What’s The Impact of Global Investment in LA Residential Property?

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View from The Century, a high end residential tower in Century City
View from The Century, a residential tower in Century City; luxury condo towers are burgeoning in Los Angeles.

On this DnA we talked about what happens to the life of global cities — like London, New York and LA — when investors park money, but rarely occupy, high-end residential property. 

We’d been thinking for a while about this phenomenon — nicknamed “zombie urbanism” by some city watchers; or, in London, “buy-to-forget.”

But it was crystallized by the publication of Towers Of Secrecy, a fascinating series in the New York Times about the shady characters behind the shell companies that own very expensive, and often empty, condos in the Time Warner Center in Manhattan.

We wanted to know just how much transnational investment is winding up in homes in the Southland, and reached out to Selma Hepp, Senior Economist at the California Association of Realtors.

Bio photo Selma Hepp
Selma Hepp

It turns out the picture is quite complex, but the bottom line, says Hepp, is that we are in “a very volatile real estate environment” that’s not “healthy for anybody,” especially the two-thirds of locals who can’t afford to buy a home, and certainly not pay in cash like seven out of ten of international buyers.

Read on for her explanation of the challenges — and possible solutions.

DnA:  What is the percentage of property that is being sold to foreign investors?

Selma Hepp: In California in general, and particularly in the L.A. area, we have had a significant influx of international monies. We surveyed our membership that worked with international buyers and found that most of the buyers are from Asia and predominantly from China, and they’ve been coming to the area in the last couple of years at higher rates than the years before.

In California about fifteen percent of buyers in general are international and twenty percent of international buyers are buying in Los Angeles. So again the biggest share of the international buyers are coming to Los Angeles.

DnA:  Is this an increase over past periods?

SH: From 2013 to 2014 we did see a slight decrease but in the longer term trend this is an increase.

DnA:  L.A. has had waves and waves of immigration but typically did those immigrants bring outside money and buy property? Or did they typically come and work here and establish themselves and then buy property?

SH: This time around it seems as though the international buyers are buying properties first, before they move here. More generally the buyers are coming with intent of buying properties for their children who will come to study in our universities. So a lot of those buyers are taking advantage of an EB-5 visa, and they are also looking for investment opportunities.

DnA: How many are buying investment properties because L.A. is a great deal compared to other global capitals?

SH: About a third of the buyers in this survey were coming for investment with intent to buy an investment or a rental property. But about forty percent are in fact buying with intent of using it as a primary residence.

DnA: Is this hot market at the very high end also impacting the low end of the market?

SH: Actually, the distribution of buyers is across all price ranges and the median price that we found was about 490,000 thousand dollars. Again, it’s it’s a bit higher than your median price for an average buyer in California. But we do see a concentration on both the lower end of the market and the high end of the market.

Quarter Survey of home sales, 2014, from the Elliman Report
State of the residential market, 2014, from the Elliman Report

DnA: But still a good number of these buyers are buying with cash which does give them an advantage over people trying to get a mortgage. Has there been a knock-on effect on the ability of of local Californians to get a foot in the property market?

SH: About seven out of ten international buyers buy with all cash. But one thing to keep in mind is the market is extremely competitive so we don’t only have international buyers coming in with cash. There is also a lot of competition from local residents, for example, people in the Bay Area who may have benefited from the tech boom.

They brought a lot of money into the area and that has been pushing prices as well. So overall I think we have a very competitive market.

Also, international buyers in California are not evenly spread out throughout the state. They’re looking at a very specific neighborhoods where there are many people already of their own ethnic backgrounds there, whether it’s from China or some other Asian country.

Again, I want to drive home the point home that what’s has been pushing the prices up in California is the lack of inventory. There’s a lot of competition still in the market.

DnA: We have also heard that one of the reasons why the market is so tight in terms of inventory is because companies are holding on to property rather than putting it on the market — even some of the banking institutions that have a portfolio of foreclosed properties. Is it is that true?

SH: It’s been very hard to track the number of homes that are purchased by investment companies. But certainly in 2012 and 2013 the dominant players in the market were investors — and again it could be a mom and pop or a large investment company.

Spelling Manor, Holmby Hills, sold in 2011 to British buyer Petra Stunt, daughter of Formula One magnate Bernie Ecclestone, for $85 million

DnA: Do you think this is healthy, the bottlenecks that some of these forces are creating?

SH: That article in the New York Times was very telling, and it made me think about what are our policies going forward with these sorts of trends going on in the market, and how they’re impacting the traditional buyer. In California we have a significant affordability crisis again. We are one of those states with very volatile prices and we are in about the thirty percent Affordability Index, which means only three out of ten buyers can afford to buy a median priced home. So we need to look seriously at how this is going to impact our communities and our residents. I think it’s a very important discussion we need to have.

DnA: Another New York Times article talked about Singapore and how its overheated luxury condo market was pushing up prices at the low end and eventually the people of Singapore got incredibly frustrated. So the government turned around and slapped an eighteen percent property tax on foreign cash purchases of condos and then they slapped another tax on property that was flipped a year later. It’s completely chilled this market, and now these luxury condos are sitting empty. Is that a viable solution? 

SH: You know the issue with taxes is sometimes you put a tax on one thing and they have an adverse effect on something you didn’t anticipate.

But I do think the physical presence of the buyer is beneficial for the entire local economy, whether it’s achieved through taxes or another solution.

DnA: It’s been suggested that because we no longer have community redevelopment agencies to create affordable house, we need to have more nonprofit land banking. Is that a mechanism you are familiar with and is it something that’s a viable means to balance out some of these inequities?

SH: In some European countries they use those sorts of policies. Another interesting story that I read that goes to that point was in Washington D.C. where two brothers crowd-funded from local neighbors in order to purchase a property that would otherwise be bought by investors; and then they tried to renovate it for a traditional buyer with an expectation of that local buyer keeping that property for so many years. So I think indirectly we are already having people come up with creative solutions.

DnA: That’s so interesting because I’m talking to you, a senior economist for the California Association of Realtors, and one tends to have the perception of realtors as wanting a good commission. So whatever produces a good commission is good. But it sounds as if you are not saying that.

SH: I think, above all, our our our goal is to be in a place in which we have stable homeownership. Nobody wants to have bubbles and consequent drops. It’s a very volatile real estate environment, and I don’t think that’s healthy for anybody. So whatever policies we need, to get at sustainable home ownership, I think is in everybody’s best interest.

Hear Selma Hepp and other voices explain how ‘zombie urbanism’ is playing out in L.A. on this week’s DnA, below.

This interview was lightly edited for length and clarity.