Experts refute reports that Hong Kong capital will return to L.A.

When Big Six accounting firm Ernst & Young earlier this year asked some 1,700 U.S. real estate executives to rank which foreign sources of capital they expect to invest the most money in U.S. real estate over the next three years, their No. 1 response was Hong Kong.

Los Angeles developers and other real estate professionals, anxious to find any outside force that might provide a boost to the depressed L.A. real estate market, likely interpreted the Ernst & Young report to be a spate of good news.

The only problem is that many financial experts with close ties to Hong Kong said they find Ernst & Young's survey results hard to believe.

"Many people would like that to happen, but I don't think it will happen," said T.S. Cheung, the L.A.-based director of the Chinese Business Group at Deloitte & Touche, another Big Six accounting firm.

Cheung, like other Pacific Rim experts, said the main reason there won't be a flight of Hong Kong capital to Los Angeles is because the Hong Kong economy is strong and many investors are looking to southern China -- not Southern California -- for future profits.

To support that contention, Cheung cited a recent meeting he had with a Hong Kong businessman who told him that his $1.5 million investment in computer components would make at least three or four times the return in one year in southern China as it would in three to four years in the United States.

The bottom line, Cheung said, is that Hong Kong investors will invest their money in the market that they think will provide the best return. And that market, at least for the near-term future, is not Los Angeles.

Despite the naysayers, Michael Evans, Ernst & Young's national director of real estate services, said he stands by his firm's survey results.

With real estate values in Hong Kong increasing by 22 percent a year for commercial properties and 30 to 35 percent a year for residential, many Hong Kong investors are predicting the bubble is going to burst on those speculative values.

As a result, Hong Kong investors are looking at buying income-producing property in the U.S. because the returns on equity for some U.S. properties are hitting 20 percent and the U.S. real estate market is perceived as more stable because it has already bottomed out, Evans asserted.

As further evidence of Hong Kong's interest in the U.S., Evans explained that he didn't have one Hong Kong investor interested in the U.S. market a year ago. But recently, he had two inquiries in one week from Hong Kong investors interested in purchasing California commercial office buildings. Most of the Hong Kong interest in U.S. real estate is focused on California, Evans said, because of the state's depressed real estate prices.

Because of generous seller financing on foreclosed property -- where the buyer comes in with 15 percent down and the seller finances the rest at a low interest rate -- investors are getting returns on equity of as much as 25 percent, Evans said.

Evans did concede that the Ernst & Young survey results, which were released in February, do not reflect the current reality of Hong Kong investment in the United States. But he said he expects more Hong Kong capital to flow into the United States, especially as the date for Hong Kong reverting to Chinese rule looms closer.

Hong Kong has been the center of a political firestorm for months -- as British and Chinese government officials and Hong Kong residents squabble over the extent of democratic reforms that will be allowed in Hong Kong when that British colony reverts to Chinese rule on June 30, 1997.

Hong Kong's British governor, Chris Patten, is pushing for electoral reforms, which has angered the Chinese.

Lu Ping, the Chinese official who directs Beijing's policy on Hong Kong, accused Patten of sabotaging efforts to end the diplomatic crisis.

"In the history of Hong Kong, he should be regarded as the criminal of all time," Lu Ping fumed.

Mainland China has even made threats that, after it takes over in 1997, it would replace the legislature put into place under British rule.

Hysteria about return to Chinese rule is long gone

Despite these threats, Cheung said many Hong Kong business people are not overly concerned about the political debate.

"Most businessmen I talk to think this (standoff) will eventually be resolved," said Cheung, who just a year ago transferred to Deloitte & Touche's L.A. office from its Hong Kong office. "Many I talk to consider this argument as a poker game where both sides are bluffing each other."

Steve Friedman, Ernst & Young's L.A.-based regional director of real estate, said the younger generation in China -- those who weren't around in 1948 when the communists took over China -- are looking for Hong Kong to become the "Wall Street of China."

The younger generation in Hong Kong envisions the colony becoming a major vehicle for channeling investments into mainland China, he elaborated.

Frankie Fook-Lun Leung, a member of the bar of Hong Kong and a partner at the L.A. law firm Lewis, D'Amato, Brisbois & Bisgaard, agreed with Cheung and others who discount the impact of the 1997 transfer of governance. Leung said the hysteria about what will happen in 1997 is long gone for those in Hong Kong.

People in Hong Kong have been subject to the panic of reverting to Chinese rule since 1982, when the Joint Declaration on Hong Kong's future was being formulated between England and China, he pointed out.

"It's not like those in Hong Kong have never experienced spasms of terror," said Leung. "They have seen Tianamen Square. They have seen negotiations, and they have seen the Chinese acting tough."

Leung and other experts added that investors in Hong Kong have already made heavy overseas investments in British Columbia, Canada and Australia.

Besides, those Hong Kong investors who are considering sinking money into California real estate are more likely to invest in San Francisco than elsewhere because of the active community that speaks Cantonese, the primary language of Hong Kong, local experts said.

Los Angeles also has an active Chinese community, primarily centered in the San Gabriel Valley. But the San Gabriel Valley's Chinese community is primarily comprised of Taiwanese who speak Mandarin, explained local experts.

At the L.A. investment banking firm Takenaka & Co., Hong Kong expert Stephen Ting was in town to offer more upbeat advice about Hong Kong investors' future in L.A.

Ting, managing director of Takenaka's Hong Kong-based international arm, said the Vancouver and Toronto markets have already been saturated with Hong Kong investment dollars, and real estate prices in San Francisco have continued to decline and are not expected to bottom out any time soon.

"Hong Kong investors are looking at L.A. because L.A. is the capital of Pacific Rim trade, and the land values have bottomed out," Ting said.

He also pointed out that some Hong Kong investors got burned by investing in southern China because, after they bought property for development, the state or local government seized that property for government use without giving investors fair market value.