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

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 movie 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 eyeing 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 hullabaloo 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.

China anguish is piling up. Read…  The Chilling Thing Nvidia Just Said about China & Tech

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  52 comments for “Is China’s Debt Crackdown Hitting California’s Commercial Real Estate Bubble?

  1. RD Blakeslee
    Jan 29, 2019 at 10:32 am

    In addition to its real estate development stoppages and unloading U.S. sovereign debt, China is unlikely to proceed with about 250 billion of other capital investment in the U.S.

    73 billion of it was to be shale gas processing in WV.

    This was agreed to on a Presidential visit to China.

    It’s hard to see why this was pushed if the President intended to pressure China with increased tariffs.

    https://www.reuters.com/article/us-trump-asia-energy-west-virginia/china-energy-investment-signs-mou-for-83-7-billion-in-west-virginia-projects-idUSKBN1D90S9

    • c smith
      Jan 29, 2019 at 5:27 pm

      Announced 20-year deal…how much of it will EVER come to reality?

  2. Iamafan
    Jan 29, 2019 at 10:43 am

    This happened before. This time on steroids.
    The building I rented before 2000 was owned by a group of investors from Hong Kong. They even had a local Chinese manage it for the absent landlords. We had the Japanese before that. After the crisis, the building was sold to emigree Russian Jews. The money to maintain the building run out, then I left and said goodbye.
    I believe this is just a cycle. You can add REITS to the owners.

    • yngso
      Jan 30, 2019 at 4:35 am

      Yesterday on the Boomblerg there was someone recommending REITs. Yeah right…

  3. kitten lopez
    Jan 29, 2019 at 10:46 am

    i really have to say i dig how your writing is becoming its own wild style. it’s so perfectly NEW and of san francisco. it’s got bite and a smile. i haven’t seen this before. it’s all yours.

    • yngso
      Jan 30, 2019 at 5:14 am

      Yeah gatita, I’m a straight guy but absolutely enthused by WR being drier than an empty cracker box and his wit even drier. The total lack of ideology and politrix is gold.

      • kitten lopez
        Jan 30, 2019 at 12:21 pm

        “gatita”! i like that. that’s funny.
        x

  4. Stupormundi
    Jan 29, 2019 at 10:52 am

    A retread of the Japanese experience in the 1980s? Didn’t end well.

    • Mike G
      Jan 29, 2019 at 2:32 pm

      Buying trophy properties in NYC, or building the tallest-whatever is usually the sign that money is getting stupid and reckless, and the start of a decline.

      • yngso
        Jan 30, 2019 at 4:44 am

        Yeah, like the Skyscraper Index, and now it’s ending because the money flow is ending.

    • Michael Fiorillo
      Jan 30, 2019 at 5:54 pm

      Yes, in the early ’80’s the Japanese were the Yellow Peril, then as the decade wore on it turned out they’d been played for rubes, the dumbest of dumb money, by good old American hype and grifting. Oh, and a bad real estate recession followed up here, as well.

      It’s starting to look like history is about to rhyme.

  5. California Bob
    Jan 29, 2019 at 10:56 am

    Sounds like the property grab facilitated by Japanese ‘boom times’ in the 90s. Japanese-style bust to follow?

    • yngso
      Jan 30, 2019 at 4:56 am

      Something much worse, because this time there’s the everything bubble. Bubbles popping will affect each other in very “wonderful” ways.

      • Jan 30, 2019 at 9:22 pm

        A daisychain of defaults across sectors.

  6. Off The Street
    Jan 29, 2019 at 10:59 am

    Chinese are the new Japanese? Recall the abrupt changes in Japanese capital flows to US real estate about 30 years ago, and that lost decade. Will the Chinese version result in a longer adjustment period given the larger relative and absolute economy?

    Sinister inference: instigated inflation and capital recycling is a variation on the Economic Hitman scenario updated for new players. Who can come next after Japan and then China are relatively subdued? Saudi isn’t as large but does influence global economic health through oil prices and has been in the US camp in some fashion since the 1970s oil shocks.

    • Bernadette
      Jan 29, 2019 at 11:17 am

      Off the Street, my answer to “who can come next…” is South Korea!

      Let’s sit back to observe the unfolding of a harmonious relationship between North and South Korea in the next few years.

      • robt
        Jan 29, 2019 at 8:08 pm

        Yeah, like North and South Vietnam.

        • Jan 30, 2019 at 12:04 pm

          And the Confederacy and the Union

      • yngso
        Jan 30, 2019 at 5:27 am

        Isn’t that amazing, them going ahead without asking the big powers for permission? Maybe reunification isn’t that far off in the future?
        East Asia was crashing all last year, and South Korea, one of the greatect industrial and exporting powers of the world, has been hard hit.

      • Kaz Augustin
        Feb 1, 2019 at 9:18 pm

        Not sure, Bernadette. S Korea isn’t that big an economy and is already in the doldrums (see Samsung, Hyundai). I believe their expansion has been too aggressive and are now at the beginning of a contraction.
        But I’m prepared to be proved wrong. :)

    • yngso
      Jan 30, 2019 at 5:07 am

      Yup, definitely muuuch bigger this time than ever before. Oil – energy – is a huge factor not gettng enough attention. What’s going on in Venezuela needs to be looked at in this context, because more oil in the market will have profound effects.

    • Jan 30, 2019 at 12:56 pm

      Reagan changed the capital gains tax on foreigners just before he left office which was a blessing for all of America. America should do the exact same thing to the Chinese. In the 1980’s foreigners mean’t Japanese, today foreigners means Chinese.

  7. zoomev
    Jan 29, 2019 at 11:02 am

    … like Rockafeller Plaza 1989.

  8. cp
    Jan 29, 2019 at 11:04 am

    Typo alert: “move theater chain AMC” should be “movie”

  9. MC01
    Jan 29, 2019 at 12:03 pm

    Great piece, truly great for no other reason it gives food for thought to the people I still hear muttering “nothing to worry about: Chinese money will come to the rescue”. Yes, it will come to the rescue… provided local authorities allow it.

    HNA Group has already been forced to sell MyCargo Airlines, their all-freight Turkish subsidiary for an undisclosed sum to a group of Turkish investors who look a whole lot like a front for Saudi money. Their share in Aigle Azur (48%) is probably next in line.
    Other HNA investments likely to be liquidated soon for cold hard cash are their (large) stakes in Dufry (duty-free shops) and SR Technics (aircraft maintenance).
    It’s interesting to note the destiny of Avolon is pretty hazy right now: ORIX Corporation (Mitsubishi) bought 30% of it from HNA last year in what looked like a bid to raise some quick cash but Avolon is a pretty nice asset given the rising importance of leasing these days but also grew very fast and in somewhat disorderly fashion due to the (apparent) ability of HNA to conjure money out of thin air.

    While the vultures aren’t circling overhead yet, it seems the days of all-out Chinese expansion are behind us. The air pockets have just started, better fasten the seat belts and hope the pilots and ground control know what they are doing.

    • MCH
      Jan 29, 2019 at 1:19 pm

      MC01, stop worrying, the Chinese middle class will save us all. They are a rising tide of spending that will lift all boats. (and if anyone still believes that, I have a lovely bridge across that bay that I collect toll on that I can sell you)

      https://www.scmp.com/news/china/society/article/2183771/chinese-disbelief-us295-monthly-salary-makes-them-middle-class

      See entertaining article above. Remember, they will continue to buy iPhones and Boeings en mass, it’ll save us. Oh, and also, Nvidia and Intel chips too, and eventually they’ll even let in Facebook, Twitter, and we’ll have democracy springing up with unicorns pooping out rainbows.

      • Howard Fritz
        Jan 29, 2019 at 1:39 pm

        I want to buy your bridge MCH.

        • MCH
          Jan 29, 2019 at 2:53 pm

          Fantastic Howard, send the check to the DNC.

          The price is literally a steal at $5B, and although the toll is only one way right now, we already have a mandated and approved toll increase in place that’ll get to $8 per car in the next six years.

          You’ll get a fantastic return, literally on this deal. And if you’d like, there are probably some LBO firms that can help with the financing.

          :)

      • MC01
        Jan 29, 2019 at 3:12 pm

        Are these the same Chinese workers whom in 2009-2010 Paul Krugman named as the leading cause for the Financial Crisis because they were stuffing their hard-earned renmimbi in their mattresses instead of going out and spending?
        Or the same Chinese factory workers who were supposed to leave their back-breaking but honest jobs to become baristas, dogsitters and taxi/Didi Chuxing drivers as China “transitions to a service economy”?
        One thing is for certain: these poor folks cannot get a break.

        • MCH
          Jan 29, 2019 at 5:42 pm

          No, these are the Chinese workers who must embrace 996. If they don’t, they are going to get hit with 007.

          See article below for reference.

          And if you ask for family time, one of the suggested cure is a divorce.

          https://www.scmp.com/tech/start-ups/article/2183950/chinas-work-ethic-stretches-beyond-996-tech-companies-feel-impact

          I find the Chinese work ethics to be a cudgel used to bludgeon the peons into submission, well, at least in China. With the mantra, if you don’t like it here, there are 30 others to replace you. In contrast to Google, where you are encouraged to rebel against the company’s business direction, and if you’re one of the protected class (read, non White/Asian males), then you’re absolutely untouchable unless you shot Larry, Sergey, or Sundar.

          That is still true even with the demographic time bomb. Just that it hasn’t exploded yet. Regarding Mr. Krugman, he let his Nobel get to his head, some jokers in Sweden handed him a metal something, and he is suddenly pontificator in chief.

      • roddy6667
        Jan 30, 2019 at 8:30 am

        I don’t know where SCMP got that $295 a month figure. The number now being used as the bottom of the middle class in China is $800 US a month.
        Somebody in Hong Kong is out of the loop.

        • MCH
          Jan 30, 2019 at 3:31 pm

          The figure isn’t from SCMP, it came from the National Bureau of Statistics in China this past Friday. And it created an uproar in Chinese social media. The said bureau then retracted

        • roddy6667
          Jan 30, 2019 at 9:22 pm

          The number used for the low end cutoff for middle class in China has been about 5600 RMB/month. That comes to $800 USD. I don’t know why $295 popped up suddenly. Maybe a typo.

    • Atu
      Jan 29, 2019 at 4:17 pm

      Well Europe is still allowing Chinese investment, billed at nine times US by bloomberg in one article. There have been various lesser bureaucratic friction (e.g. Wanda and edificio españa), though none so far obviously a trend. I don’t have full 2018 figure but 1st half to Europe was up yearly. So China owns controlling or large share in several main ports for example, is looking to control Portuguese electricity suppliers via soe etc. The US is a bit grumpy about this, and whether Chinese investment into the US was purposefully dissuaded or China saw the US as not a good option for now, when you compare it to investing into EU in its current state it sort of paints a whole different picture, with a shift to globalise westwards and taking oportunity of depressed European prices into the bargain…the US not a bargain nor welcoming for now.

    • yngso
      Jan 30, 2019 at 5:30 am

      I don’t share your hope

  10. two beers
    Jan 29, 2019 at 12:03 pm

    “The FBI […} seek evidence of possible crimes including bribery, extortion, money laundering and kickbacks that could involve L.A. city officials and development executives.”

    Forget it, Jake. It’s Chinatown….

    • yngso
      Jan 30, 2019 at 5:32 am

      Oh, you’re not talking about Huawei, strange…

  11. Iamafan
    Jan 29, 2019 at 12:43 pm

    There’s probably also some “irreconcilable” differences in culture.
    So many of these real estate investment units end up being rented to Mainland Chinese (not necessarily immigrants). The problem is that most of them are not so welcomed as guests as they tend to be noisy especially in groups. In Manila, Philippines, many of the swanky condos are very affordable to Chinese speaking illegal workers for online gambling. They are angering the rich local owners who thought they were buying upscale living. Those of you who have kids, might see similar issues near colleges in the States. Not everything is money.

  12. Sadie
    Jan 29, 2019 at 12:44 pm

    Chinese regulators sent the founder to prison? Not a chance of that ever happening in the US for financial crimes. They don’t commit crimes here, the rules are just changed. This Chinese founder will go to prison and “disappear” never to be seen again.

    • Bobby Dale
      Jan 29, 2019 at 6:29 pm

      In the US financial crimes are treated as a backdoor tax, i.e. fine the company (stockholders) and allow those in the company who committed the crimes to move on the the next scheme, taking the unearned bonuses with them.

    • MC01
      Jan 30, 2019 at 3:05 am

      In China political patronage always trumps wealth. That’s why once Chinese businesses reach a certain “critical mass” the owners have to scramble for political patronage, no matter how much they hate politics.

      As long as political patronage remains strong, a business owner can afford to do almost anything: banks will speedily approve loans and bureaucrats will quickly deliver all the needed authorizations. Local party members will be polite to a fault and always send their congratulations for successful business transactions.
      But when political patronage runs out… remember that not even Chen Boda’s spotless Maoist credentials could save him.

      Wu Xiaohui, the Anbang founder, is an example of what happens when political patronage runs out for a reason or another. It’s especially telling he’s been sentenced to 18 years of jail, exactly the same as the bureaucrats, Party officials and managers arrested as chief supporters of the “Gang of Four” in the late 70’s/early ’80s.
      Like Boda it’s unlikely Wu will disappear in jail or serve the full term: at some time in the future he’ll be released “for health reasons” and allowed to live the rest of his life in obscurity. As a propaganda tool he’s more useful alive and out in the open where everybody can see him, just like Boda was.

  13. Paulo
    Jan 29, 2019 at 1:10 pm

    Good thing they don’t control the construction companies, workers, and product flow. At least these empty shells won’t fall down due to material(s) substitution and engineering oversight payoffs. right? right?

  14. Chauncey Gardiner
    Jan 29, 2019 at 1:25 pm

    Thanks for this post. Will be interesting to see how these and other property developments play out against a backdrop of real estate asset price appreciation that has been fueled with debt due to central bank liquidity and interest rate suppression policies, combined with a component of flight capital.

    Whether these particular developments are also reflective of broader liquidity issues globally is an open question based on the property and asset sales mentioned here, and reports of Chinese pressure on debtors under various “Belt & Road” initiatives. I believe Lendlease Group is a large Australian construction and development company HQ’d in Sydney. Potential related exposures of MNCs generally?

  15. Jan 29, 2019 at 2:37 pm

    The FBI also raided the offices of Huawei in San Diego, and they are seeking extradition of the CFO from Canada. (Long list of trumped? up charges) Anyone who underestimates the context behind these markets is making an error. With data not coming in and political feuds who can say what the value of anything should be?

  16. c smith
    Jan 29, 2019 at 5:23 pm

    Echoes of Japan Inc, circa 1989…

  17. C
    Jan 29, 2019 at 7:13 pm

    I follow more residential sales, and a recession or correction would be *welcome* here. If you bought a house during the 2001 recession (dot-com or whatever), your house appreciated in only three years. Residential Chinese families own Cupertino and Stanford (except the parts that are Apple and Stanford (: and have no desire to leave. Better jobs here, better schools here, and a Chinese community to feel welcome in. But expensive houses are expensive, and lower housing prices *here* will be welcome.

    As for business and development (as mentioned in this article) — and houses in the middle of nowhere… ergh. (: I’ve seen pockets of business real estate with For Rent signs, and Chinese dis-investment isn’t going to help!

  18. Iyamwutiam
    Jan 29, 2019 at 8:01 pm

    I would say that
    1. China is not Japan because unlike Japan .. they can service their rising rich who number in the 100s of millions. They can emulate the US and be a consumer economy which is resistant to trade pressures.

    2. The comment on Huawei and perhaps a connection to funds drying up may not be just coincidence. I urge everyone to read up on 5G technology.. who ever has the best technology base is what this about. Huawei is years beyond all other companies in 5G.. for example US carriers tech means it has to be beamed at microwave freq. which is nothing new and does not penetrate buildings. While Huawei 5G can easily build on 4G towers and scale up quickly.

    3. The trade war (see above) is a back drop and I think China has really awoke the West. It was and is unthinkable that a non European country is leading the world in cutting edge technology. Chime invested it’s surplus billions also in research and may soon be ahead in quantum computing and AI. The combination of 5G + AI + quantum computing is the next few decades and can very much be like America with 1,2,3 and 4G, Apple, MSFT, Google, Oracle, Cisco etc being created with the billions of US government sponsored research. The same thing has happened in China but at an amazing pace .. in less than 15 years they are at the cutting edge!!

    • yngso
      Jan 30, 2019 at 5:52 am

      According to Harry Dent China is becoming Japan because it also has a peaked boom and a demographic problem.
      Apple is in trouble and never talks about 5G, and the US is trying to stop Huawei, weird coincidence!?
      China is doing future tech while the US is closing the barn doors after its tech horses ran.

  19. Just Sayin
    Jan 30, 2019 at 12:52 am

    The mainland Chinese are as much tech thieves from America et al as the Israelis.
    Huawei CEO is daughter of founder who was formerly a high ranking Chinese military official…one would hope most of us can put 2 and 2 together on why their government reacted so quickly to her arrest – namely because Huawei is a state enterprise, always has been.

    They are not light years ahead, they are stealing just to keep up.

  20. Sinbad
    Feb 2, 2019 at 1:52 am

    Starting this economic war with China, is the economic equivalent of Operation Barbarossa.

  21. Dan Sheehan
    Feb 5, 2019 at 4:28 am

    World Beware When the Sleeping Giant Awakes !!

Comments are closed.