CRE Trends: The Drivers Behind Foreign Investment in U.S. CRE

NAIOP_CRE Trends_Mandy Brown

By: Mandy Brown

What makes the United States a desirable location and safe bet for foreign investors?

At the Commercial Real Estate Conference 2016, Jim Hime, CFO of USAA Real Estate Company, said the key drivers for the increase of foreign investors can be attributed to the robust economy, search for yield, diverse sovereign wealth funds and recent changes due to the Real Property Tax Act.

The majority of the capital coming in to the U.S. is going into “Gateway Cities,” such as New York City, Los Angeles, Chicago, Dallas, Boston, D.C., San Francisco, Seattle and Atlanta.

Mike Hu, senior vice president at Gaw Capital Partners, expressed two macro events that are currently driving investment trends: China’s overseas acquisition deals are becoming larger due to a depreciating currency; and the Brexit vote, which increased uncertainty and will most likely have a negative macroeconomic impact. Recent foreign investment in U.S. real estate has been in hotels and resorts and Class A office properties.

Another driver is the power of sovereign wealth; real estate acquisition has increased from less than $10 billion to almost $40 billion in 2015. Hu mentioned the two reasons in his opinion that people are investing in China and abroad, the first being pure diversification, and the second the high-net worth individuals and small investment vehicles. He concluded, “we’ve seen a variety of changes … we’re starting to see a strategic shift from equity to debt, which is something to keep your eye on.”

Thomas McNearney, chief investment officer of Transwestern, discussed the spike of foreign investments, motivations of these investors to come to the U.S. and why this investment money is here to stay. They invest because of stability, global deregulation, the stable and transparent CRE market, growing retirement and pension funds, ample investment alternatives, growth of trade surpluses and the continuation of Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) softening, McNearney asserts.

The panelists all agreed that the U.S. proves to be a desirable place based on the rates, growth, ROI and yield. A foreign investment survey revealed that 70 percent said the U.S. provided the most stable and secure real estate investments. When it comes to foreign investors, they can be placed into one of three categories: institutional, high-net worth investors or sovereign wealth funds.

When Hime started the panel session, he asked the audience when they think the next real estate downturn would be; the majority raised their hands at the 36-month mark (he added they must be experienced in real estate). The question was if the investors who went through the recession still want to invest internationally.

McNearney’s thoughts were that the fundamentals, supplies, occupancies and rents are all improving and growing – a positive sign. The GEP is not in sync with our production side and the foreign investor’s behavior is not matching the rhetoric of learning from past experiences. Hu sees some investors who invested with a short-term lease who will not see their return on investment.

Buzz about the upcoming election prompted the question if this uncertainty is affecting foreign investments.

Hu’s opinion was that the worries come from the U.S. citizens internally but the foreign investors are not seeing the issue unless they are looking for short-term deals. McNearney thought there is a curiosity about it but the issue we should be worried about worldwide is the attack on free trade.

McNearney stated an example of no free trade by his analogy: “Japan is a bug looking for a windshield.” He said this due to the large debt Japan has built by trying to stimulate their economy internally and buying their own debt, resulting in no inflation and a decrease in their economy.

Foreign investors seem to have a preoccupation with gateway cities due to higher growth rates, but foreign investors should be looking to invest in secondary cities for more liquidity, a decent deal, cheaper costs and a higher return on your investment. Another reason foreign investors are choosing gateway cities are for the long-term leases, stable cash flow, and essentially – it comes down to owning a showpiece.

Image courtesy of Business Rewritten

[Editor’s Note: SmallGiants recently contributed live blogs during NAIOP’s Commercial Real Estate Conference 2016  held September 26 – 28, 2016 in Scottsdale, Arizona. This series highlights trends in the commercial real estate industry. These are re-published with permission from SmallGiants.]

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