By James Nelson
Even as the overall investment sales market has slowed, some foreign investors have stepped up their game and are taking advantage of this challenging marketplace. In the U.S., foreign investment rose to its highest level in Quarter 1 2023 since 2015, accounting for 18% of the total sales dollar volume, according to Real Capital Analytics (RCA) data. During the past 24 months, 41% of the purchases made by the top 20 foreign investors have come from Canadian buyers. Singapore’s sovereign fund GIC has held the top spot as a foreign buyer in the U.S., marked by deals such as the participation with Oak Street in the acquisition of real estate investment trust Store Capital Corp. in a deal valued at around $14 billion, as reported in MarketWatch. In addition, the Financial Times notes that GIC, which is estimated to have assets that exceed $700 billion, has alluded to an interest in increasing exposure to US-focused funds. Other foreign buyers have come from Bahrain, Japan, Spain, Norway, France, Israel, Germany, and Australia.
Among U.S. cities, New York has returned to the #1 spot for preferred investment, according to the AFIRE International Investor Survey: Q1 Pulse Report. Foreign investment in New York City more than doubled in the first quarter of 2023 compared to 2022, increasing from 5% to 12% and accounting for $1,881,857,688 in sales dollar volume.
Buyers from Korea have been the most active foreign investors in New York City during the past 24 months, accounting for 31% of the purchases made by the top 20 foreign investors. This is followed by foreign buyers from Germany, Japan, and Canada. Historically, Canada has been one of the top foreign investors in the city, and Brookfield AM has held the leading spot during the past 24 months among foreign buyers, with acquisitions totaling $1,076,650,000. While China has constituted nearly a third of the foreign investment in New York City in the past, recently the country has remained quiet. China’s level of investment has accounted for a mere 2% of the purchases made by the top 20 foreign investors in New York City during the last two years.
The recent patterns reflect what has occurred during previous down cycles for commercial real estate. Oftentimes local investors sit on the sidelines as the market fluctuates, preferring to wait for conditions to improve before they move forward on an opportunity. At these times, foreign investors frequently see the chance to make purchases. They may not face the same challenges related to speed and tighter competition that typically appear during upswings.
The Appeal of Low MaintenanceForeign investors must abide by certain guidelines, including the provisions of the Foreign Investment in Real Property Tax Act (FIRPTA). The law requires non-U.S. persons to follow tax and interest rules as they buy and sell real estate. When entering a U.S. market, foreign investors often participate as limited partners.
As they search for acquisitions, non-U.S. investors usually opt for properties that are more passive in nature and don’t require heavy hands-on management styles. Investments in regulated multi-family housing may not be on the top of their agenda. If they do pursue this route, they may look for a strong local operating partner to oversee the related daily business needs. Instead, foreign investors frequently choose establishments with fewer tenants such as retail properties.
The Ability to Acquire All EquityOne of the biggest advantages for many foreign investors relates to the capital they can bring to the table. Many are not reliant on the debt markets to finance their purchases. Investors from countries outside of the U.S. might come into a deal with all cash. This was the case in the recent capitalization of 245 Park Avenue, in which Japan-based Mori Trust Co. took a 49.9% interest of the office space. The property had a gross asset valuation of $2.0 billion. In the deal, Mori brought all equity to the table, and agreed to assume $500 million of the debt.
A Long-Term OutlookMany see that there is upside potential for those who can enter a market now and wait for it to recover. This is especially true in places that have historically performed well, including New York City. Simon and David Reuben, affectionately known as the Reuben Brothers out of the UK, continue to invest in the metro area, closing on seven New York City investments since 2020, as reported by Bloomberg. They recently acquired approximately 11,000 square feet of retail space at 747 Madison Avenue. Through the deal they joined Jeff Sutton’s Wharton Properties as owners of the flagship shops of Versace and Alexander McQueen. In addition, the William Pears Group, another British real estate investor, has been investing in New York City during the last years. Run by Mark Pears with younger brothers Trevor and David, the billionaire group has bought unsold sponsor units in bulk.
The uptick in foreign investments emphasizes the need for sellers to work with an investment sales broker who is able to implement a broad marketing campaign. The days of making a half-dozen or dozen phone calls to the most logical local prospects are in the past. Owners will want to connect with professionals who can reach far and wide, and leverage resources that go beyond social media and digital marketing. It’s also in a seller’s interest to cooperate with the brokerage community, as foreign investors are frequently represented by residential brokers. Non-U.S. buyers may start in a market by purchasing a residential apartment, and later consider a commercial investment.
Clearly there are opportunities in today’s market for those who have the resources and are ready to act. Foreign investors taking advantage of the market dip may be able to reap the rewards later. A long-term approach could yield higher returns as the market recovers and eventually regains momentum.
Real Estate Weekly Article.