Is China’s Debt Crackdown Hitting California’s Commercial Real Estate Bubble?

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

Oceanwide Plaza – a three-tower condominium, hotel, and retail complex expected to cost over $1 billion – is one of the largest real estate projects in downtown Los Angeles. It was scheduled to be completed in 2019. The owner and developer, Oceanwide Holdings, is a Chinese conglomerate that is also currently building one of the largest mixed-use projects in San Francisco, the $1.6 billion Oceanwide Center. But now it seems the funds have run out.

“In an effort to prioritize construction activity, and while we restructure capital for the project, interior construction at Oceanwide Plaza is temporarily on hold,” Oceanwide Holdings said in a statement, cited by the Los Angeles Times.

“Our decision to provisionally pause construction is solely based on these internal factors and nothing else,” the statement said. With “more than $1 billion of equity already invested in Oceanwide Plaza, we look forward to investing more capital into the property and together, with Lendlease, remain committed to building this landmark project for LA.”

The statement said that construction will resume in mid-February, and that it will be completed next year.

This comes at a time when the Chinese government is cracking down on capital flows from China to other countries, particularly to fund real estate projects, and when it is also cracking down on the ballooning debt of Chinese conglomerates, after a reckless binge of buying up everything in sight. HNA, Anbang, and other conglomerates are now being forced to unload these toys. In HNA’s case, this includes the $305 million deal to sell a building in Manhattan a year ago. And it has put numerous other recent acquisitions on the market.

Anbang Insurance Group, which had purchased the Waldorf Astoria in New York for nearly $2 billion in 2014 and which in 2016 handed Blackstone Group $5.5 billion for a portfolio of 15 hotel properties, collapsed and has been taken over by Chinese regulators, and its founder was sent to prison. Now these investments are up for sale.

Dalian Wanda – which also acquired the movie theater chain AMC for $2.6 billion and Legendary Entertainment – has also been unloading its properties in the US, including One Beverly Hills, for an undisclosed amount that the Wall Street Journal disclosed was over $420 million.

So a work-stoppage by a Chinese property developer due to funding is rattling some nerves in California.

“They said they were stopping work on the project at this time, and had no further explanation,” the general manager of the LA Department of Building and Safety, Frank Bush, told the Los Angeles Times. He said that Lendlease, the general contractor on the project, called his agency on Friday to cancel an inspection scheduled for that day.

There are some other potential wrinkles.

The FBI is also probing Oceanwide Plaza and other Los Angeles downtown projects with foreign investors, according to the Times, “as they seek evidence of possible crimes including bribery, extortion, money laundering and kickbacks that could involve L.A. city officials and development executives.” The Times adds:

No one has been arrested or charged in the probe, and the federal warrant [filed in 2018] did not say that agents had gathered evidence of criminal activity by the individuals or companies named in the document.

Oceanwide has refused to confirm or deny if it has received a federal subpoena. But in the statement concerning the construction halt, it told the L.A. Times that because the federal investigation was ongoing, “Oceanwide has no comment regarding any investigation-related matters.”

In 2016, investments from China in US commercial real estate reached a record $19 billion, according to Cushman & Wakefield’s 2016 report, with the top three targets being Manhattan, the San Francisco Bay Area, and Los Angeles. About two-thirds of this money went into trophy deals with a price tag of over $1 billion.

Chinese money is “transforming LA’s skyline, revitalizing neighborhoods, and inspiring additional investment,” the report gushed, concerning several high-end developments in LA Downtown, including the Oceanwide Plaza.

In 2017, that flow of capital from China into US commercial real estate began to fizzle, with an estimated in $7.3 billion flowing into commercial real estate, according to Cushman & Wakefield’s 2017 report last March.

We can’t wait to see the 2018 numbers because the flow has reversed, with Chinese investors trying to get out from under the properties and their associated debts.

Among the other large Chinese projects in L.A. is the Metropolis, a four-tower $1-billion condo and hotel project that is expected to be finished by the end of 2019. The three residential towers are already partially occupied. Whew!

Real-estate folks in California are now nervously eyeing all China-backed unfinished mega-developments in the state, as authorities in China are struggling to keep their debt-bubble from unwinding in a disorderly manner. The fact the Chinese investors have become net seller is so not cool.

In San Francisco, folks fret over the $1.6 billion Oceanwide Center project. One of its two towers, when complete, will be the City’s second tallest. The project is across the street from Millennium Tower, the infamous Leaning Tower of San Francisco, which thankfully was built by American developers, or else the hullabaloo would be global instead of local. Oceanwide Center is scheduled for completion in 2021, assuming, to nervously channel some prime Elon Musk, that funding is secured.

China anguish is piling up. Read…  The Chilling Thing Nvidia Just Said about China & Tech

Print Friendly, PDF & Email

16 comments

  1. ambrit

    Somewhat connected is the risk of major damage from earthquakes on the West Coast. The silver lining in all this is that these mega-projects will make excellent fish spawning and living structures when underwater. Another concern is all of the city infrastructure upgrades such massive projects will entail. Given the present day penchant for not taxing the rich, and these buildings are characterized as “upscale” after all, who will be on the hook for funding these city service expansions? Three guesses.
    Meanwhile, imploding metropoleis like Detroit are reducing city infrastructure.

    Reply
    1. Louis Fyne

      When/if the Big One hits, I’d rather everyone I kbow be in an EZ credit-financed modern tower….. It’s those cutsey, pedestrian-scaled masonry buildings that are absolute death traps (barring expensive retrofitting).

      Just saying. if you’re paranoid about long tail risk like me

      Reply
    2. MyLessThanPrimeBeef

      Now that we are about to enter the MMT Age, where the theory is finally known by all, it would be inconsiderate of the Federal government for cities not to get funding for those infrastructure upgrades such massive projects will entail, for no reason other than ‘if money is not a problem, people will always find a use…good or bad.’

      Call me a pessimist, but don’t say I equate this to opening the Pandora’s Box, or Eve biting the fruit (because that would be picking on women).

      Reply
    3. Arthur Dent

      The San Andreas is a lateral-strike slip fault. so land won’t go underwater in a major way. Instead, the pre-1970s 2 to 4 story buildings in the LA area will be pancaked to the ground, opening up lots of vacant land for developers to swarm onto. This will be similar to the effects of a major storm surge where the houses get rebuilt bigger at more expense.

      The same will occur in the Pacific Northwest with a different type of quake. The Big One there is an offshore subduction zone that is gradually building the Cascades range. The soft soils in the Seattle area will jiggle like a bowlful of jelly breaking buildings, highways, and bridges while the Washington-Oregon Pacific coastline will be swept clean by a tsunami that residents will have 15 minutes warning of. When the shaking stops along the Pacific coast, you start running for high ground greater than 100 foot in elevation because anything below that elevation will likely be inundated and destroyed 15-30 minutes later. The highest inundations will be at the heads of bays where the towns and wharves are.

      Reply
      1. Cal2

        Agree with all, except 2-4 story buildings aren’t all that’ll be affected.
        The age of the structures and the type of construction control a lot. All high rises built with welded steel frames are vulnerable.
        https://www.sfchronicle.com/science/article/68-SF-high-rises-crack-earthquake-which-ones-safe-13418917.php

        Height isn’t vulnerability. Structures up to (N) stories are more affected than taller ones.
        https://earthquake.usgs.gov/learn/topics/buildings-eqs.php

        Store as much water as is reasonable. Food for a couple weeks. Practice camping out in your yard or living in your house for a week with the main breaker turned off and no water if you want so see what it will be like. Now is the time to prepare.

        Reply
  2. Cal2

    “The FBI is also probing Oceanwide Plaza and other Los Angeles downtown projects…“as they seek evidence of possible crimes including bribery, extortion, money laundering and kickbacks that could involve L.A. city officials and development executives.
    and by extension, “In San Francisco, folks fret over the $1.6 billion Oceanwide Center project.”

    Mr. Wolfe, I refer you to yesterday’s, Jan 29, links and this comment from
    Down2Long

    at 11:30 am

    “…And don’t even get me started on how you can’t get your plans approved at the Los Angeles Building and Safety department without being able to figure out who is looking for a bribe. I had a plan check guy, wouldn’t approve my plans because he “didn’t like” my licensed engineer and architect. Took a year, another $5k. Came back with a new set of plans. He was furious with me, just started stamping while snapping at me “why’d you get new plans?” Suddenly it dawned on me that he was mad because I hadn’t given him the $5k. I said “You should’ve told me you wanted a “mordida” (bribe.)…”

    As a lad growing up in San Francisco, in a family involved in the building trades, it was common knowledge that a mere case of booze got your major permits signed. Now, I guess it’s in the millions, in cash or other tangibles. The PlanCheck Mafia grows more powerful every day.

    Reply
  3. Susan the Other

    Just imagine if China’s kleptocrats had put $7 billion into public housing, transportation infra, medical infra, eco agribusinesses, sequestering CO2, cleaning up industrial pollution… that money would actually have paid off in all directions.

    Reply
    1. Rajesh K

      Same thing can be said for the US.

      I know just the answer though. The government is too small!!!! The Chinese and American government will need to be merged together into a Pan Pacific Super Government. Just think of the upside i.e. the deficit will immediately be cancelled out, Google can run amok in China, opioids become a fully national issue, we all get G5 tech from Huawei, etc, etc.

      The possibilities are just too mind boggling to contemplate.

      Reply
  4. David in Santa Cruz

    All the Chinese cash sloshing around California has been propping up values and construction for nearly two decades. While they can cut off their cash, the buildings and real estate can’t be repatriated — unlike the losses generated by cutting off that cash. The Japanese found that out back in the ‘90’s.

    Reply
  5. Hayek's Heelbiter

    Why has no one mentioned the massive Chinese investment in London real estate?

    There are large swathes of London called “ghost neighbourhoods.” Barely occupied high rise luxury flats owned by the Chinese (or Russians or money sloshed in from other dubious sources), with no street life, no shops, deserted after eight p.m.

    Can anybody enlighten me?

    Thanks.

    Reply
    1. Yves Smith Post author

      Chinese haven’t been a big factor in London. Historically, it has been the Saudis, who bought up much of Mayfair, which was close to a ghost town (ironically, more active now with hedgies who put offices there displacing some of the Saudis) and Russians. Even in NYC, Russians are much bigger buyers than Chinese. One year (can’t recall if 2014 or 2015), 70% of the residential real estate purchases in Brooklyn were by Russians.

      Reply
      1. Hayek's Heelbiter

        Many, many thanks for enlightening me.

        Lived in UK since 2010. Odd that the papers usually only mention the Chinese and occasionally the Russians but almost never the Saudis. Could there be something going on behind the curtain regarding this omission?

        Whoa! What a statistic and how depressing about my dear old beloved Brooklyn. I lived in the Heights when hookers trolled the sailors on Atlantic Avenue. Now you can’t get down the sidewalk past the ethnic women pushing hedgie babies in $700 strollers [prams].

        No wonder I got gentrified out.

        Reply

Leave a Reply

Your email address will not be published. Required fields are marked *