What are the strategies of the big foreign real estate investors buying downtown Los Angeles buildings--and can a local investor pick up any tips?
A survey of foreign investors and their advisers reveals a basic faith in the future of Los Angeles, as well as in the future of downtown office buildings.
However, they do see some thorns in our rosy future.
Who are these big foreign investors?
Michael Zietsman of the international corporate real estate services firm of Jones Lang Wootton, says the biggest of the big are the Japanese. Other major foreign institutional investors include European and Canadian firms.
Lists Four Attractions
According to Tatsuo Wakabayashi, manager of Real Estate Advisory Group, Mitsubishi Trust and Banking Corp., the big Japanese investors consist of developers, real estate divisions of the giant trading companies and life insurance companies.
Why do they like Los Angeles?
Sol Rabin, senior partner and director of research at TCW Realty Advisors, says that foreign investors see four good reasons for investing in Los Angeles.
1-- Political stability in the United States.
2-- The cheap dollar.
3-- The balanced and growing economy of Los Angeles.
4-- The higher returns available here.
Larger Returns Here
Zietsman says British real estate investors are used to 4% to 8% returns, as contrasted with 6% to 9% returns in Los Angeles.
In Japan, returns run from 1% to 3%, especially in Tokyo, according to Wakabayashi.
Rabin observes that there are differences between American and most big foreign investors. European investors traditionally hold about 20% of their funds in real estate, in comparison to from 5% to 10% by American firms.
Wakabayashi says that Japanese pension funds invest only 2% to 5% in real estate. Rabin says that the big foreign investors plan to hold on to their investments for 25 years or more. They are less concerned with tax advantages than Americans.
Prime Real Estate
Wakabayashi adds that Japanese investors start with the assumption that they will hold onto the property "forever." The Mitsubishi executive notes that the Japanese word for real estate fudosan, which translates as "never moving asset."
Why do foreign investors like downtown office buildings?
First of all, Rabin says, because downtown is considered prime real estate, and prime is what the big foreign investors want. Secondly, they like office buildings because in the United States more and more people are doing their work in offices. In fact, he says, 60% of all new jobs in this country are office jobs.
Bob Ortiz, senior vice president at Cushman Realty, says that the appeal of downtown to these foreign investors is just basic real estate logic applicable to an American investor: When buying commercial property, look for the most central location.
Ortiz also says that downtown high-rise buildings offer a pride of ownership that, even for sophisticated foreign investors, is a very real factor in buying real estate.
Will the new technologies change foreign investors' appetites for downtown offices?
Jack Nilles, director of the USC Information Technologies Program, Centers for Futures Research, says "We no longer need to have middle managers and other office staff physically located downtown.
"They can operate out of satellite offices in Woodland Hills or anywhere else and still keep in instantaneous contact with the main office. On the other hand, the job of a chief executive is largely one of corporate diplomacy, and his or her job normally would require being in a prestigious central location."
However, Ortiz, points out that for a firm to have its name on a downtown high rise, it must rent at least 300,000 square feet, making it practical to keep its office staff downtown. Do the big investors have major concerns about the future of downtown?
Haruhiko Uchida, senior vice president and general manager of the Sumitomo Corp.'s Los Angeles office, admits to concerns about overcrowded freeways. He advocates a light-rail system, pointing to the success of transit systems in Tokyo, Paris and London. "Even San Franciscans have gotten used to BART," he says.
Are there enough downtown properties to satisfy foreign investors?
Tours of Other Areas
"No", says Carl Muhlstein, senior vice president, financial services director for the western region offices of Cushman & Wakefield. "For example, there are only 25 key buildings in downtown Los Angeles, 90 in downtown Manhattan, and 25 in Boston, whose location and quality would qualify for Japanese investment."
For this reason, Cushman & Wakefield, together with Mitsubishi, recently sponsored a tour for Japanese investors of suburban markets in major U.S. cities, including West Los Angeles/Beverly Hills and Irvine.
Wakabayashi says that in Japan there is no suburban office market. Muhlstein compared the Japanese office market to Los Angeles in the 1950s "when everything was downtown."
What has all this foreign investment done to local investors?
Lower Borrowing Cost
Ortiz says it has pushed many smaller domestic investors into other areas, such as Hollywood, Glendale and Pasadena. However, he says, large American institutions continue to buy downtown property. For example, Prudential Insurance Co. recently bought out its partner's--Oxford Properties--share of the Citicorp building.
Rabin says that Japanese investors have an advantage over local investors because they can borrow money for 2 1/2% to 3% less.