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CALIFORNIA PORTFOLIO : A New Gold Rush for Depressed Real Estate?

April 04, 1993|JOEL KOTKIN and DAVID FRIEDMAN | Joel Kotkin, a contributing editor to Opinion, is a senior fellow at the Center for the New West and an international fellow at the Pepperdine University School of Business and Management. David Friedman, a Los Angeles attorney, is a visiting fellow in the MIT Japan program.

When the state economy recovers, who will own California?

The investors who are snapping up the assets of insurance compa nies, savings and loans, banks and troubled Japanese speculators at prices far below their late-1980s highs recognize that the state economy, contrary to the crystallizing conventional wisdom, has tremendous long-term potential. California's population growth, Pacific Rim ties and dominance in such industries as entertainment, biotechnology and microelectronics are only some of the factors attracting them.

"Right now, you have a herd mentality--bad news breeds bad news. But in dark clouds, there are some great silver linings," says Joel Levin, an adviser to American Continental Properties, which represents roughly $2 billion in European investment funds.

Levin's group, which is mostly buying multifamily housing and retail space, is but one of the new investors zeroing in on California's devalued real-estate market. Others include:

* The Institutions . Sensing opportunities to generate huge short-term profits, top Wall Street firms are forming billion-dollar funds to buy distressed California real estate, especially retail properties. Among them are GE Capital, reportedly evaluating real-estate portfolios throughout the state, and Morgan Stanley, which recently formed a limited partnership fund that bought $1.7 billion of BankAmerica properties for roughly $1 billion.

With low interest rates forcing institutional investors to move billions of dollars out of certificates of deposit and money-market funds, demand for quality real estate that can be bought for as low as 60% of its appraised value, repackaged into new portfolios and quickly "flipped" for a 20%-30% return will steadily grow. California may disproportionately benefit from this huge capital shift because, unlike the Southwest or Northeast, most of its quality assets have yet to be put on the market by either the Resolution Trust Company or private investors.

* The vultures . During the Oil and Rust Belt busts of the 1980s, "vulture funds" acquired bargain-basement properties in distressed states that are now generating handsome returns. Many are moving into California. Among the major players reportedly active in California are the Bass brothers, who purchased American Savings, Texas investor Richard Rainwater, Chicago investor Sam Zell, a member of the group who bought Carter Hawley-Hale, financiers Charles Hurwitz and Ronald O. Perelman and the Perot family.

More so than the institutions, the vultures are likely to invest for the longer term, seeking to create value by more effectively managing the assets they purchase. Typically, they will buy buildings cheaply and lure tenants away from other properties with lower rents or other discounted services. While this puts pressure on overall real-estate returns in the short run, it also helps lower business costs and diversify the economy, results that were crucial for Texas' recovery from its oil-bust unemployment and property-value declines.

* The New Tribes . If the big foreign investor in California in the '80s was Japan, other East Asians are fast becoming the key players in the 1990s. Japanese investors, who are clearly pulling our, are replaced by Chinese financiers from Southeast Asia, most notably Taiwan, Hong Kong, Singapore, Malaysia, Indonesia and Thailand. Major acquisitions by such groups in the past two years include the Los Angeles Airport Hilton, the Bunker Hill towers and, most recently, Stouffer Hotel Holdings Inc., which includes Stanford Court in San Francisco and Stouffer Esmeralda in Indian Wells. The latter was bought by Cheng Yu-Tung of Hong Kong, chairman of New World Development Co.

Even more significant than these "trophy" acquisitions is the growing stream of smaller transactions involving businesses and buildings scattered throughout Asian San Francisco, where one study predicts Chinese firms will double their investments in 1993 alone, and the San Gabriel Valley, Inland Empire, Orange County and even the hard-hit South Bay.

New Tribe investors are much more focused on California's medium- to long-term strengths than the return-hungry Wall Street funds. "Chinese do not seek to sell property, but to add inventory," says Lily Wong, a Chinatown realtor in Los Angeles. "They see Southern California coming back in three to or five years and they see the prices are now low. They are pragmatic and see a good opportunity."

The Chinese influence in California will grow dramatically as newly rich buyers from mainland China, which has accumulated more than $50 billion in foreign-currency reserves, and at least seven new banks from Taiwan, now among the world's best capitalized, begin to make their presence felt in the local economy. "They see the recession as the best time to make money," says L.A. attorney Cedric Chou, who represents several of these banks in the state. "They are bringing money into the market and the market is cash-short."

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