Is China’s Debt Crackdown Hitting California’s Commercial Real Estate Bubble?

Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter

The moment the money runs out.

Oceanwide Plaza – a three-tower condominium, hotel, and retail complex expected to cost over $1 billion – is one of the largest real estate projects in downtown Los Angeles. It was scheduled to be completed in 2019. The owner and developer, Oceanwide Holdings, is a Chinese conglomerate that is also currently building one of the largest mixed-use projects in San Francisco, the $1.6 billion Oceanwide Center. But now it seems the funds have run out.

“In an effort to prioritize construction activity, and while we restructure capital for the project, interior construction at Oceanwide Plaza is temporarily on hold,” Oceanwide Holdings said in a statement, cited by the Los Angeles Times.

“Our decision to provisionally pause construction is solely based on these internal factors and nothing else,” the statement said. With “more than $1 billion of equity already invested in Oceanwide Plaza, we look forward to investing more capital into the property and together, with Lendlease, remain committed to building this landmark project for LA.”

The statement said that construction will resume in mid-February, and that it will be completed next year.

This comes at a time when the Chinese government is cracking down on capital flows from China to other countries, particularly to fund real estate projects, and when it is also cracking down on the ballooning debt of Chinese conglomerates, after a reckless binge of buying up everything in sight. HNA, Anbang, and other conglomerates are now being forced to unload these toys. In HNA’s case, this includes the $305 million deal to sell a building in Manhattan a year ago. And it has put numerous other recent acquisitions on the market.

Anbang Insurance Group, which had purchased the Waldorf Astoria in New York for nearly $2 billion in 2014 and which in 2016 handed Blackstone Group $5.5 billion for a portfolio of 15 hotel properties, collapsed and has been taken over by Chinese regulators, and its founder was sent to prison. Now these investments are up for sale.

Dalian Wanda – which also acquired the move theater chain AMC for $2.6 billion and Legendary Entertainment – has also been unloading its properties in the US, including One Beverly Hills, for an undisclosed amount that the Wall Street Journal disclosed was over $420 million.

So a work-stoppage by a Chinese property developer due to funding is rattling some nerves in California.

“They said they were stopping work on the project at this time, and had no further explanation,” the general manager of the LA Department of Building and Safety, Frank Bush, told the Los Angeles Times. He said that Lendlease, the general contractor on the project, called his agency on Friday to cancel an inspection scheduled for that day.

There are some other potential wrinkles.

The FBI is also probing Oceanwide Plaza and other Los Angeles downtown projects with foreign investors, according to the Times, “as they seek evidence of possible crimes including bribery, extortion, money laundering and kickbacks that could involve L.A. city officials and development executives.” The Times adds:

No one has been arrested or charged in the probe, and the federal warrant [filed in 2018] did not say that agents had gathered evidence of criminal activity by the individuals or companies named in the document.

Oceanwide has refused to confirm or deny if it has received a federal subpoena. But in the statement concerning the construction halt, it told the L.A. Times that because the federal investigation was ongoing, “Oceanwide has no comment regarding any investigation-related matters.”

In 2016, investments from China in US commercial real estate reached a record $19 billion, according to Cushman & Wakefield’s 2016 report, with the top three targets being Manhattan, the San Francisco Bay Area, and Los Angeles. About two-thirds of this money went into trophy deals with a price tag of over $1 billion.

Chinese money is “transforming LA’s skyline, revitalizing neighborhoods, and inspiring additional investment,” the report gushed, concerning several high-end developments in LA Downtown, including the Oceanwide Plaza.

In 2017, that flow of capital from China into US commercial real estate began to fizzle, with an estimated in $7.3 billion flowing into commercial real estate, according to Cushman & Wakefield’s 2017 report last March.

We can’t wait to see the 2018 numbers because the flow has reversed, with Chinese investors trying to get out from under the properties and their associated debts.

Among the other large Chinese projects in L.A. is the Metropolis, a four-tower $1-billion condo and hotel project that is expected to be finished by the end of 2019. The three residential towers are already partially occupied. Whew!

Real-estate folks in California are now nervously eying all China-backed unfinished mega-developments in the state, as authorities in China are struggling to keep their debt-bubble from unwinding in a disorderly manner. The fact the Chinese investors have become net seller is so not cool.

In San Francisco, folks fret over the $1.6 billion Oceanwide Center project. One of its two towers, when complete, will be the City’s second tallest. The project is across the street from Millennium Tower, the infamous Leaning Tower of San Francisco, which thankfully was built by American developers, or else the hullaballoo would be global instead of local. Oceanwide Center is scheduled for completion in 2021, assuming, to nervously channel some prime Elon Musk, that funding is secured.

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