U.S. CMBS — Five Compelling Attributes for Foreign Investors he U.S. market remains the top destination for foreign real estate investment, according to a recent survey published by Jones Lang LaSalle which noted $39 billion of foreign investment in 2013, representing a 40% increase over 2012. Capital flows in 2014 surpassed 2013 levels and investment activity continues to increase. According to the Association of Foreign Investors in Real Estate (AFIRE), a recent survey indicated that 81% of respondents, “intend to increase their portfolio of assets in the U.S. as it is perceived to provide a stable environment in which to invest and is the best market for capital appreciation.” While sales of iconic U.S. properties such as The Waldorf Astoria for nearly $2 billion to Anbang Insurance Group of China or a minority interest in The General Motors Building to a venture comprised of the Chinese developer Zhang Xin and Brasil’s Safra banking empire for an imputed value of over $3 billion are making headlines, foreign capital is also investing across the capital structure, not just in the equity, but in the debt. CRE Finance World Winter 2015 22 While sovereign funds from countries such as Singapore, China and Norway are well known investors, many newer entrants are making significant inroads into the U.S. real estate market, or have announced plans to do so, including investors from South Korea, Malaysia and the Middle East, among others. These institutions are fluent in the U.S. market, are comfortable with the economic recovery and continue to see the United States as a large, liquid and stable “safe haven” for investing. As large scale “trophy” assets become more difficult to source and as property prices continue to climb, particularly against a backdrop of record low interest rates across the globe, foreign investors are increasingly looking to the debt markets as a means of fulfilling their U.S. real estate allocations. This paper examines five primary attributes that make U.S. commercial real estate debt (CRE Debt), and CMBS in particular, a compelling investment for foreign investors, including: 1) favorable tax treatment, 2) increased visibility/ exposure to the U.S. real estate market, 3) the ability to precisely pin-point risk and reward (from AAA to unrated), 4) liquidity and confidentiality, and 5) current income. With global interest rates near zero, U.S. CRE Debt provides investors with a liquid, discreet and current paying instrument secured by hard assets in a stable and growing economy. Background As illustrated below, interest rates are at historically low levels on a global basis. Low interest rates, particularly in Asia and Europe have led to increased allocations by sovereigns to U.S. real estate as a greater “total return” investment and as a portfolio diversifier. Further, many investors, including those from China, Norway and Korea who have historically not been as active in the U.S. as other sovereigns, have substantially increased their investment activity in the U.S. in order to fulfill their portfolio allocations. However, as larger equity investments, from hotels to office buildings, have become increasingly challenging to source, and increasingly expensive, seasoned and relatively newer entrants alike have uncovered real estate debt as a compelling alternative, or as a complementary asset class, to their equity investment strategies that provides diversity, liquidity and current income. T Ed Shugrue, III CEO Talmage, LLC The General Motors Building — NY, NY The Waldorf Astoria — NY, NY “Foreign investors are increasingly looking to the debt markets as a means of fulfilling their U.S. real estate allocations.”
CREFW-Winter Edition
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