Friday, January 23, 2015

Chinese Capital in the Bay Area

Cory Weinberg of the San Francisco Business Times wrote an interesting article re Chinese capital and its growing presence here in the Bay Area.  

The $296 million sale of the First and Mission Streets mega-development to Beijing-based Oceanwide Holdings is one of the boldest moves by a Chinese developer in the Bay Area. The region has also seen notable Chinese investment in luxurious San Francisco condos, massive Oakland mixed-use plots, and San Jose office towers in the last couple years.

Chinese investors aren't just interested in the region or the country because of our hot real estate market. They have spent more than $600 million on Bay Area real estate during the last two years, according to Real Capital Analytics, for reasons that are more complicated. 

Here are six reasons why Chinese real estate companies want a piece of the action:

1) The Chinese real estate market is overheated
A report by Knight Frank says that Chinese investors have set their sights toward the western world mostly because their own residential market has cooled significantly. As a result, the value of Chinese investments in U.S. real estate grew from $600 million in 2009 to $12 billion in 2013.
That's in part because the Chinese government has put cooling measures in place to weaken demand, while the amount of residential space that sits vacant has shot up 80 percent since 2010. Developers are now in "cutthroat competition" in China, forcing them to get creative for where they park their capital.

2) Chinese companies have more freedom lately
Chinese companies looking to invest in overseas real estate were handcuffed until recently. But starting in 2013, Chinese companies could invest $1 billion abroad instead of just $100 million. Insurance companies could double the amount of their assets they put in real estate, according to Knight Frank.

"Prior to 2011 there was virtually no outbound direct investment from China into commercial real estate. A few years ago, the Chinese government started to relax numerous restrictions and actively encourage outbound investment via its 'go out' policy, so it really was a sea change," said Robert Hielscher, managing director of JLL's capital markets group.

3) U.S. and China got friendly and expanded visa limits last year
Don't forget about President Barack Obama's announcement last fall to extend visas for Chinese business people, students, and tourists in order to spark investment. That's helped open more doors for Chinese companies to open offices and for Chinese nationals to buy their own homes here.

"It's made a tremendous difference in the flow of people being able to get in and out of the country," said Skip Whitney, executive vice president at Kidder Mathews, who advises investors in China, Hong Kong and Southeast Asia on West Coast properties.

4) There's been more matchmaking
Bay Area real estate developers have also received more help from city officials with finding Chinese capital partners. Former Oakland Mayor Jean Quan helped link East Bay-based Signature Development Group with Zarsion Holdings in 2013 to help pay for the massive Brooklyn Basin development.

China SF, a nonprofit that works with San Francisco's Office of Economic and Workforce Development, also helped bring together the off-market sale of First and Mission to Oceanwide.
"We've been looking at real estate for last year and a half," said Darlene Chiu Bryant, executive director of China SF. "We created a book of properties interested in inbound investment" to show Chinese companies.

5) Buying big U.S. commercial properties makes headlines
There's no better way for a Chinese company to get name recognition overseas than investing in a trophy property. That's why more Bay Area business and political leaders know Vanke - not because of its $81.3 billion in total assets, but because it became the joint venture partner for Lumina. Even though Oceanwide has more than $5 billion in revenue, not many in the United States had heard of the developer until they paid $200 million for a downtown Los Angeles property in 2013.

"It's also a way for these Chinese companies to become more visible international. If you're the first (company) to buy a building in New York or London or San Francisco, that's unbelievable PR in addition to the value of the specific deal," Hielscher said.

6) San Francisco has started to look more like Shanghai, kind of…
China has more than 70 towers taller than San Francisco's tallest building, the Transamerica Tower. Yes, San Francisco hasn't cared for height very much, but that's starting to change as the Transbay district pops up. One of the buildings Oceanwide will build will be the second-tallest in the city at 910 feet.

"It's fortuitous and not totally coincidental that this type of interest is coming as San Francisco seems finally to have understood that verticality makes for a better city and it's finally setting itself up to be a denser city with a 24-hour lifestyle," said Greg Flynn, CEO of Flynn Properties, which has retained a minority stake in 225 Bush St. after selling it to Chinese developer Kylli Inc. last year.

Wednesday, November 5, 2014

San Franciscans Crash Capri


When you go from the Mediterranean climate of San Francisco to the Mediterranean itself, you step into a deep history.  Capri, one of the destinations on the honeymoon trip I took with my wife, is no different: in fact, it's been a resort town since the times of the Roman Republic.  You can still visit the ruins of the Villa Jovis, the retirement palace built by Emperor Tiberius.  And singers, artists, and writers have been finding their muse on the island for a long time.



Like San Francisco, parts of Capri feel like they're not entirely there for the residents: you might see as many tourists at the Grotto Azzurra as you would crowding around the cable car stop on Powell Street.  But this isn't necessarily a bad thing.  An infusion of international visitors can shape the surface character of a city without chipping away at its authentic core.

Similar to San Francisco's painted ladies, you can see Capri's heritage shining through in its architecture.  One thing I was interested to see were the brick retaining walls on the hillsides – something you won't see on any of San Francisco's hills.  San Francisco may be a little earthquake-shy about that kind of detail, but in Capri, these walls are laid in by hand, and they have the residents' trust.

But there is one thing about Capri: it's expensive.  When you're on an island, with nowhere to expand to, real estate tends to be at a premium.  That's why, for example, Tokyo is one of the most expensive places in the world to live.

San Francisco has an inkling of this, being bounded on three sides by water.  But in San Francisco's case, its connection to surrounding communities takes some of the pressure off.  While some people may want the full city experience, others are content to live in Daly City, across the bay in Berkeley or Oakland, or even further out.  Commuting into Capri isn't that easy.

And San Francisco has also embraced, in some neighborhoods, the demand for housing and grown up – up, as in skyscrapers.  Take the Millennium Tower in SoMa: 58 stories, mostly condominiums.  Capri hasn't embraced that sort of high-rise, high-density housing, for understandable reasons: it takes an aesthetic leap of faith to break from tradition in an area like this.

San Francisco is a city that has to walk a balance between preserving its history and character and growing into the future; between existing within its bounds and making itself inviting for homeowners who fall in love here.  And that's part of why I love it.  For Capri, being a resort island may be preferable, and that's fine: I'll be happy to visit it again, revisiting some lovely honeymoon memories, and still set my roots in the City by the Bay.
 


Monday, October 20, 2014

Do I Rent or Do I Sell?

A fascinating case study just came up: I was recently speaking with someone who was asking me – should I continue to rent my former home, or sell it outright?

Now there are many facets towards this decision beyond making “financial sense,” like convenience, time and specific goals – but I’ll show how to at least make sense of the numbers. Numbers don’t explain everything, but they sure help when a justification is trying to appeal to reason.

Here was the scenario:

They paid $925,000 for their residential property, put 20% down to avoid PMI, got a great rate at 3.85%, and just completed their 14th year of a 30 year mortgage. We had a conversation as to what their estimate of property value and we agreed that for the time being we would leave that number at cost, the $925,000. The scenario looks like this:


The nitty-gritty surrounding the rental numbers look like this:  

So the immediate thought is: What!? How does this make any sense? I’m losing $4,000 per year; it’s costing me money to rent this home out?

But like most things in life, it’s never quite so simple. Based on the mortgage contract—year 15 looks like this:

It boils down to the fact that people don’t think through just how much equity is created on the back end of the mortgage! Even though there is a negative annual cash flow, the actual equity had increased by nearly $23,000 (The $267k less the $245k equity from last year). The net appreciation when one considers this equity growth less the annual cost to rent is a net appreciation of ~$18,940. 

Obviously nobody is making life altering changes over $18,940, but we left out the most important point of all: what if the value of the home appreciates? Selling the property meant that the upside potential is eliminated; it was determined in this case that the cost of waiting wasn’t so bad: and that they could afford the modest annual expense. As far as tax-planning goes, they were looking at the best case scenario: negative income (write off) + appreciating assets. People that are buying bonds today, for example, are getting the exact opposite: income + losing value. That conversation is for another day.

Anyhow, I have taken the liberty of creating a model for this. If you are interested, please give me a call.

Tuesday, October 14, 2014

Inspiration: Honeymoon in Paris



When you travel internationally, you have a chance to discover things you never thought about your home.  For example: you might not think about how young San Francisco is until you find yourself standing on a Paris street.  Sure, the Spanish settled here in 1776, but Paris was around for the Roman Empire!  The Eiffel Tower may have been a modern wonder, a hymn to industrialism at the 1889 World's Fair, but that still makes it a good 50 years older than San Francisco's marvel of engineering, the Golden Gate Bridge.

When my wife and I traveled to Paris, the comparisons came naturally.  These are both cosmopolitan cities, centers of culture with great international renown.  Both are married to water: San Francisco has the Bay, and Paris has the Seine.  And foodie culture in Paris may have a longer history than San Francisco's own, but San Francisco is no less in love with its food, infusing it with international inspiration and entrepreneurial creativity.  And you can see the French-born Art Deco movement stamped in many of San Francisco's buildings, from the Rincon Center to Coit Tower.  And art deco is just scratching the surface of Paris' exquisite art and architecture – just as it doesn't sum up our proud and varied history of buildings here.

It may be 5,500 miles from San Francisco to Paris, but it turns out that's not that far, in the grand scheme of things.

Paris also gave us a chance to see San Francisco’s housing market in a new light.  While the $1,000-per-square-foot real estate prices here might give some people sticker shock, consider this: in 2011, according to Credit Sesame, a square foot in Paris would cost you over $3,000. Whew!  You can't get a better baguette here, but you can still dig into some San Francisco sourdough, and have a place to call your own at under a third of the cost.

Paris is a lovely city to visit, crammed to the gills with history, with monuments, with beautiful food and beautiful people – especially if you happen to bring your beautiful wife along for the trip!  But while I encourage everyone to visit if they get the chance, I still choose to live in its younger (but just as cosmopolitan!) cousin.  San Francisco may look back to the Gold Rush and the 1906 earthquake for its history while the foundations of the Louvre were laid in the 12th century, but when I come home to the house I'm building my family in, I love my younger city that much more.

Monday, September 1, 2014

Earthquake's Effect on Bay Area Real Estate

I was asked to share my opinion in the SF Chronicle on Sunday, 8/31/14, on the potential effects of an earthquake in the Bay Area.  Here’s what I had to say:

Despite the severity felt by earthquakes in the short term, home prices in the Bay Area have continued to appreciate over the long term at an astonishing rate. The impact that earthquakes have had on home prices honestly depends on the period of time we focus upon. There have been six recorded earthquakes in the Bay Area with a magnitude of at least 5.0 since 1979. The National Association of Realtors reported in 1989, the same year as the Loma Prieta earthquake, that the average median home price in San Francisco was $260,600. In 2014 that figure has risen to $972,800!

The greater question to pose to ourselves can be stated simply: Do we believe that these specific and erratic occurrences will derail the long list of positives that this region has to offer homeowners? Using history as a guide, I would not bet against this place. Back even before the Gold Rush, Bay Area residents have always been a determined and resilient breed with a history of rolling with the punches - or earthquakes - and bouncing back. I believe that the response to these natural events comes with a positive contribution from every person who has a stake in this unpredictable and beautiful place we call home.

Tuesday, July 1, 2014

The Middle Class Struggle to Obtain Property in San Francisco

It is worth being derivative sometimes; following suit in content, if that means we can better appreciate an important point.  The Wall Street Journal did a good job a few months ago highlighting the undeniable, fundamental challenge of the San Francisco housing landscape.  One quote read:

Workers are finding jobs by the bucketful in San Francisco, but housing supply hasn’t kept pace. About 4,000 housing units have been added in the past three years, for roughly 10,000 new households, according to the city planning department.

            rents are up 17% over the past three years.

            the housing shortage is “a crisis of our own making.”

The messy reality is that…any sustained boost in construction would require the city to overcome a slew of neighborhood and political forces that are aligned against building anything in a hurry, or in certain areas.

And so the paradox at hand is balancing the desire for affordable housing for all while maintaining best interests for existing homeowners.  The estimate within the piece is that it costs $650,000 to build an 800 square foot unit in a midrise building.  Further, it was reminded that building permits themselves must undergo discretionary review (in some cases).  

So in a nutshell, what we are dealing with here is a social problem very much opposite of what is happening across the nation: political activism seeks to push prices down, versus propping them up, in SF.  This is the challenge as to why areas like SF really cannot be compared to national averages.  It is also worth expressing how it can be relevant to pay attention to the local political agenda.

As for the “middle class”—a concept that needs its own elaboration—what is supposed to happen within the marketplace is supposed to play out as the graph below illustrates: 

 


And thus what agents, like myself of course, pay attention to are the how and when homes are sold for gains (unique and specific to individual seller preferences) and inventory returns to the marketplace at large.  That’s something to appreciate.