Foreign Investment In U.S. Real Estate Remains Elevated; Capital Preservation And Stability Often Prioritized Over Yield

Foreign Investment Drivers

Canada Leads Foreign Investment, But China’s Potential is Significant
The size, variety and transparency of U.S. commercial real estate has historically attracted investors from across the globe. Often, these investors seek long term return potential as well as capital preservation. Foreign investors frequently channel their capital through local intermediaries, making it difficult to identify international capital sources. Based on transactions where the investor’s origin can be identified, though, Canada leads inflows into the U.S. Singapore, Qatar and South Korea occupy spots among the five largest investors. However, a host of high net worth Chinese citizens, sovereign wealth funds and newly established insurance firms seeking portfolio diversification vaulted China to the second position on the foreign investor list. Since starting at a negligible level six years ago, China’s growing purchasing power enabled it to execute deals valued at nearly $13 billion over the 12 months ending in the second quarter. Given its vast population and significant accumulation of personal wealth, China will continue to emerge as a notable source of capital for investment in U.S. commercial real estate

 


Increasing investor sophistication broadens participation. Numerous high net worth individuals and families from overseas have been active single family buyers in the U.S., but many are becoming increasingly sophisticated real estate investors with sufficient capital to participate in U.S. commercial property ownership. Canada, the U.K. and Australia have long exploited cultural affinities and language familiarity to make inroads into the U.S. commercial market, while citizens of other countries have acted more cautiously. The rising population of high net worth individuals and households in China has launched a financial advisory and wealth management industry that could facilitate greater participation in U.S. commercial real estate. Improved access to professional investment advice could increase demand for real estate investments and eventually lead to greater direct ownership of hard assets. Some capital constraints persist; however, as Chinese citizens can currently move just $50,000 annually out of the country. A number of methods have been employed to circumvent this restriction, including pooling capital from multiple investors, although this strategy has been used less frequently recently.

Florida favored by Latin American capital. While Latin Americans comprise a considerable segment of the residential market, especially in South Florida, their trackable direct investments in commercial real estate have been more modest. The percentage of sales of less than $10 million where the source of capital was identified as Latin American comprised less than 5 percent of the buyer pool in deals completed in Florida over the past 12 months. Each of the four major property sectors, plus hotels, were represented in the deals conducted by Latin Americans during the period, with Miami Dade County the most active market. Rather than direct deals, most of the commercial real estate transactions by Latin Americans in Florida appear to be executed through U.S. based intermediaries and syndicators, or relatives that are residents of the state.

Wellpublicized big ticket deals just a fragment of foreign acquisitions. The purchase of high profile assets by foreign entities represents a disproportionately large share of cross border deals in the U.S. Recent sales of hotels in major cities, trophy office properties and portfolios of assets make good news and thrust commercial real estate into the consciousness of the general public. While foreign investors may be best known for their large purchases, a number of smaller investors from outside of the U.S. also claim a share of the vast $1 million to $10 million price tranche.

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