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Chinese Money

Even as major Chinese investments in U.S. commercial real estate face challenges, investors from China continue to pour money into Valley-region projects. Last month Pasadena-based Gemdale USA — a subsidiary of Shenzhen-based Gemdale Group — closed a deal in Santa Clarita Valley to buy the Madison apartments at Westfield Valencia Town Center for $45.9 million from L.A.-based Decron Properties, according to Costar Group. The deal included three mid-rise buildings at 24555 Town Center Drive. In recent weeks, a number of large Chinese real estate investments have unraveled as the result of a crackdown by the Chinese government on capital leaving the country. For example, last month, Shanghai-based Greenland Group subsidiary Greenland USA placed the unfinished, $1-billion condominium skyscraper Metropolis Tower 3 in downtown Los Angeles for sale, mere weeks after listing its adjacent Hotel Indigo. Investment group Dalian Wanda Group recently listed its One Beverly Hills hotel and condo project, along with four other projects worldwide. And China’s Insurance Regulatory Commission seized the assets of Anbang Insurance Group, including New York’s Waldorf-Astoria and a hotel portfolio worth $7 billion. But that hasn’t stopped Gemdale’s purchase in Santa Clarita. Since 2015, Gemdale USA began partnering with modest-sized, privately owned Los Angeles developers LaTerra Development on such projects as the $125 million, 203-unit mixed-use Deluxe Hollywood complex in Koreatown. It also financed the upcoming $91-million, 221-unit Pinnacle 360 in Historic Filipinotown. Millennial appeal In a March 2017 interview posted on East West Bankcorp’s website, Gemdale Chairman Jason Zhu said the timing is great to invest in California’s multifamily market. “The economic foundation is good,” Zhu said. “The U.S. is the only country right now that has no imminent financial trouble. Europe is still in a financial crisis and other regions in the world have rocky political climates. Even China, which is one of the biggest economic engines, faces the challenge of upgrading industries, especially in manufacturing.” Zhu identified what he believed to be U.S. real estate trends largely dictated by the habits and lifestyles of millennials. Characterizing them as a generation of renters instead of buyers, Zhu explained that millennials prefer to walk to work, stores and bars, and to have their friends and urban amenities nearby. “This trend will inevitably reshape the city and urban areas by becoming more accessible and affordable for people,” Zhu said, adding how apartments are becoming more like hotels, laden with amenities such as pools and gyms. “Home ownership is on the decline and more people are looking into stay-in condominium units and apartments. This also means that there’s more money to be spent and more economic stimulation.” Santa Clarita is not the only community on L.A.’s fringes attracting Chinese investors. The Watermark Apartments, a $90-million multifamily project in Reseda, is going to be built by Gelt-Uhon Development Holdings LLC — a joint venture between Tarzana’s Gelt Inc. and Uhon Inc., the Pasadena-based American arm of China-based developer Shenzhen Yuhong Investment Group Limited Co. The Watermark is a five-story, 250-unit project at 6625 Reseda Blvd. designed for relatively affordable rents of $1,300 to $3,500 per month. The developers anticipate a housing demand as nearby Providence Tarzana Medical Center staffs up about 1,000 new employees. City Councilman Bob Blumenfield sees Watermark as a crucial component of his Reseda Rising initiative to restore vibrancy and commerce to one of the Valley’s sleepier neighborhoods. If Reseda seems like an offbeat community for Chinese investment, it has much potential, said Uhon Chief Executive Rushan Wu and Vice President of Operations Chen Wang. “The market is good, the demographic is good,” said Wang, who added that it’s also great timing, given the area’s developments. In fact, Uhon almost purchased another nearby Reseda property last year, Wang said. Uhon has also invested in Santa Clarita Valley, where it owns Monterra Ridge, a 232-unit apartment community on 22 acres in Canyon Country. Uhon’s parent company was founded by Wu’s father, Hongshun Wu, who two decades ago began creating high-density condos in China. Upon establishing its Pasadena office, Uhon deepened its project acquisitions and partnerships with Gelt, which primarily owns apartments in Arizona and Utah. The four partnerships are in Denver, Albuquerque, Canyon Country and Gresham, Ore. “Uhon and Gelt have been partners for several years on multi-family projects throughout the western United States,” said Gelt partner Steve Wasserman, a founder of Tarzana-based law firm Wasserman Comden Casselman & Esensten LLP. “Uhon and its entire team have extensive experience in the development of large-scale multi-family projects (and) Uhon’s team in China provides continued assistance with these projects. Gelt looks forward to many more projects with the entire Uhon team.” Investment tides Amid the woes of major Chinese real estate leviathans Greenland, Dalian Wanda and Anbang Insurance, why are Valley deals still going through? Uhon’s Wu said China’s capital controls do not directly affect smaller-scale companies such as hers as the Chinese government is seeking to exercise control over big insurance companies and developers whose global investments have gotten out of hand. “Our company is a private-owned business. It’s lucky that we got capital out before the controls so now the funds we have in the U.S. will last quite a while,” said Wu, who added that returns on existing investments, plus partnering on future investments, will stretch Uhon’s capital. “In the five-year range, I don’t think there’s any problem,” she said, speculating that China will soon slacken capital controls. “China is trying to open up and do business and invest outside of China.” Peak Chinese investment in North American commercial real estate occurred in 2015 and 2016, but by 2016’s end, China began outlawing mergers and acquisitions abroad totaling more than $1 billion, as the Communist country’s Insurance Regulatory Commission cut the 15 percent overseas investment limit to the low single digits for companies exhibiting weak solvency ratios. In 2017, investment declined by 25 to 35 percent. “As it becomes more and more difficult to get money out, there will be less investment,” said UCLA Anderson School of Management economist William Yu. Investors borrowing money from Chinese banks to use as offshore leverage became a very risky game, Yu said, threatening China’s financial stability. All the outbound money is fine if projects are successful and investors can retrieve a much higher return on capital. However, “if the investment turns sour, that’s a very legitimate concern for China,” Yu continued, as the level of capital flight, or capital outflow, begins depreciating Chinese currency. “That’s why China imposes this capital control,” said Yu, who believes that this governmental move was a mistake. “The amount of foreign investment is not as important or trustworthy as China’s commitment to international markets.” Chinese investors have been very motivated to get their money out of China and take on more risk or settle for lower returns, said Eric Sussman, senior lecturer at UCLA Anderson School of Management. Sussman views submarkets such as the Uhon- and Gemdale-targeted Santa Clarita in line with booming Inland Empire or Riverside County, where there’s space for growth. In L.A.’s more developed parts, there’s a paucity of land and projects large enough to draw sizable revenue, Sussman said. In Uhon’s case, Gelt has provided the firm with “a lot of good insight” on the market and chief executive Wu emphasized that the sector of residential real estate in which Uhon traffics has little overlap with Anbang’s or Greenland’s investments. “Luxury apartments make rents too pricey for working-class people,” said Wu, whose Watermark is aimed at middle-class residents. And while Reseda and Santa Clarita may not appear as sexy as downtown L.A., “it has less risk than doing business in downtown L.A.,” Wu said. “The whole U.S. economy is at a peak. (Multifamily) is a really safe investment right now.” Advancing into 2018, Chinese investment levels “will go back to normal,” UCLA’s Yu predicted. Nevertheless, the UCLA Anderson Forecast economists added, Chinese investment will remain atop California’s foreign real estate investment list. “It’s still a boat load of capital, it’s just lower than what it was,” Sussman said.

Hannah Madans Welk
Hannah Madans Welk
Hannah Madans Welk is a managing editor at the Los Angeles Business Journal and the San Fernando Valley Business Journal. She previously covered real estate for the Los Angeles Business Journal. She has done work with publications including The Orange County Register, The Real Deal and doityourself.com.

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