Commercial real estate is attracting the attention –and capital- of investors from all over the globe. Interest in the U.S. commercial market is driving up prices in major cities and creating intense competition, as well as capital for new development, something that is not necessarily forthcoming from U.S. banks. Money is coming from high net worth individuals and pension funds, and perhaps most significantly from Sovereign Wealth Funds.
These government treasury funds manage a staggering amount of capital globally. Their value is over $6 trillion, and 60% of those funds are invested in real estate. Of the $8.7 billion that Asian investors spent on commercial real estate in the first quarter of last year, the U.S. market took in 40%.
Many of these large investors favor deals involving multiple properties, since the discount that comes with buying additional properties offers an opportunity for greater returns. Foreign investors have participated in major NYC development projects over the last few years, including the massive tower at 55 Hudson Yards, primarily funded by Japanese firm Mitsui Fudosan.
With about a quarter of all commercial transactions in NYC involving foreign capital, we might well ask: what is behind this intense international participation in our CRE market? Various factors draw foreign investors to U.S. commercial real estate, but chief among them are these three.
In comparison to other world economies, the U.S. market is strong and reliable. With short-term interest rates falling to below zero in Japan and severe inflation still plaguing many countries, our market is seen as a safe place to park capital, even if returns are not stellar. Foreign investors are looking for low-risk opportunities.
Changes to U.S. investment regulations over the last year have helped to sweeten the deal for international investors. FIRPTA, originally passed in 1980, was modified at the end of 2015. The existing law put a considerable tax burden on the gains of foreign investors from U.S. real estate. The changes increase the size of the stake a foreign investor can take in a U.S. Real Estate Investment Trust (REIT), and also exempt U.S. real-property interests held by foreign pension funds from FIRPTA altogether.
A strong commercial market, combined with these favorable regulatory adjustments, makes U.S. commercial properties very attractive to international investors.
U.S. transactions can involve multiple properties and large, mixed-use development schemes. U.S. developers hungry for capital have a ready audience on the international market, and foreign investors are fueling the continued growth in new commercial projects in major U.S. cities. A piece from Price Waterhouse put it this way:
With banks on the sidelines, international capital is helping to produce as well as extend a balanced recovery, providing domestic investors with new sources of partnership, capital, and confidence.
Foreign investors are all about minimizing risk, and U.S. properties offer steady yields that make sense for them in the current climate. At the same time, those investors are extending our economic recovery and creating new opportunities throughout the CRE market.
What’s next for the international investment market? Keep watching our blog for more updates and trends in this quickly-changing environment.