Chinese investment in the US dropped 80% last year following new outbound capital restrictions from the Chinese government. In Los Angeles, which saw a majority of the Chinese investment in the last three years, the abrupt decline in investment activity could mean a local pricing correction, according to Greg Karns, a partner at Cox, Castle & Nicholson and an expert on Asian real estate investing. Karns says that we haven't seen a pricing correction yet, but the timeline for transactions has gotten longer. With interest rates expected to rise, Karns says that this year could be a turning point. We sat down with Karns for an exclusive interview to talk about how the pull out of Chinese investment is affecting the commercial market in Los Angeles and what a pricing correction could mean for the market.
GlobeSt.com: Los Angeles has seen a strong amount of investment activity from China. How do you think the decline in Chinese investment will impact the Los Angeles market?
Greg Karns: It is interesting because it would make sense that if you take the investors out of the market that are setting the top of the market year-in and year-out, then there would be some market adjustment. I am not sure that we have seen it yet. I think that most real estate people would say that it was better to be a seller last year than this year. Other than assets not moving as quickly, I haven't seen a change in pricing. I have seen a reduction in the number of new acquisitions and financing from Chinese banks in terms of the number of loans.
Personally, I think that there is still a lot of capital including a lot of Chinese capital that is already here, what you might call domestic Chinese capital. I don't think it is going to take a dramatic adjustment in pricing or valuations before new capital will jump in and decide that a deal works for them. There are investors from South Korea and Japan, and I hear more and more about family offices from South America [becoming more active here]. There is a lot of capital, and if there is some overall adjustment in the market, I think that it won't take too long for that capital to decide that it has adjusted enough for them [to enter the market].
GlobeSt.com: Yes, I was going to ask if there have been other foreign capital sources filling in the gap, and it sounds like there are. Is the Chinese exit from the market allowing these investors to become more active in L.A.?
Karns: There are other reasons as well that they are more active, but they are definitely more active. They haven't been actively competing with Chinese investment, and maybe that was because Chinese investment was broad and far-flung. We worked with groups that invested in apartment communities and at the same time, groups that were buying mega office and hotel buildings. As we have seen the Chinese investors back down due to their currency controls, I haven't seen foreign investors jump in to all of those sectors. I am also seeing a greater focus among the Chinese groups on the operational aspects of properties, and a shift from purely investment to a focus on the development and operation of the real estate.
GlobeSt.com: Which asset classes will be most affected?
Karns: We have seen a slowdown in the overall volume of new transactions. The Chinese continue to develop projects that they have acquired in the last couple of years, but we also see some of those projects get slowed or delayed. That is probably a result of currency controls as well because of issues getting capital out of China for financing. I do hear that in areas where there was a real predominance of Chinese investment, the markets are becoming more stagnant without it. That includes markets like Australia, where in 2016, more than a quarter of the houses sold were sold to Chinese. London is also softer without the Chinese. Here, I am not sure that I see it in pricing yet, but certainly in the time it takes for transactions to get done.
GlobeSt.com: From the seller's side of the table, I can see this could be a negative. From the buyer's side, is a pricing adjustment good news?
Karns: To the extent that you are largely removing Chinese investors from the market, then I would say that will make it easier to buy properties. The Chinese were probably the largest group of investors for the last few years. I do think that a lot of people are anticipating some adjustment in real estate markets, although they don't know what brings it on. Maybe it is the exit of Chinese investors and maybe it is interest rate hikes. This year is more of a turning point. You are going to see more people having to be more flexible on their pricing, especially in a market like Downtown Los Angeles. There are a lot of projects being built Downtown, and now you have Greenland putting its entire condo project on the market. I talk to economists that look at demand in Los Angeles and say that it is all going to get eaten up, but it is a lot in Downtown. If it were spread out, it might create less anxiety. Those could be catalysts for whatever adjustment there might be. Three more interest rate hikes this year certainly won't hurt it.
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Kelsi Maree Borland
