Small World After All

The British are coming. Not satisfied with their own commercial activity, our neighbors across the pond purchased Southern California's crown jewel of condo development parcels: the amazing eight-acre site at 9900 Wilshire Blvd., in the rarified confines of Beverly Hills. The cost was $500 million, with 252 luxury units planned along with a bit of ground-floor retail.

The Brits burst onto the scene of this former Robinsons-May department store with an unsolicited bid of such scale that American owners capitulated mid-scheme, so to speak. Architectural renderings and potential buyer lists were handed over, and the regime change was done.

But the Union Jack is not alone in this Southland invasion. The flags of many other nations are rising on Southland dirt as well. from China, Korea, Germany, Australia and even Mideasterners, just about anybody who has cloth and a pole is flying theirs in the land of the free.

The dollar is cheap, interest rates are low, and there is abundant capital the world over. Uncle Sam, for all his woes, is still the global safe harbor for flight money, a haven for immigrants and their cash, as well as a sensible "asset diversification" play for institutional investors on the continent, and high-net-worth players everywhere. Plus, the Southland is just a sexy place to be.

This game is getting big. In 2005, foreign direct investment in the US reached $1.87 trillion, up 8.5% from 2004. The level of offering investment has been rising markedly--indeed, until 1999, never had foreign investors acquired more than $1 trillion annually in US real estate. But in 2006, foreign direct investment probably crossed over $2 trillion, according to figures from the National Association of Realtors.

Though Washington DC and New York City are mentioned as rivals for foreign real estate capital, Los Angeles is regarded by many as less expensive. It is certainly a bargain compared to the East Coast cities mentioned above--and not only for investors across the Atlantic, but across the Pacific, says Mike Choi, vice president with NAI Capital's Pacific Rim Division.

Changes in South Korean international financial regulations are resulting in a new wave of peninsular capital coming to Southern California, according to Choi. "Before, there was a limit on the amount of capital a Korean national could take out of Korea, but now there is no limit," he says. "We are seeing Korean investors, for example, buy condos in Downtown Los Angeles, sometimes 10 or 15 at a time."

Korean investors are attracted to Southern California for the same fundamental reasons as other investors. But they are also attracted to the established Asian and Korean communities and banking operations here already, Choi believes. Bank names such as Hanmi Financial, Center Financial, Nara Bancorp and Wilshire State cater largely to Korean customers.

Due to the liberalization of Korea's international investment regulations, and the growing Korean economy, Choi is bullish on the role of Korean investors in Southern California properties going forward. "[Their role] will continue to grow," he says. "Many Korean business have excellent cash flow, and they are able to buy properties here."

As with Koreans, there are already established Chinese communities and banking operations in Southern California, including some banks with branches on both sides of the Pacific. Los Angeles-based Cathay Bank, for example, with assets north of $7 billion and more than 30 Southland branch offices, also has a 20% stake in First Sino Bank, which is based in Shanghai. Besides Cathay, there are more than 25 other Chinese bank companies plying their trade--and their loans--in Southern California.

Many Chinese investors are interested in developing mixed-use properties in the San Gabriel Valley and elsewhere, says Christine A. Lee, executive vice president with NAI Capital. "The cap rates have become so compressed in California, that if a Chinese investor wishes to just buy a property, they can get higher returns in China," Lee says. But in Southern California they can try development, often with a joint venture partner, she believes.

Another plus for investing in the US: It is still not legal to own land in mainland China. In that nation, "buyers" obtain 75-year land-use rights. For investors who want complete ownership, the Southland beckons.

From the Chinese stronghold in San Gabriel, Lee expects Chinese warehouse buyers to move in all directions. Perhaps even into industrial space in Compton, and especially in the City of Industry, and west into Downtown Los Angeles. 'There is no more land left in the San Gabriel Valley," Lee says, describing the area's industrial market. Demand for owner-user space, in the 6,000-sf to 10,000-sf range, is strong, Lee says.

Given the size of the Chinese population in Asia--nearly 75 times that of the Korean population--it seems likely that future Chinese investing in Southern California will ultimately dwarf previous ethnic investment waves.

Investors from all over the world may also surmise that Southern California, and especially Los Angeles, is cheap, compared to London, New York, Tokyo, or other "international gateway cities,' says David Rifkind, a principle with Los Angeles-based real estate investment banking shop George Smith Partners. "To us [U.S. investors] it may look expensive, but as a value proposition, Los Angeles is probably the lowest cost international gateway city in the world," he says.

Real estate has also been "commoditized" in the past 20 years. The commercial mortgage-backed securities market, the online availability of title reports and lease rates and other real-time information has made real estate investing, even from afar, a little less of a crapshoot, Rifkind notes. Indeed, buying a property that can be leased for a more or less known amount going forward seems lie the Rock of Gibraltar when compared next to the world's securities markets, he says.

So, back to the Brits plunking down a cool half-billion dollars for the old Robinsons-May department store site, at the entrance to Beverly Hills from Los Angeles. Is this a new wave of continental investing? And are these the sorts of prices they are willing to pay? As in $62.5 million an acre?

"Perhaps, but only for very specific properties," says David Margulies, CEO of New Pacific. "This was a very unique property, a once a generation opportunity. The buyers [the Guernsey-based CPC Group] saw that."

There is already a waiting list of 2,800 qualified buyers for the condo portion of the project that is to be erected on the key site, according to Margulies. And just where are the buyers coming from? "From all over the world," Margulies says. "The name Beverly Hills is internationally recognized."