The Foreign Capital Marriage: Prenuptial Considerations

CRE Finance World, Winter 2014

The Foreign Capital Marriage: Prenuptial Considerations A publication of Winter issue 2014 sponsored by CRE Finance World Winter 2014 73 nternational investors have long regarded the US as the leading destination for investment due to our stability, transparency, and consistent capital appreciation. Appetite for investment in US debt and equity has increased year after year as waves of capital make its presence on our shore. In annual surveys conducted by AFIRE (Association of Foreign Investors in Real Estate) and the University of Wisconsin, respondents identified the US as their favorite choice among international real estate markets year after year. Chart 1 The U.S. is a vast and complex market. For some foreign investors, its magnitude and diversity of markets can be intimidating. The United States offers a large and diverse set of opportunities, yet foreign capital typically arrives with their own perspective and bias. In an increasingly global world, why do foreign investors prefer certain markets? How do their own cultures and financial systems influence these preferences? Why do some investors prefer long-term appreciation while others seek current yield? To this end, it is essential to understand potential investors’ backgrounds as explored in the following discussion. Europe For the past several years, Europe has produced ominous headlines and recurring questions: Will Greece default? Will Germany support continued bailouts? Will the economic entity known as the European Union even survive? Though Germany continues in its role as the region’s economic driver, the British pound remains a safe haven for capital, and other European nations maintain their liquidity, member nations like Greece become increasingly worrisome. Investment opportunities in Europe are similar to those in the United States. Europe’s markets are well developed and, under normal circumstances, its capital markets supportive of transactions. Moreover, European investors examine opportunities within an institutional framework and conduct due diligence in a manner similar to that of U.S. investors. In Real Capital Analytics’ country-by-country summary of foreign capital invested in the U.S., European investors demonstrated the greatest commitment to U.S. real estate from foreign investors in both amount and duration of investment. The primary reasons are geographical proximity and historical ties between Europeans and Americans. Not just the history as a former British colony but our growth occurred with extensive immigration from European countries at the turn of the Twentieth Century. Europeans are more familiar with U.S. cities and regions. Because many European banks have offices in the U.S., relationships are established relationships with U.S. capital markets and their processes. Europeans have an extremely “institutional” approach to their organization structures and investment strategies as extensive pools of potential investment capital is held by insurance companies, pension funds, and family offices as well. Of all foreign investors, Europeans have the closest perspective to how they examine risk/return when they underwrite real estate debt and equity. Similar metrics and due diligence procedures create a fairly consistent perspective among both Europeans and Americans toward leads, valuations, and capital decisions. European investors expect a high degree of transparency regarding the performance of assets. In exchange for this, they may be comfortable paying asset management and performance fees. In general, European investors emphasize risk-adjusted returns. They evaluate investments on a total return basis (income and appreciation), not simply their current income. European investors tend to hold clear risk/return parameters and similar perspective on the valuation and calculation of return. They have recognized the recent run-up in pricing in core real estate markets as an opportunity to sell. Of all international investors, Europeans display the most willingness to examine opportunities in U.S. secondary markets and even their outlying suburbs. Many investors are comfortable accepting higher cap rates in such markets as Philadelphia, Dallas, and Seattle rather than low-cap rate, highcompetition areas like New York City’s office market. They are able to consider a ten-year horizon and recognize assets that may appreciate over time, eventually outpacing the rate of inflation. I Robin Barone


CRE Finance World, Winter 2014
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