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Los Angeles' US$1b trophy tower halted as China pulls back

Setback due to subcontractors' lawsuits, US-China trade war and Beijing's crackdown on credit and capital flight

Los Angeles

IT'S meant to be one of the crown jewels of downtown Los Angeles' urban renaissance but now it's in limbo - plagued by lawsuits from subcontractors, and victim of an ongoing trade dispute between China and the US and a Beijing crackdown on credit and capital flight.

Construction has largely stalled at the three towers of Oceanwide Plaza, across from the famous Staples Center arena where two top sports teams - the Los Angeles Lakers from the National Basketball Association, and the Los Angeles Kings from the National Hockey League - play their home matches.

On a recent Friday afternoon, no workers or vehicles entered the construction site, which takes up a city block and towers over Figueroa Street. A few security guards manning an entrance insisted that work was going on, yet no activity was visible from the outside.

The developer, Beijing-based Oceanwide Holdings, offered few details on the future of the US$1 billion-plus project - other than to insist that it has financing and work is continuing.

The lawsuits by unpaid subcontractors, on the other hand, give a glimpse of the developer's struggle to come up with needed money to finish the project.

As a trade war between the US and China approaches its second anniversary in January, Beijing is making it tougher to shift money abroad, having imposed capital controls last year to help stabilise its currency.

Those restrictions have meant that Chinese direct investment in the US real estate and hospitality sectors plummeted to US$377 million last year from a high of US$17.3 billion in 2016, according to data from Rhodium Group.

"It appears they wanted to self-fund the entire project," Dale Ortmann, an attorney representing two of the Oceanwide subcontractors, said of the China-based company.

"Now, with the changes in Chinese government policy, the owner is trying to find a traditional construction loan while in the middle of construction."

Under California law, all subcontractors' claims over unpaid invoices, no matter when they performed work on the project, will have priority over any liens a subsequent lender may have, according to Adam Salis, a lawyer in California who specialises in real estate.

That's why construction lenders usually will only get involved before work has started on a project.

With economic growth slowing last year, China tightened restrictions on capital outflows after Chinese companies had gone on a years-long global buying and building spree.

Over-leveraged conglomerates such as Dalian Wanda Group and Anbang Insurance Group were forced to liquidate overseas real-estate worth billions of dollars, and developers were no longer able to finance their projects abroad with money from home.

"The capital outflow control has been strictly enforced by the Chinese government so far this year due to the intensifying US-China trade war," said Patrick Wong, a Bloomberg Intelligence analyst based in Hong Kong.

Oceanwide Plaza is part of a building boom that has been transforming downtown Los Angeles in recent years.

Whereas for decades the city's historic core had been a ghost town at night - home to mostly destitute transients and a few artists and urban pioneers, the 21st Century has brought in an influx of young professionals seeking an alternative to the suburban, car-dependent Southern California lifestyle.

The number of market-rate apartments has increased by more than 10-fold, from 2,426 before 1999 to 27,616 as of the second quarter of this year, with another 3,296 under construction, according to data from the Downtown Center Business Improvement District.

The number of condos during this period rose from 829 to 6,760, with 1,839 under construction.

In the South Park area of downtown, around the Staples Center, developers including Philip Anschutz's AEG, Shanghai-based Greenland Holding Group and Hankey Investment have gone to town to transform the skyline with gleaming towers - hotels, luxury condominiums and apartments.

Oceanwide Plaza's contribution to this new hub of high-end living is to include the first Park Hyatt on the West Coast.

The project's tallest tower at 604 feet is to include the 184-room hotel and 164 hotel-serviced residences. Two adjacent towers hold another 340 condominiums.

The development is also to feature a 700-foot LED ribbon wrapping around the building, 153,000 square foot of retail space and a two-acre sky park.

In downtown San Francisco, Oceanwide halted construction this month on one of the two towers of a mixed-use development. The 54-story tower is to house a Waldorf Astoria hotel, a Hilton Worldwide Holdings property.

Hilton's CEO Christopher Nassetta said on an Oct 22 earnings call that the company had been aware of Oceanwide's liquidity problems.

"It became public this week, but we've known about that for the better part of a year," he said.

In April 2018, the company announced that it had topped out the three LA towers and that the development would be completed this year. But in January, work was suspended. Since then, construction has proceeded at a reduced pace and at least six subcontractors have gone to court over unpaid work.

An Oceanwide spokesman in Beijing said that the LA project is still under construction, and that the company still has access to development loans. The company said that in light of local market changes and economic uncertainties, a "realignment of the work" on the San Francisco project, known as Oceanwide Center, was necessary to keep the project sustainable. Oceanwide offered no further detail.

While LA's Oceanwide Plaza remains in limbo, the downtown market for high-end condominiums is becoming a buyers' market, said Christiano Sampaio, founder of real estate brokerage Loftway.

There is still strong demand for unique properties, according to Mr Sampaio, particularly in the Arts District, the old industrial neighbourhood on the side of downtown where Warner Music Group this year moved into a former Ford factory.

But the influx of Chinese investment that helped inflate real estate assets from Vancouver to Sydney is abating. "A few years back, we had a lot of Chinese buyers but that has slowed down," Mr Sampaio said. "There's more inventory now and buyers are postponing making a decision."

In court, the company failed to have the first lawsuit, by Webcor Construction over a US$60 million claim, sent to arbitration or to get an order reducing the subcontractor's lien.

At a hearing scheduled for Wednesday (Thursday morning, Singapore time) in a state court in Los Angeles, Webcor and Oceanwide are set to argue whether the developer needs to start providing documents to the subcontractor while it appeals the denial of its arbitration demand.

In the lawsuits, Webcor and other subcontractors have pointed to what they say is a "suspicious" US$325 million deed of trust on Oceanwide Plaza that is held by a group representing Chinese EB-5 visa investors. BLOOMBERG

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