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Foreign Investment in U.S. Real Estate by Stephen Muller

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Foreign Investment in U.S. Real Estate by Stephen Muller FEATURE — Foreign Investment Foreign Investment in U.S. Real Estate By ontinuing a decades-long trend, the United States The Wharf, the Hoffman Madison Waterfront development remains the premier “safe haven” for foreign invest- in Southwest Washington that has been generating substantial Stephen Cment in real estate. Despite the rising appeal of interest both domestically and abroad. emerging markets in countries such as Brazil, Turkey and Muller China, foreign investors are still turning to the United States With its variety of components and iconic location, The Wharf to acquire real estate properties, particularly in gateway cities is a prime example for the type of multi-family assets on the like San Francisco, New York, Los Angeles, Washington, radars of foreign investors. It is a $2 billion world-class, mixed- Boston and Miami. use waterfront project located on the historic Washington Channel. Adjacent to the National Mall, The Wharf stretches Forecasting with any specificity the type of property foreign across 27 acres of land and 24 acres of water from the Munici- investors will favor in 2013 — retail, multi-family, indus- pal Fish Market to Fort McNair. When complete, it will feature trial, hotel or office — is more difficult. With the entry of approximately 3 million square feet of new residential, office, the Norwegian fund NORGES (the world’s largest sovereign hotel, retail, cultural and public uses including waterfront wealth fund) into the U.S. market, office property remains promenades, parks, piers and docks. Hoffman Madison Water- a top contender amongst foreign investors, with retail close front exclusively retained The Greenwich Group International behind. NORGES made its first U.S. purchase this year, in May of 2012 to raise capital for this brilliant property. paying approximately $600 million for a 49.9 percent stake in a portfolio of assets in New York, Washington and Boston. Not surprisingly, Canada is currently leading the way with Managers of the fund noted that they are considering further foreign investments in U.S. real estate. Having survived the investments in retail centers — investments they would make economic downturn with less damage than was experienced in through real estate investment trusts (REITs). the states or abroad, and with restricted real estate opportuni- ties at home, our neighbors to the north have been increas- While interest in office and retail are expected to grow, multi- ingly looking south of the border for real estate investment family has been the number one magnet for foreign investors in opportunities. Since 2010, Canadian pension funds have U.S. real estate. Surveys by the Association of Foreign Investors funneled over $9 billion into commercial real estate and are in Real Estate (AFIRE) have listed multi-family as the top tar- on track to lead foreign investment again in 2013. As with get for foreign funds for the last three years. Such interest bodes many of their foreign investor counterparts, the Canadians well for projects with large multi-family components, such as have been heavily focused on coastal markets such as Seattle, 28 PLACES-MAGAZINE.COM Foreign Investment — FEATURE Foreign Net Real Estate Investments in the United States by Buyer Region In addition to Canada and Europe, it would be re- miss not to mention the rise of Chinese investment Note: Net capital flows from second-quarter in the U.S. So far Chinese real estate investments $7,000 2011 through second-quarter 2012. have been mostly limited to luxury vacation homes All dollars in millions. but real estate companies and banks are increasingly positioning themselves to promote commercial real $5,000 estate projects to the Chinese. As the Yuan rises, and as wealthy Chinese find themselves limited in top grade investment properties at home, rising levels of interest among Chinese investors is expected for all $3,000 types of real estate assets in the U.S. While foreign investment in U.S. real estate has been growing steadily over the last 12 quarters, interna- $1,000 tional investors are still experiencing barriers to entry in the market. Primary among them is the For- Australia eign Investment in Real Property Tax Act of 1980 $0 (FIRPTA). The bill, which created significant tax barriers acting as disincentives to cross-border equity –$1,000 Asia Other investment in U.S. real estate, has been the target Millions of dollars Canada of reform efforts in the last two years. Legislation to Germany reform the bill in order to increase foreign invest- Middle East ment activity is pending in both houses of Congress, –$3,000 United Kingdom United and the expectation is strong that some relief will be enacted this year. Advocacy in support of reform has been spearheaded here by the National Association of Real Estate Investment Trusts. As we go to press –$5,000 with this issue of PLACES, reform efforts have been Americas, excluding Canada Americas, excluding strengthened by a speech and proposal presented by President Obama on March 29, 2013, that would “put foreign pension funds on an approximately –$7,000 equal footing: exempting their gains from the Europe, excluding the U.K. and Germany the U.K. excluding Europe, disposition of U.S. real property interests, including infrastructure and real estate assets from U.S. tax under FIRPTA.” –$9,000 (Source: Real Capital Analytics) Chart courtesy of ULI With the United States economy continuing to improve, the U.S. can expect to see continued inter- est in international investment in real estate in 2013. As offshore pension funds and sovereign wealth Los Angeles, Southern California, and Florida, with foreign investor in U.S. real estate. Office buildings funds continue to seek safe havens for their invest- preferences for multifamily, hotel and retail. have been predominantly preferred by European ing activity, opportunities in the U.S. continue to investors, followed by retail and to a lesser degree beckon. Top quality mixed use developments such as According to CoSTAR Group, some of the largest multi-family assets. Different regions, however, The Wharf, as well as solidly leased office and retail recent Canadian deals in the U.S. include Toronto- appear to have varied appetites for asset classes. UK centers, are sure to draw attention from savvy global based Brookfield Asset Management’s acquisition of investments in the U.S. remain primarily focused on investors. This also is great news for companies like 19 apartment portfolios with nearly 5,000 units from office, while Germany is spread between office and Madison Marquette, with its expanding portfolio of Babcock & Brown Residential, a firm with multi- multi-family investments, with a slowly emerging top tier, high end retail properties, office and mixed family holdings in North Carolina, South Carolina interest in retail and hotel. Asia is the second largest use projects, in some of the most prized markets in and Virginia. The transaction brought $414 million investor in U.S. real estate (just ahead of Europe), the United States. G into the U.S. The Vancouver-based American Hotel with the Middle East positioned as the fourth larg- Income Properties REIT also recently closed on a est investor group. Both Asian and Middle Eastern Stephen Muller is Managing Director at major transaction acquiring Lodging Enterprises’ investment groups are equally divided in their asset Greenwich Group International and is located U.S. portfolio of 32 hotel properties, with more than preferences with increasing interest to invest in in New York City. 2,500 rooms in 19 states. The deal brought close to all five property types. Latin American investors $130 million into the U.S. interested in U.S. real estate are emerging as possible significant players, however their interest has been In a recent study conducted by the Urban Land largely confined to the South Florida or New York Institute, Europe as a whole stood as the third largest multi-family markets. PLACES MAGAZINE 29.
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