Monday, May 29, 2017

Luxury Condominium Towers and Foreign Absentee Ownership



Pavilion Residences Tower No. 3 in Kuala Lumpur
Three months ago I received a request from a Chinese-American bank to appraise an unbuilt condominium as a rental property at The Metropolis, LA’s most extravagant new residential tower yet, which is being developed by the Greenland Group, a Chinese company. 1500 condominiums are being built and offered for sale for prices ranging from $600,000 to $2,000,000.
The Metropolis in downtown Los Angeles


Inquiring with Chinese-speaking Los Angeles realtors, I heard the opinion that many of the buyers at The Metropolis were Chinese and did not intend to occupy their units. I have heard similar rumors for Oceanwide Plaza.

A National Association of Realtors survey a couple of years ago even measured that the percentage of Chinese buyers purchasing such homes for primary occupancy was only 39%.

One decade ago, downtown Miami had a problem with empty, see-through condo towers. Miami is not the same town as Miami Beach, an affluent oceanfront community on the eastern side of the Intracoastal Waterway. Downtown Miami has no beaches, and it fronts the Intracoastal Waterway, not the ocean. Capital flight out of South America, particularly Venezuela, took care of that vacancy problem.

With capital flight, the primary objective of the buyer is to move money out of the home country for its own protection into nations with secure property rights and stable political conditions, not necessarily with the expectation of profit.

In New York City, appraiser Jonathan Miller noted that similar condo towers in New York City serve as "safe deposit boxes in the sky that buyers can put all their valuables in and rarely visit."

In a follow-up visit to Kuala Lumpur, I saw a similar phenomenon at work in the luxurious Bukit Bintang section of town, with numerous high-rise luxury condo towers under construction at once. I was already familiar with the 44-story Pavilion Residences towers at the Pavilion Mall; Tower 2 is said to still be only 40% sold, mostly to foreign absentee owners. There are still few lights on at night. Now Pavilion Residences Tower No. 3 is finishing construction.

History has not been kind to condominium communities with low rates of owner occupancy. Ten years ago a CPA friend urged me to buy Las Vegas condos “before it’s too late”, but too many units were bought by investors rather than occupants. The result was an oversupply of investor-owned units which could not pay for themselves, and tumbling condo prices. The more expensive the unit, too, the harder it is to find renters to cover the ownership costs. Wealthy people prefer to own rather than rent.

Flight capital is more patient than investor capital, which lessens downward pressure on prices, but there is another risk, instead, which is when the home country political conditions change enough for foreign condominium owners to bring their capital back home. This can create a sudden surge in condos for sale, such as witnessed in Vancouver at the turn of the century, when condos owned by Hong Kong investors were put on the market all at once.

There is a reason why lenders and Fannie Mae and Freddie Mac instruct appraisers to indicate whether the residence they are appraising will be owner-occupied or investor-owned, and whether the condominium building itself is primarily owner-occupied rather than rented out. Owner-occupied condos are more stable, and when real estate markets decline, investors are much more likely to bail out than owner-occupants.

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