Financial $afe Haven

Who Are The Wealthy Foreigners Investing In The United States

New York. Boston. Chicago. Salt Lake? The United States’ largest cities have long been attractive targets for foreign investors looking to put their money into commercial real estate. Now, as more and more foreign investors flood into the market, they’re looking beyond the big cities and into up-and-coming markets.

Whether it’s an office building, a hotel or a skyscraper, demand for U.S. property is booming, thanks to six years of low-interest rates as and the desire of foreign investors—especially those from countries with volatile economies—to find a safe place for their cash.

According to research firm Real Capital Analytics, foreign acquisitions of U.S. properties added up to $39.6 billion in 2014. That’s nearing the peak of $46.5 billion in foreign capital that entered the United States in 2007 at the top of the real estate market.

Though it can be difficult to get a read on the volume of foreign capital pouring into the states, global consulting firm Deloitte estimates that foreign capital has recently grown from 8 percent to about 11 percent of the total real estate investment activity in the United States.

FUELING THE FIRE

In September 2015, many Utahns were taken by surprise at the announcement that a Chinese firm would be purchasing the Miller Motorsports Park, a racing facility that boasts a 23-turn, 4.486 mile road circuit course; a kart track; and a 24-acre paddock with garages, a club house and a museum. The Miller Motorsports Park was built by the Larry H. Miller Group of Companies, a privately held, Utah-based company (subject to judicial review).

The company had elected not to renew its land lease with Tooele County, and the county put the facility up for sale. Local media outlets covered the bidding process closely, and the county received multiple proposals from regional development firms. So the news that a Chinese firm had agreed to pay $20 million for the facility seemed to come out of the blue.

But it shouldn’t have been such a surprise.

“Investors have become more comfortable migrating away from overpriced markets because they realize they can get the same, if not better returns. They've found that secondary and tertiary markets can be as good as, if not better than, major markets.” Adam Gatto, CBC Advisors
“Investors have become more comfortable migrating away from overpriced markets because they realize they can get the same, if not better returns. They’ve found that secondary and tertiary markets can be as good as, if not better than, major markets.”
Adam Gatto, CBC Advisors

“Foreign investment in U.S. commercial real estate has been growing for the past six years, and it is expected to increase even further,” says Adam Gatto, senior vice president of investment properties at CBC Advisors.

There are several reasons for this demand, including the perception that the United States is a stable, safe place to invest. “The U.S. commercial real estate market has been attractive for a long time because of its liquidity, and it’s been considered a safe haven for long-term investments,” Gatto says, especially compared to more volatile options such as China and the Middle East or slowgrowing countries in Europe.

According to Real Capital Analytics, the United States provides by far the best opportunity for capital appreciation globally, by a 26 percent margin over second-ranked Spain.

The primary markets in the United States have long included New York City, Washington, D.C., Boston, Chicago, San Francisco and Los Angeles. However, that geographic concentration came with some unintended consequences. “So many foreign investors were following the followers,” Gatto explains. “They were going to big cities, where everybody was comfortable, but that drove up the prices.”

For instance, when Alibaba, the Chinese online retail giant, decided to launch its U.S. headquarters in Seattle instead of San Francisco, there were suddenly hundreds of Chinese investors interested in the area, according to David Hennefer, Executive Vice President with CBC Advisors.

Because of that intense demand in primary markets, the situation is evolving and entering a more “mature phase” of the real estate market, says Gatto. “Foreign investors have more access to data and are better equipped to look at markets that may be outside the realm of the traditional locations.”

Investors, armed with data, strong partnerships and a better understanding of what drives the U.S. real estate market, are now looking at secondary and tertiary markets—places like Cincinnati, Denver and Portland.

“It’s not just about trophy properties anymore,” Gatto says. “Now that they’ve participated at a more transparent level, they can say, ‘New York is nice, but we don’t want to pay that much and we want a better return on our money.’”

Instead of just looking at geography, investors are now more driven by an area’s technology, lifestyle and jobs outlook. That means investors are willing to pass on San Francisco if they can find a city with similar characteristics, whether it’s San Diego, the Raleigh-Durham area or Phoenix.

A recent survey conducted by the Association of Foreign Investors in Real Estate (AFIRE) found that 66 percent of respondents support increased investment beyond the prime U.S. gateway markets.

“Investors have become more comfortable migrating away from overpriced markets because they realize they can get the same, if not better returns. And they can also stay ahead of the trends—where the technology is and where the jobs are headed,” Gatto says. “They’ve found that secondary and tertiary markets can be as good as if not better than major markets.”

Assessing the strength of a market often requires partners who have a finger on the pulse of local real estate trends. “As advisors at CBC, our job is to direct those investors to opportunities, but also advise when certain markets appear overvalued and so not investing is the right choice,” says Gatto.

The type of properties sought by foreign investors has been evolving in recent years as well. In the past, these investors have sought the biggest, most luxurious buildings in the biggest cities—the trophy properties.

But with an expanding eye for value and stability, multi-family properties now rank high among foreign investors, according to AFIRE. The demand for multi-family properties has held firm from 2010 onward. Office and retail properties rank lower—although demand for them has been trending upward. Interest in industrial buildings has seen a sharp increase, and these properties now rank almost as highly as multi-family assets. The area that has fallen off is the hotel segment, where interest has steadily dwindled since 2010.

SEEKING STABILITY

“This is not going to be a short-term tred. The chinese tend to be long-term inbestors and those investments in the country will strengthen the economy.” David Hennefer, CBC Advisors
“This is not going to be a short-term trend. The chinese tend to be long-term inbestors and those investments in the country will strengthen the economy.”
David Hennefer, CBC Advisors

Today’s investor landscape is a mix of old and new faces. Canadian investors continue to look for opportunities in the states—in fact, Canada represents the largest chunk of foreign investment in U.S. commercial real estate. Germany, which has been a dominant player for many years, has been especially active as of late. There are also relative newcomers in the mix. Norway, Japan and The United Arab Emirates have all become major investors, and Middle Eastern investors are starting to look for new opportunities as well.

Companies in China have invested in the United States for many years, but continually growing Chinese interest is bringing billions of additional investment dollars. Hennefer says the Beijing economy has enjoyed a high GDP, but it’s dropped. Add the fear that the Chinese market is in the middle of a bubble that will burst soon, and you have people concerned about their portfolios retaining value.

“The Chinese really like development,” Hennefer says. “They’re coming to certain key cities and looking for highrise apartment buildings. They’re also interested in existing office buildings in places like Chicago and Houston.” However, he adds, “right now, the Chinese only know the NFL cities,” although he believes they will soon turn their attention to secondary markets. “This trend of Chinese investors looking at secondary markets is going to increase. This is not going to be a short-term trend. The Chinese tend to be long-term investors and those investments in the country will strengthen the economy.”

The members of AFIRE agree with that assessment—more than 70 percent of the organization’s members believe the recent surge in investments from China marks just the beginning of a long period of high investment volumes from the country.

In general, foreign investors from places like China and the Middle East are “motivated by the fact that the volatility in their countries dictates that they redirect capital out and into the U.S. commercial real estate market because it’s stable and transparent, which allows them to sleep at night,” Gatto says.

Global commercial real estate investments have widened the scope of available choices for investors wanting to participate in this relatively new dynamic to property investment. More specifically, foreign investor interests in U.S. commercial real estate facilitate a desire to hold assets in U.S. currency. This diversity provides a safe method to enhance return on capital. Current real estate cycles now provide investors the ability to expand or contract their investment strategy.

There is another enticing reason for wealthy individuals and families to bring their money to the United States: the EB-5 immigrant investor program sponsored by the federal government.

Lew Cramer, president and CEO of CBC Advisors and former CEO of World Trade Center Utah, explains that if foreigners make a commercial investment of at least $500,000, in approved neighborhoods, that leads to the creation or preservation of 10 or more U.S. jobs, the EB-5 program allows the investor—as well the investor’s spouse and children—to apply for an American green card.

The vast majority of EB-5 investments dollars—roughly 85 percent—are currently coming out of China, says Cramer. Much of the remainder of the investment dollars comes from India and Korea.

For Cramer, the EB-5 program is about more than financial returns. A lot of foreign investors see it “not only as a way to keep their money safe and liquid, but as a way to create opportunities down the road for themselves and their families.”

FORMING PARTNERSHIPS

Historically, investors have entered U.S. markets with the help of American joint venture partners. “This was a way for investors from places like China, Japan or Dubai to enter the U.S. and feel comfortable that their partner has their eyes and ears to the ground,” Gatto says.

Some high-worth investors choose to buy small properties—generally in the $5-20 million range—on their own. Purchases beyond that amount usually lead to investors partnering with a U.S.- based private equity firm or investment group. Gatto says those American firms serve as the “boots on the ground” to scout opportunities in lesser-known markets.

It’s not uncommon for a sovereign wealth fund, for example, to deploy $100 million or more to U.S. markets and ask the private equity group to manage the investment. Those dollars may be spread out across different markets and different properties—a percentage of a hotel here and part of a warehouse there—in order to achieve their expected returns.

“Some feel safer sharing the risk with American firms,” says Cramer. “But others are sophisticated and mature enough to do it on their own. They’re big enough and comfortable enough in the market and they like what they see.”

“In Salt Lake, we have private equity groups that facilitate joint ventures with foreign investors on larger properties, and we also have high-net-worth and ultrahigh-net-worth investors that come in and buy commercial real estate properties single-handedly,” Gatto explains. “All of that is predicated on the transparency of the deal, their knowledge of the market and their comfort level. But deep down, they know they’re mitigating risk by moving money out of their countries to have at least a percentage of their capital to the safe haven of the U.S. commercial real estate market.”