Safe Landing for Foreign Capital

Foreign flight capital favors U.S. multi-housing investments.

For multi-housing entrepreneurs looking to diversify their sources of capital, foreign capital could provide another avenue to tap into. Foreign investors favorably view investments in United States real estate, ranking the country number one for providing secure and stable real estate investments as well as potential for capital appreciation, according to the Association of Foreign Investors in Real Estate (AFIRE) 2015 survey. Multifamily continues to rank high among the various commercial property types.

Brian Ward, president of the Americas, capital markets and investment services, Colliers International, Seattle, said, “They really understand the space. They like the long-term demographic place of housing and, in the United States, the need for multifamily housing, whether it be for rent or for sale. They particularly like those types of investments in markets in the United States that they really get.”

Sources of foreign capital and favored markets

As might be expected, given the country’s proximity and cultural similarities with the United States, Canada heads up the list of foreign multi-housing investors in 2014, based on a
ranking by Real Capital Analytics. Of the total investment of $5.6 billion in 157 properties overall, Canada accounted for $2.8 billion, or half this amount. Switzerland was another major investor at a little over $1 billion. Other prominent investors are Saudi Arabia, Japan, Israel, China, the U.K., Singapore and Germany.

As of mid-year 2015, foreigners invested more than $7 billion in a total of 160 properties, according to RCA. Canada again heads up the list and Mexico ranks second. Switzerland, China, the U.K., Bahrain, Kuwait, Sweden and Israel also are major sources of multifamily capital in 2015.

The markets most favored by the foreigners include New York City’s Manhattan borough, sunbelt cities such as Atlanta, Phoenix, Houston, Dallas, Orlando and Raleigh-Durham, as well as San Jose and Seattle on the West Coast. Suburban Detroit, and its bargain prices, also captured their interest.

The investor types range from sovereign wealth funds and pension funds to banks, life insurance companies and private investors.

Accessing foreign capital

Those looking to tap into this capital should aim to establish a rapport and have people, such as outsourced advisors, advocating on their behalf with the foreigners, rather than just approaching the foreigners when the capital is required.

Ward said, “One of the frustrations I hear from foreign capital investors is that U.S. operators try to fly in for a day and meet people and strike up a discussion around investment. And it’s almost impossible to succeed with that approach.”

Stephen Cowan, a partner with the law firm DLA Piper in San Francisco, also advises being in touch with brokers such as Eastdil, CBRE and Cushman that present deals to foreign investors.

Favorably priced

In addition to providing a way for U.S. multifamily operators and developers to diversify their capital base, foreign capital can also often be accessed at a favorable cost. This comes about as large amounts of foreign capital compete for U.S opportunities. Some investors are motivated to preserve their capital as much as they are by the actual return, which means their return requirements tend to be favorably low. Cowan noted, “The capital from foreign investors is often aggressive, meaning that they are willing to accept either greater risk or lower returns with sometimes lower control.”

Foreign capital could also provide an exit strategy for multifamily operators who have painstakingly built up a large portfolio and would find it tedious to sell the portfolio piecemeal. Jim Costello, a Boston-based senior vice president with Real Capital Analytics, said, “It’s a good exit play for investors that don’t want the tapered exit. The folks that have built up big portfolios, if they are looking for deep-pocketed groups who want to spend $100 million to $1 billion at a time, that’s a source of capital willing to do that.”

Impact of cultural differences and geopolitics

While foreigners’ favorable perception makes it easier for the multi-housing sector to gain access to this capital, multifamily entrepreneurs should not discount the risks.
One important aspect of working with foreign capital is to understand their motivations and be attuned to cultural differences. It could also take a longer time to negotiate a deal, particularly when the foreign investor doesn’t speak English. Cowan advised, “There are a lot of frustrations and difficulties. It is just not a smooth process, particularly for an Asian investor looking to invest. They are just slow and deliberative and they expect the U.S. process to go more quickly even though their investment process goes very slowly.”
There could also be fallout from global geopolitics and economic factors. Ward noted, “If there is a black swan event or an upheaval in China, and you are relying entirely upon a Chinese investor to grow your business and something changes there, then you may have issues.”

Still, for the most part, geopolitical and economic events, such as the current Chinese slowdown and the Greek debt crisis, tend to drive foreign capital towards the United States based on a capital preservation strategy.

Costello said, “Uncertainty creates demand for safe assets of different sorts. With U.S. multi-housing, you know what you’re getting into, you’ve got some stable yield there. So I wouldn’t be surprised if we see money coming in.”