The Panama Papers and Real Estate in San Diego

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Photo: Tom Abbott

Part 2 of 1

April 11, 2016 (San Diego) The first question that needs asking is what are the Panama Papers? The Panama Papers are a collection of documents leaked to the German the German newspaper Süddeutsche Zeitung, whichwas shared with the International Consortium of Investigative Journalists (ICIJ). This source was  working for a Panamanian legal firm called Mossack-Fonseca. The business engages in the creation of off shore companies which are used to both  create off shore investment accounts and to avoid paying taxes in their home countries. Some forms that these accounts take, such as bearer share accounts, where the owner of the share does not have to be identified, have been used in the past to shelter owners from both Illegal activities and paying taxes.

They are used to hide money and also to put funds in for investment. They are part of the capital flight that affects governments, including the United States, around the world. How large is the leak?  This leak was 11.5 million files, detailing the financial deals of this Panamanian firm. So far this investigation has involved many news outlets, all over the world, The internet has made this work possible, as they are able to share files and information across borders.

San Diego

So why should this matter to San Diegans? This is about high level and well connected people, But, this affects you and me in very direct ways. One of the most obvious ones is tax evasion. How much money is siphoned abroad from the United Sates? We truly are not sure, but we know that 35 Trillion are sloshing around. This translates to this. What we also know is that one way to shelter money and lander it is to buy real estate, cash in hand. Some of the buyers are getting a summer home. Some are buying homes for children attending college in the United States. Some are using it to hide money or with the intent to rent.

According to Tim Redmond writing for the San Francisco Redmond, writing for the 48hills.org, reported on the real effects in San Francisco:  He was quoting an NPR story.

“the vice president of Transparency International talked about how the offshore deals impact ordinary people – and the first thing she talked about was housing in cities like New York and San Francisco. See, the shadowy banking system allows people with illegal money – money from arms trading, money from drug sales, money stolen from the people of a struggling country – to launder it and use it, among other things, to buy real estate.

He also quoted from the Miami Herald that actually documented this problem in Miami.

“Money from people linked to wrongdoing abroad is helping to power the gleaming condo towers rising on South Florida’s waterfront and pushing home prices far beyond what most locals can afford.”

This information came from the Panama Papers. This is how this is being done  according to the same article:

“The guys who want to clean up dirty money are always going to try to penetrate the system at its weakest spot,” said Joe Kilmer, a former Drug Enforcement Administration special agent. “You’ve got so much real estate being bought and sold in South Florida. It’s easy to hide in plain sight.”

This raises a question about San Diego. So how much of our real estate is being bought this way? Cash only, and no name? Well according to Michelle Muniz, writing in October of 2015 for the Global Real Estate Experts:

“Chinese investors want to protect their wealth by diversifying their assets, buying U.S. real estate and moving money out of the country”, said William Yu, Economist at the UCLA Anderson Forecast. (RealtyTrac Housing News Report, August 2015) The combination of low interest rates, a weakened dollar and increased home values and rents are attractive not only China, but other foreign investors to housing markets in the U.S.. Similarly, population growth, increased prosperity and limited housing supply is fueling home values in the United Kingdom, Hong Kong and Australia, attracting foreign buyers to those markets.”

She also pointed out where those foreign buyers are coming from.

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For the record, Americans are also buying property abroad.

Could this be affecting San Diego?

The clear answer is yes. According to Commercial Real Estate Insights

Foreign investors now represent two of every five dollars invested in U.S. Skyline property, according to JLL’s recently released 2015 Digital Skyline. Those cross-border dollars invested in 2014 represented more than 150 percent growth from 2013 into the Trophy and Class A properties where investors and tenants alike tend to focus their demand.”

So this is nationally. According to this site, this is the situation in San Diego:

“The size of investment in San Diego tends to be less than $100 million. Many of the international investors are looking to invest larger sums of money and the majority of the individual property sales in San Diego are less than $50 million.”

During 2014, four international buyers entered the San Diego market—one from Turkey, two from Canada and one from Mexico—but the acquisitions were made countywide and not in the skyline. However, Lynn LaChapelle, managing director for JLL San Diego’s capital markets team, adds, “The pace of investing in San Diego has remained consistent year-over-year from 2014 into 2015, and sentiment remains very positive.”

According to Murtaza Baxamusa, speaking to the Union Tribune in 2013, 30 percent of San Diego County’s homes in July of 2013 were bought with cash, He told the UT:

“Some may argue that the presence of cash buyers signals strong market demand. But speculative buyers have blown bubbles in the past, and this time may be no different. If housing costs spiral unsustainably faster than family incomes and local employment growth, homes become poker chips for international gamblers, than dwelling units for San Diego families.”

This is what is diving the fast rise in housing costs, This also translates to rents, since  many of those homes are bought for rental purposes.

Kurt Wannebo, real estate broker and CEO of San Diego Real Estate and Investments told the UT:

“First, it’s important to understand where most of this money is coming from. It’s both foreign and institutional, but in either case they are all mostly investors. My knowledge of these cash buyers is that they are all bullish on certain geographic areas such as Southern California. They are switching to buy-and-hold models, where in any case they will win. If interest rates rise, they will see rental income rise. If not, they anticipate value appreciation on their investments. These are longer term strategies that investors are starting to feel, are a safer place to place money into.”

This increases income inequity and places housing outside the reach of the citizens of San Diego, We are one of the most expensive cities to live in the world. We are in the top ten. So this is how this story affects all of us. It also raises important questions about those shinny towers in downtown San Diego. They are not just out of the reach of most San Diegans, but they are mostly empty. How many are investments fueled up by off shore accounts?

Part One

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  1. New Financial Rules in Place: Panama Papers – Reporting San Diego
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