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Foreign investment in U.S. properties dips

Two years ago, foreign investors went on a shopping spree in the U.S. for trophy office, hotel and other large commercial real estate properties. Since then, the upper end of the market has been a harder sell.

In 2017, for the second consecutive year, the total volume of cross-border investment in U.S. commercial real estate decreased, Real Capital Analytics (RCA) reported.

foreigncomThe overall investment in assets valued at least $2.5 million was estimated at $58.2 billion in 2017, down 23 percent from the 2016 level, RCA data suggests. This has come down from around $91 billion during the peak in 2015.

Cross-border investment has been returning to a “regular churn,” RCA Senior Vice President Jim Costello said during a telephone interview. 

“Actually, deal volume, despite falling for the past two years, it is still elevated,” Costello said. “There are some properties that will trade hands more frequently, but we had an excessively high volume in 2015 because of one-time opportunities.

"Cap rates [and] interest rates were falling. So you had owners who held assets for a long time and they were looking around, and said, ‘Wow, somebody is willing to pay me this much? I will sell it now.’”

There were some exceptions last year. Singapore companies invested $9.6 billion in 133 properties, nearly tripling the investment volume for that island nation over the 2016 level.

The Netherlands, usually a lesser player in U.S. property deals, saw an explosion of activity that made it the fifth largest source of foreign investment capital in 2017. Companies from the Netherlands invested $3.3 billion in 53 properties, up more than 900 percent in terms of volume over 2016, RCA reported. This was almost entirely driven by APG Group, a pension-fund manager, which invested in 45 properties last year.

Canada was the top source of foreign capital, with nearly $21 billion invested in 611 properties, up 51 percent in terms of volume, according to RCA. There is one caveat to the country-by-country numbers, Costello said. In some of these deals, foreign investors have done joint ventures with U.S. investors or with investors from another county. RCA assigns the full volume amount in a deal to just one country of origin, which can sometimes overestimate or underestimate the actual investment by a foreign country.    

Costello said the key takeaway is that share of U.S. property deals with a foreign investment component has been dropping. In 2017, foreign investors accounted for 11 percent of the total investment volume in commercial real estate last year, which was down from 14 percent in 2016 and 18 percent at the peak in 2015. 

Despite the drop, interest in U.S. properties still runs high across the world, Costello said. 

“The U.S. broadly is still viewed as a great investment location because of the stability issues,” Costello said. “As bad as we feel it is here sometimes, it still is one of the safest, most productive regions in the world. The investors see that and the investors see that in property and long-duration assets.”

Generally, however, foreign investors retreated from the CRE market to a greater degree than domestic buyers.  A predicted drop in Chinese investment came to pass. Last year, in a move to stem capital outflows, Chinese regulators made it harder on its companies to invest in foreign properties valued at over $10 million. Investment in U.S. properties by Chinese companies dropped year over year by 64 percent in 2017, to $6 billion, RCA said.  

Analysts expect foreign investors to continue to fall back somewhat. One issue is the high cost of U.S. commercial real estate. Another is that foreign economies have been doing better.

“The European Union economy overall is looking quite solid — [and] 2017 was a good year,” said George Ratiu, director of quantitative and commercial research for the National Association of Realtors. “In that regard, for investors, there are a lot more targets now for acquisition in other places. In addition, Asian economies remain quite strong. So, for foreign investors, there are opportunities in a lot more places.”   

Despite the pullback, U.S. lenders are competing  aggressively to fund loans for foreign investors in U.S. real estate, said Stephen Frank, president of the Albany-based CMN Funding.

“Investors still want to come here,” Frank said. “I am still seeing that, especially Florida, Texas, New York areas.”

“There are a lot of programs out there for this particular investor,” Frank continued. “There is a lot of competition for the bridge market, that short-term buyout, 24 to 36 months, just to get the acquisition. I don’t feel there is as much competition for the long-term, for permanent financing. So, I would say, heavy competition on shorter-term financing and not so much on long-term financing. ... We have programs for both.”


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