Moreover, wealthy Hong Kong business people are fearful of creating an image of capital flight that could destabilize the economy back home, where most of their investments remain. Investors from China or developing countries in Southeast Asia could also face a negative backlash if their movement of capital overseas is publicized. And in some cases, these investments are illicit gains looking for a hiding place.

“It may not reflect well on them if the local population [in China or Southeast Asia] knows that one of their biggest companies is investing $200 million in California whereas they are at the standard of living of a Third World country,” explained Frankie Leung, a Los Angeles-based China legal expert.

Over the last year, Alter and his partner, Eddy Chao, the most visible players in the California market, purchased nearly $200 million worth of real estate on behalf of a consortium of Chinese investors. On Wednesday, they completed the purchase of the 294-room Pleasanton Hilton at the Club in Pleasanton, a Bay Area bedroom community. The estimated price tag was $20 million to $25 million. This year, Alter and Chao expect to increase their investments by at least 50%.

Others are also jumping into the market. A Taiwanese textile firm bought the Westin Bonaventure Hotel & Suites for about $52 million in 1993. A Hong Kong Chinese group was a top bidder for the Ritz-Carlton Huntington Hotel in Pasadena, but lost out to the Los Angeles County Employees Retirement Assn. in 1994.

Although hotels remain a major target of investment, Chinese investors have begun looking more aggressively at downtown office buildings and industrial or retail space throughout Southern California.

The Chinese are banking on a rebound in the Los Angeles economy that would boost occupancy and put more pressure on existing office space, since there are no new projects in the pipeline.

“In the downtown market, the Chinese have been more interested than other domestic investors,” said Frederick Chin, managing director of E&Y; Kenneth Leventhal’s real estate consulting practice in Los Angeles.

One trigger for this exodus of funds from the greater China region was China’s latest round of military muscle-flexing and its fast-approaching takeover of Hong Kong, scheduled for mid-1997. This has spooked wealthy business people in both Taiwan and Hong Kong.

But in addition to political insecurity, there are longer-term forces propelling this overseas Chinese money into the United States. They include a boom in Asian stock markets and real estate values that have spawned a new wealthy class of Chinese business people and the loosening of government restrictions on overseas investments.

To foreigners, the United States still offers the safest haven for money because of the size of the domestic economy and the protections of its legal system. They view U.S. real estate as an insurance policy that offers long-term guaranteed returns if the economy or politics turn sour back home.

Eric Liu, director of the Hong Kong-based Telok International, said his clients, primarily Chinese industrialists and professionals, are seeking 20-year investments that provide a steady income. He has purchased 200 small retail projects throughout California for his Chinese clients, focusing on centers anchored by a large tenant such as Blockbuster Video or McDonald’s.

“If they want to make fast money, they can make it in Asia,” he said. “When they ship it over here, they want their money to be safe, headache-free.”

Randy Lee, Liu’s Los Angeles partner, said many wealthy overseas Chinese have been exposed to the U.S. real estate market through their children, who are attending school in the United States, particularly in California.

Entrepreneurs and well-connected government officials in China, whose foreign reserves now rank the fifth-largest in the world, have also begun quietly investing money in California real estate, often through companies in Hong Kong, according to local investment consultants.

Skyrocketing prices in Asia’s largest cities make California’s depressed real estate market look like a fire sale, although increased competition from domestic and foreign players is starting to push up prices of some types of properties such as hotels.

In Hong Kong, where real estate prices expanded by 20% to 25% a year during the ‘80s, prime office space now rents for $10 a square foot, including expenses, compared with $2 to $2.50 a square foot in downtown Los Angeles, according to Liu. A 3,000-square-foot apartment in Hong Kong rents for $20,000 a month.

Hong Kong landowners, fearful of the bubble bursting and nervous about the colony’s future after 1997, have begun shifting funds elsewhere, causing a drop in prices in recent months.

Jackson Tai, the former head of J.P. Morgan’s real estate department, predicts more Hong Kong investors will seek a safe haven in the coming year for reasons other than politics. That is because Hong Kong’s real estate market will change dramatically after 1997, when the border with China is in effect erased and the population can more easily spill over onto the mainland.

Hong Kong’s present land squeeze will also be eased by the completion of several major bridges and tunnels and by the construction of a new airport. That will free up Kowloon, the site of the present airport, for high-rise construction.

“The government says it can control it, but I’m not sure,” said Tai, who now heads up J.P. Morgan’s Western division, which is based in San Francisco. “There ought to be a crash in 1998. Real estate is driven by scarcity and inflation. [After 1997], you will be able to build up and sideways.”

Tai also thinks some of the Hong Kong expatriates who returned home during the 1970s and ‘80s will bring their money back to the United States in the coming year, driven by fears that their freedom will be curbed under Chinese rule. Overseas Chinese investments are also coming from other parts of Asia where real estate and stock market booms have created pockets of wealth. A Singaporean Chinese group recently purchased the Airport Marina Hotel near Los Angeles International Airport for $17.8 million, according to Lee, of Lilly Enterprises.

CP Forward, an Indonesian Chinese partnership operating hotels in Asia, purchased the Sheraton Los Angeles Harbor Hotel (now the Radisson Los Angeles Harbor Hotel) for $11.7 million in 1994, and the Radisson Suite Hotel in Santa Ana last year for $8.8 million, according to Grubb & Ellis.

“We also expect there might be some movement of high net worth Chinese individuals from South America,” Lee said. “We’ve got one group of Peruvian Chinese who have already purchased a couple small things here.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

SOLD: 1100 Wilshire Building

Sold: 1993

Location: 1100 Wilshire Blvd., Los Angeles

Size: 37 stories, 330,000 square feet

Estimated price: $18.5 million

Buyer: Format Corp. (Taiwan)

SOLD: The Westin Bonaventure Hotel and Suites

Sold: 1995

Location: 404 S. Figueroa St., Los Angeles

Size: 1,474 rooms

Estimated price: $50 million