U.S. Demographics, Transparency Driving More and More International Capital

Strong U.S. demographics and the rise of the Asia Pacific economy have created a wave of international capital hungry for real estate deals stateside, resulting in a rapidly expanding role of foreign capital in the U.S. real estate market.

Nearly half of all the real estate deals in the world involve a foreign buyer or seller, with China expected to make up nearly 32 percent of that activity by 2022, according to David Green-Morgan, global capital markets research director at Jones Lang LaSalle, who spoke during a concurrent session titled “The Wall of International Capital Targeting U.S. Real Estate?” at the 2015 ULI Spring Meeting in Houston.

“The U.S. is a country of enormous opportunity where investors can build up a portfolio and have ample liquidity to exit on the way out,” Green-Morgan said. “And over the last few years, the U.S. has delivered some of the most consistent direct real estate returns in the world.”

In addition to a nod from Asia, Green-Morgan said the U.S. is starting to attract capital investments from funds and investors in European countries. On top of traditional institutional capital, private wealth from high-net-worth individuals in these countries also has begun to flow freely into the real estate market here over the last five years. In fact, by 2020, an additional $200 billion is expected to be invested from these individuals—mostly based in Asia and the Middle East—alone.

However, because of tax constraints such as the Foreign Investment in Real Property Tax Act, many international investors choose to enter the U.S. real estate market through joint ventures with U.S.-based companies. In the last year, 32 percent of foreign investment in the United States came in the form of joint venture activity.

Because of cultural differences and because there is a significant difference in the level of sophistication, capabilities, and experience in structuring and closing transactions involving foreign investments in U.S. real estate, Mark Wilsmann, managing director of MetLife Real Estate Investors, said that U.S. real estate executives need to be prepared for finding ways to help get these deals done to take advantage of the potential influx of capital.

“A lot of these countries are still in the mode of figuring it out,” he said. “They are going to need help in developing strategies to access U.S. real estate.”

Two of the main reasons for the potential outflow of capital from China into the United States is a relaxed regulatory environment allowing for investment outside of that country, as well as an evolving Chinese economy, Green-Morgan said. In 2013, China began allowing insurance companies to begin investing in real estate, which created a new class of investors that is now looking westward.

Although some industry experts have said that the outflow of capital from China might be due to a concern over a possible economic bubble, Green-Morgan said the bulk of Chinese capital is not flight capital but rather the result of years of capital building up there that is now on the brink of pouring out.

“There are a lot of dynamics at work in a complex country,” he said. “This is more about positives than negatives.”

Martin Bruehl, head of investment management for Union Investment Real Estate, said the Germans also have become more sophisticated and more willing to invest in the United States, and—like most foreign investors—they tend to pay top dollar for real estate assets here.

The panelists agreed that one major advantage to these outside investors coming in is that they typically plan to hold the assets for the long term—sometimes 50 years or more—which helps make the scope and price of investment more attractive, leading to higher sales prices. Because they are looking at real estate deals through a long-term lens, Wilsmann said, these investors tend to care more about the location and physical dynamics of the asset than they do about negotiating a favorable deal on the access price.

However, one disadvantage is that foreign investors tend to move more slowly in the decision-making process involved in purchasing a large asset, sometimes taking months to pull the trigger.

But Wilsmann said that can sometimes be a fair trade-off in exchange for receiving top dollar for an asset.

“They are typically not set up to make a decision in a day or week—it’s a substantial process,” he said. “But to access the properties, they are often willing to offer prices that will allow the seller to provide them the time they need to make a decision.”

As the U.S. real estate market prepares to benefit from this influx of capital, Tom Arnold, head of the Americas for the Abu Dhabi Investment Authority, said the light is shining brightly for U.S. real estate across the world, driven by the strength of the market’s dynamics.

“The biggest sell factor for the United States is that the demographics here are the best in the world,” he said. “That’s hard to ignore.”