Foreign Investors Return
Foreign Investors Return
The good news is that international buyers are bullish on U.S. commercial real estate. "Many of our members (primarily banks, pension funds, and other institutional investors) are heartened by the price corrections they're beginning to see in the U.S. market and expect to increase their debt and equity investments in late 2009 and 2010," says James Fetgatter, chief executive of the Association of Foreign Investors in Real Estate in Washington, D.C.
"The yield compression in the U.S. market between 2006 and 2008 wasn't an attractive proposition for global investors, but as U.S. property prices recalibrate, they are becoming much more active," says Joel Coren, senior director of CBRE Global Property Advisors, also in Washington.
"We've definitely seen an increase in interest in the last six months, but there's still not a lot of buying. International investors are waiting to see what's going to happen," says Andre J. van Rensburg, ALC, CIPS®, president of Prudential Commercial Real Estate in Jacksonville, Fla. Concerns about the fallout from CMBS debt that can't find refinancing is also keeping some overseas investors on the sidelines, says Fetgatter.
Like their U.S. counterparts, many international buyers haven't been ready to commit capital to commercial real estate until they're convinced the pricing has bottomed out. "Everyone is very cautious about investing too early in the cycle; most of my institutional and high net worth clients are planning to launch their investing in 2010," says Scott Sweeney, CCIM, CPM®, executive vice president of Falcon Real Estate Investment Co. in San Diego.
One group that has already been "very active" in U.S. markets is German open-ended funds, says Coren. He points to a fall purchase of a trophy D.C. office building by Deka Immobilien GmbH as an indicator of transactions to come. German funds are probably the most liquid global capital source today, which gives them the opportunity to come into a market early "once the pricing paradigm shifts."
Other international buyers in the United States are from China (both from the mainland and Taiwan), the United Arab Emirates, and Israel, all of whom have seen their home economies remain relatively strong during the recent worldwide downturn. The Asia-Pacific region is the most interesting area to watch for new buyer sources, suggests Coren. There's a lot of wealth coming out of countries like Singapore and South Korea, as well as China.
It's also important to note that high net worth investors are often "independent of the economic situation in their respective countries," and will continue to invest despite the economic downturn, says Michaela Driver, CCIM, director of commercial real estate at RE/MAX Properties North in Chattanooga, Tenn.
What will they buy?
International buyers may be coming back, but that doesn't mean they're going to snap up those partially leased strip malls in the heartland any time soon. Just as with U.S. investors, volatile markets have prompted an international flight to quality—Class A, CBD offices with stable leases, medical and biotech sites, very select luxury retail like Rodeo Drive, and triple-net retail properties. The mid-2009 AFIRE survey found that its members favored office, which replaced multifamily as the preferred investment. "In this uncertain economic environment, today's global investors are looking for a much more defensive play," says Coren.
"It's about preserving the capital first, and then about returns," says Sweeney. He notes that unlike a local real estate investor, even sophisticated international buyers usually lack the market niche expertise for truly opportunistic investing.
"For international investors, it's all about the property's quality and its income stream," agrees van Rensburg. Cash flow may be particularly important to smaller United States–focused investors, who often rely on income streams from property as a source of funds to send their children to U.S. universities or to finance vacations in the United States.
For institutional investors, market uncertainty has also meant a move away from secondary markets to safer and more familiar coastal cities. In the AFIRE survey, members showed a marked preference for Washington, D.C., followed by New York and San Francisco. "Only when the commercial real estate fundamentals have recovered will most foreign buyers consider more value-added investments in secondary markets, says Coren.
Yet, not all foreign investors are quite so conservative, says Carlos Fuentes, CCIM, CIPS®, of VET Realty in Lutz, Fla. Many of the South American and Central American clients he works with are looking at distressed assets. "They're more accustomed to risk and will buy more troubled properties if they see they can get a lower price." Some Middle Eastern buyers are also more willing to make such opportunistic investments, says Sweeney.
International buyers who are comfortable with a particular property type or buying strategy are also likely to stick with that play, says Driver.
Attractions beyond cash flow
But while falling prices are making U.S. real estate attractive to international buyers once again, that isn't the only factor. Investors from countries with volatile political climates are motivated by the safe and stable environment to "park their money." That's particularly important for investors from countries such as Venezuela that are tightening the amount of currency citizens can take out of the country, says Fuentes, who was the 2009 NAR Regional Coordinator for North and Central America and the Caribbean. Investors also recognize the need to diversify beyond their home regions, says Sweeney.
Another factor getting a lot of attention from commercial practitioners and investors are the E-2 and E-5 treaty investor programs. Under these long-established initiatives, citizens of many foreign countries with which the U.S. has treaties are eligible for fast-track approvals of permanent resident visas when they invest a substantial amount in a U.S. business. Real estate is an acceptable investment option, but it can't be a passive investment.
Under the E-2 program, investors must take an active role in managing the business, although they don't have to work in or live near the business. "It's a great opportunity if you do business brokerage as well as real estate. I've helped international clients buy businesses and properties for fast-food restaurants, tanning salons, and beauty parlors," says Fuentes.
The EB-5 visa program, which usually requires an investment of $1 million and the creation of at least 10 new permanent jobs, can lend itself to securitized pooled investments that incorporate real estate and operating businesses, says Rick Hayes, CEO, Waveland Ventures in Austin, Texas. His firm has launched just such a program in cooperation with a designated regional investment center in Colorado. Currently on the drawing board is the Colorado Science + Technology Park at Fitzsimons, a 170-acre campus near Denver that will include life science, education, medical, and research facilities. The Colorado Regional Center will provide both debt and equity capital toward the estimated $4 billion development costs to construct properties that range from hotels to medical office buildings.
Not all U.S. laws make American investment more attractive to international buyers, however. The Foreign Investment in Real Property Tax Act of 1980, for one, is getting some pushback from foreign investors, mostly because of their reluctance to complete all the necessary tax returns and other paperwork, says Jeff Rubin, an international tax partner at Deloitte Tax. Although FIRPTA is hardly new, the complexities of the act seem to trouble more investors than it did a decade ago, says Rubin. "It's less about the withholding of funds to cover future capital gains required under the act and more about confusion over the requirements," he says. He also notes that the expansion of technology that makes financial information more accessible and storable worries some overseas investors. Investments in public REITs can offer overseas investors tax savings in some cases. Larger and more sophisticated investors may seek to set up and invest in a private REIT, notes Rubin, but it does put the United States at something of a competitive disadvantage compared to other locations such as Europe, where tax reporting requirements are less onerous.
Other commercial practitioners, like Cynthia Joachim, CBR, CIPS®, of Century 21-Harry J. Joachim Inc., REALTOR®, in Biloxi, Miss., believe that FIRPTA closes a tax loophole and ensures that foreign buyers are at parity with U.S. citizens when they sell their real estate. The argument is that's its not fair to tax one and not the other, she says. (At present, NAR has no position on altering FIRPTA, although it may investigate options at a later date.)
Be Ready for the Recovery
Yet, even with the hurdles of tax policy, foreign investors are unlikely to turn their backs on the potential returns U.S. commercial real estate market currently offers. "Once the pricing paradigm shifts, you're going to see a flood of foreign capital," says Coren.
"In ten years, we're going to look back and remember 2010 as the golden year for real estate investment, a time when fortunes were made," says Driver. Be sure that you and your international clients get a share of that gold.
How to Get the Business
Convinced that the coming influx of foreign capital is too good an opportunity to miss? Then the next question becomes: "What does it take to get and keep international business?"
More than anything else, it takes patience, says Frank Mann, a senior director based in Cushman & Wakefield's Atlanta office. "International buyers often have longer term holding periods, which can range from 15 to 30 years, so they may have a three-year time line to build a relationship with a real estate company and negotiate a purchase." International buyers make up for the long lead time with tremendous loyalty and trust, provided you do a good job for them, says Fuentes.
Another challenge you might not fully consider is time zone differences, says Mann. "You work all day, eat dinner, exercise, and then at 10 p.m., you get on a conference call." One way to make those conference calls easier and lessen language barriers is to provide a translated outline of key points before the conversation begins.
Making initial contacts with international clients is often difficult, since most business comes through referrals, say experts. Talk to your local development authority about international groups that already invest in your area and then cultivate them through local social clubs and cultural organizations, suggests Carlos Fuentes, CCIM, CIPS®, of VET Realty in Lutz, Fla. Advertising in financial publications in your target client's native language is another way to reach new prospects, says Michaela Driver, CCIM, director of commercial real estate at RE/MAX Properties North in Chattanooga, Tenn. A native German speaker herself, she works with clients in Germany, Austria, and Switzerland, but also serves clients from the United Arab Emirates.
Sometimes finding international buyers is all about being at the right place at the right time. Adrian Arriaga, CCIM, CIPS®, with AAA Real Estate & Investments in McAllen, Texas, who works with Mexican, German, and Korean clients, met his first Asian investors on the golf course. Conducting presentations overseas and attending foreign conferences such as FIABCI are also ways to make new contacts, he says.
Investment groups remain a great source of smaller international buyers, suggests Cynthia Joachim, CBR, CIPS®, of Century 21-Harry J. Joachim Inc., REALTOR®, in Biloxi, Miss. She notes, however, that the worldwide economic downturn has cut interest among the German and Japanese investors who once bought multifamily properties in her area. Arriaga had hoped to work with a Vietnamese investor group earlier this year, but swine flu fears cancelled the trip.
Overcoming language and cultural barriers are perennial concerns for those working in the international area. Networking opportunities abound through the NAR Global Business and Alliances group, Certified International Property Specialist designees, local chambers of commerce, and economic development offices at local consulates. An international platform—whether a franchise, international company, or association—also makes contacts and communication easier.
Also be prepared to have a cadre of professionals on call who can answer questions on titles, contracts, and taxes, which may be much different than in an investor's home country, says Joachim. Things you take for granted, such as the fact that the owner pays for tenant improvements, aren't standard procedures in many countries, says Mann.
Once you have a client and begin to show them properties, don't hesitate to bring in local officials and business leaders to support your case, says Mann. For a recent solicitation to an international investor in a major public-private partnership, Mann pulled together a resource group that included the director of the Woodruff Arts Center and the general manager of Hartsfield Airport. "Many overseas investors will put more value on meeting even a minor local official than U.S. buyers would," he says.
In the last analysis, working with international buyers is not too different than working with any other investors. They want a good price, a good return, and a commercial broker who knows and can educate them about a specific market. In the end, "global real estate is still a local business," says Joachim.