Category: Foreign Investment

Cross-Border Investment Dropped Sharply in the First Half of 2020. But Foreign Buyers Will Come Back.

In spite of the current situation, global real estate investors still have a favorable view of the U.S. market.

While cross-border capital flows have declined considerably in the second quarter, industry sources expect foreign investors to return some time next year.

Cross-border investment sales activity fell sharply to $3.9 billion in the second quarter of 2020 due to the overall slowdown caused by the pandemic. Foreign investors represented 8 percent of total U.S. investment activity during the period, well down from the 22 percent high mark set in 2015, according to a recent report from data firm Real Capital Analytics (RCA). For the whole first half of 2020, cross-border investment in U.S. commercial real estate dropped by 34 percent year-over-year, according to a report from real estate services firm CBRE. JLL estimates foreign investment volume decreased by 29 percent in the first half of 2020 compared to the first half of 2019.

Industry sources maintain this pullback is not a sign of global investors writing off the U.S. as an investment destination.

“In some ways, the environment is quite good for foreign capital [investment] into real estate because the hedging costs have just dropped right down,” says Richard Barkham, global chief economist at CBRE. “We have got some pretty hot sectors in industrial and logistics. The U.S. has always been seen as the highest performing economy in the world. So, we do expect that investment to come back.”

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    Foreign Investors Have Stayed Away from U.S. Real Estate in Recent Months. That Trend Is Not Expected to Hold

    Once the pandemic is over, foreign buyers will likely see attractive investment opportunities in core assets.>/h2>

    As the U.S. crawls out from under the coronavirus lockdown and copes with a pandemic-inflicted recession, foreign investment in U.S. properties has largely stalled. Commercial real estate professionals say that lull could be short-lived, though.

    Some industry observers say they’re already seeing at least a slight upturn in cross-border money coming into the U.S. real estate sector, although a number of deals that were in the works have fizzled. Looking ahead, some experts foresee a more significant surge in cross-border activity later this year and early the next.

    What’s the source of this confidence? Some say that because the U.S. remains such an attractive market, foreign real estate investors seeking an American home for their capital can’t afford to hold off for too long.

    “Some foreign investors from countries that are still reeling from the pandemic may sit out for the moment and reinvest in their own local markets,” says commercial real estate attorney Roman Petra, a partner in the Orlando, Fla. office of law firm Nelson Mullins Riley & Scarborough LLP. “However, the U.S. is a strong marketplace for foreign capital. As the U.S. economy continues to recover and grow, foreign capital will invest.”

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      U.S. CRE Still a Top Pick for Foreign Investors, AFIRE Survey Indicates

      Before COVID-19 spread, foreign investors continued to view U.S. commercial real estate as a safe haven.

      Foreign investors continue to view U.S. commercial real estate as a solid investment, with multifamily and industrial properties remaining their favored picks, according to the results of the 28th annual survey conducted by the Association of Foreign Investors in Real Estate (AFIRE) and the James A. Graaskamp Center for Real Estate at the Wisconsin School of Business. Survey participants pointed to low interest rates, continued capital markets liquidity and the low U.S. unemployment rate as reasons for their confidence in the performance of U.S. real estate assets. (Since the initial survey was conducted before COVID-19 became an issue of global concern, the organizations are now conducting a follow-up survey on its potential impact on investment trends).

      In all, 72 percent of AFIRE’s survey respondents indicated that they viewed the overall U.S. commercial real estate market as being as attractive as it was in 2019. Eight percent of respondents view it as even more attractive investment option than before, while 19 percent indicated it was less attractive this year than the last.

      Those who view U.S. commercial real estate as being more attractive pointed to the market meeting investor yield expectations and being considered a safe haven for capital, healthy property fundamentals and lower hedging costs.

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        U.S. Tightens Rules for Foreign Deals’ Security Risk Reviews

        The new rules will have an increased focus on real estate transactions.

        (Bloomberg)—The Trump administration on Monday issued long-awaited rules that will intensify scrutiny of foreign investment in U.S. companies.

        The final regulations, which will go into effect on Feb. 13, put teeth in a 2018 law that expanded the authority of the Committee on Foreign Investment in the United States, or Cfius, to examine national security risks posed by foreign deals. More cross-border transactions will now be subject to reviews by the inter-agency panel, exposing a greater number of deals to the risk of rejection by the U.S. government.

        “These regulations strengthen our national security and modernize the investment review process,” Treasury Secretary Steven Mnuchin said in a statement. “They also maintain our nation’s open investment policy by encouraging investment in American businesses and workers, and by providing clarity and certainty regarding the types of transactions that are covered.”

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          Chinese Investment in U.S. Commercial Real Estate Is Plunging

          Chinese investors put 76 percent less money into U.S. CRE year-to-date through September than in 2018.

          (Bloomberg)—Chinese investment in U.S. commercial property is plunging as restrictions on capital leaving the country and geopolitical tensions weigh on real estate deals.

          Chinese investors put $1.4 billion into U.S. commercial real estate in the 12 months through September, a 76% plunge from a year earlier, according to a report from Real Capital Analytics. Investment from Hong Kong was also down in the period.

          (Bloomberg)—Chinese investment in U.S. commercial property is plunging as restrictions on capital leaving the country and geopolitical tensions weigh on real estate deals.

          Chinese investors put $1.4 billion into U.S. commercial real estate in the 12 months through September, a 76% plunge from a year earlier, according to a report from Real Capital Analytics. Investment from Hong Kong was also down in the period.

          Money Moves

          “Chinese investors have become net sellers as authorities in China have restricted speculative outbound investment,” Jim Costello, senior vice president at Real Capital Analytics, wrote in the report.

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            Foreign Investors Ramp Up Multifamily Acquisitions

            Even as the overall volume of cross-border investment in U.S. real estate slows down, apartment properties remain popular with foreign buyers.

            Foreign investors continue to spend money on apartment properties in the U.S., even while they may be slowing down on purchases of assets in other sectors. In the second quarter, cross-border investors became net sellers of U.S. commercial real estate overall for the first time in seven years, according to Jim Costello, senior vice president with research firm Real Capital Analytics (RCA).

            But “we are not seeing any slowdown from global capital into multifamily,” says Brian McAuliffe, president of capital markets with real estate services firm CBRE, based in Chicago.

            These investors are lured by the ongoing strong demand for apartments that has shrunk vacancy in the sector. In addition, because apartment buildings rely on their income on dozens or sometimes hundreds of different tenants, their incomes are viewed as less volatile than, for example, a single-tenant office building, according to McAuliffe.

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              Foreign Investment in U.S. Commercial Property Drops Almost 50%

              Deals involving foreign investment in U.S. commercial real estate totaled $16.9 billion in the first six months of 2019.

              (Bloomberg)—Foreign investment in U.S. commercial real estate plunged in the first half of 2019 as signs of a global economic slowdown made buyers more cautious.

              Deals totaled $16.9 billion, down from a record $32.7 billion in the same period last year, according to a report by CBRE Group Inc. Much of the decline was in spending on large mergers and acquisitions, which tumbled 83%, the brokerage said. Individual asset and portfolio sales fell 26%.

              A Pause on Deals

              The current slowing economy and uncertainty over where U.S. interest rates were headed have caused many overseas investors to hesitate on deals, according to Spencer Levy, chairman of Americas research for CBRE. That may change as buyers get more clarity.

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                How Foreign Investors Can Deal with Higher Risks in a Down-turning Market

                Foreign investors continue to be interested in U.S. assets. But they need to tread carefully.

                U.S.-based private equity funds have more than $300 billion waiting to invest in commercial real estate. That’s a lot of money chasing quality deals, while some experts—including Bank of America/Merrill Lynch—warn that we are coming close to another recession.

                What can that mean for foreign investors looking to invest in the U.S. market? Possibly higher risk, since flush domestic investors will have pushed up the price of quality investments, perhaps even above the asset’s inherent value. An investor not fully knowledgeable of the market—both locally, regionally, and nationally—may end up paying above top dollar just as a market decline hits, which could be disastrous. Foreign investors often take a much longer view in terms of the expected ROI, making them attractive partners for U.S. developers. However, given the situation, foreign investors need to be acutely aware of some of the pitfalls facing those who are willing to invest in the United States. Recent examples provide some perspective.

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                  Special Incentive for Property Buyers: A Foreign Passport

                  When Natalia Yavorska and her husband first considered buying a holiday retreat somewhere warmer than their Ukrainian homeland, they were drawn to the Canary Islands.

                  A vacation to the Spanish archipelago in 2012 left them eyeing land on the southwest coast of the island of Tenerife, and while the initial attractions were the golf courses and ocean views, the deal was sealed by a special extra that came with their purchase.

                  “The fact that we could get a Spanish residence visa from buying real estate was very important, and that made it an easy decision,” said Ms. Yavorska, a 60-year-old former banker from a town near Kiev.

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                    How the Interests of EB-5 Investors and CMBS Lenders Can Sometimes Be at Odds

                    Situations where a property changes hands or defaults may prove tricky for situations where an EB-5 project is financed by a CMBS lender.

                    A notable characteristic of the real estate capital markets over the last 20 years has been the ability to access non-traditional sources of capital for both debt and equity investment in U.S. commercial real estate. One such source is the EB-5 investment/visa program. Created by Congress in 1990, the EB-5 program creates a fast track for non-U.S. citizens toward a green card in return for capital investment in qualifying U.S. domestic businesses and projects. The EB-5 program has garnered its share of controversy for possible abuses, but can also lower the cost of equity capital for a developer.

                    An often overlooked issue is the interplay of EB-5 financing with the requirements of a CMBS lender, where the developer, EB-5 investor and CMBS lender have objectives that are in conflict, at least initially. In particular, the EB-5 investor may seek decision-making and investment accrual rights not acceptable to CMBS lenders.

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