Residential

The Power China has Over the Los Angeles Real Estate Market

There are a lot of theories about why Los Angeles had a sudden boom in their real estate market over the past half decade. And most of them are accurate. Some of it was due to low interest rates and the recovery from the recent economic recession. A portion of it was due to the interest from tech companies in Silicon Valley moving south to L.A.. They were moving to create what is now being dubbed “Silicon Beach” on the West side of the metropolis. Some of it had to do with public transportation, the rise of ridesharing and “blighted” neighborhoods undergoing revival. But a notable part of the city’s revival has to do with one place: China.

The Origin

The nation of China is partially responsible for the revival of Los Angeles. Beginning in 2014, China began investing heavily in United States real estate, buying over 10 billion dollars in property in 2015 and over 15 billion in 2016. This specifically happened in and around Los Angeles, with nearly 2 billion in property purchased in the city alone in 2014 and over 1 billion in 2015 and 2016.  This can be seen in broad charts about sales prices in Los Angeles over the course of those three years alone. In March of 2014, the median sale price of a home in L.A. was around $525,000. By March of 2017, the median sales price of a home had broken $700,000 and continues to rise today.

Now there were other aforementioned factors, but the massive purchases made by Chinese nationals created a proverbial Great Wall of China in the real estate game. Homes and commercial properties would be taken off the market by massive, aggressive bids from people born in China who had fortunes they wanted to keep in a stable market like America. Furthermore, the commercial Chinese investors were savvy in their purchases. They truly embraced the game of capitalism that was under close watch in their home country.

The Relationship Between L.A. and China

They bought and upgraded hotels around LAX, which is an excellent investment as there will always be business. They bought the trendy Dream Hotel complex in Hollywood and the Courtyard Los Angeles L.A. Live in the city’s newly bustling downtown. Chinese billionaire businessmen were making Los Angeles their real estate investment bank. The Wanda Group bought $420 million dollars of commercial property in Beverly Hills with plans to build a 1.2 billion dollar mixed use complex. The Chinese mega-developer Greenland USA spent $1 billion on a metropolis complex in downtown Los Angeles, building a 56-story condo tower. The area most effected by this Chinese money was downtown Los Angeles. Due to all the commercial and mixed use development saw price per square foot amounts rise from the high five hundred dollar mark to the high $600 dollar mark (around $670 per square foot) in just two years.

Recent Falls

Yet in 2017, everything slowed nearly to a screeching halt. This overseas mindset that had swept across the Pacific Ocean to L.A. did not jive with Beijing time and the People’s Republic had taken notice. Namely Li Keqiang, the Premiere of the State Council who heads China’s economic policy, who has tightened the flow of money out of the country. His State Council laid down new restrictions in August of 2017 on foreign investments, in order to limit the risk of runaway debt and blunt capital flight.

The results have been relatively dramatic. Chinese investment in L.A. in 2017 fell to under $500 million total. The Wanda Project still hasn’t broken ground and is looking to sell the land they purchased in Beverly Hills. The 56-story condo tower and Hotel Indigo that Greenland USA is midway through constructing is now also up for sale. It seems that companies  are pulling back. On the other hand, the high net worth individuals who have made investments still appear to feel untethered. Other large Chinese backed investment projects still seem to be on track, like the $1 billion Oceanwide Plaza complex across from Staples Center in downtown L.A. and the $700 million dollar W Hotel and condo complex just a few blocks away.

With the ongoing trade war, investment is only looking to fall more. In the foreign direct investment (FDI) had fallen dramatically since the beginning of the tariffs. There is now a negative net flow from China to the U.S.

But this is an interesting example of the power of Chinese real estate can have on a market. When they focus on a particular place, the market goes wildly white hot. When they pull back, everything cools very quickly. It will be interesting to see what happens in the future and how other savvy investors will react in kind.

David Farron is the Co-Founder and CEO of InternationalRealEstate.News. A seasoned data analyst, he is an expert in international financial markets and has managed sizable budgets for a myriad of programs, including for UBS and Bloomberg. As an entrepreneur, his vision is to create a multidisciplinary platform that optimizes the best of technological applications and human talent to the benefit of the international real estate market.

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