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CRE Finance World, Winter 2014

Of all European nations, Germany has the strongest presence in U.S. real estate (followed by the British). Larger German organizations have established locally operated investment platforms such as SEB, Jamestown, and Paramount. German investors seem to prefer core assets, and their stable cash flow, over opportunistic or development projects. They understand the role of value creation and the effect of back-end appreciation on a transaction’s returns. Holding a long-term perspective toward their investments, they are typically more willing than other investors to consider secondary markets. Many larger European investors use subsidiaries as effective channels for U.S. investment. As in the U.S., Europe’s insurance companies are a continuing source of both real estate equity and debt. Several insurers have expanded their presence in the US and will consider a variety of asset types so long as they are the main investor. Because of Continental Europe’s boundaries and general lack of market growth, European investors are especially proactive in their global real estate investment strategies. Because of its stable markets, developed capital markets, and established (and enforced) legal system, the U.S. has emerged as a safe harbor for European capital—especially in light of the present state of Europe’s real estate cycle. Since European real estate investments typically focus on long-term stability and preservation of principal, as opposed to opportunistic ventures, they show a preference for core markets. The U.S. real estate market offers enough liquidity for European property owners to sell assets and repatriate capital to the Continent. In many instances, large investor groups, public and private, have invested heavily in U.S. real estate during periods in which the strength of the euro exceeded that of the dollar. Later, when the need arose, these banks and insurance companies could sell these assets at a profit and replenish their home capital reserves. Middle East A majority of the capital in the Middle East comes from its profits in the oil industry. The region is unique in that a majority of the capital invested in real estate is controlled by families and several major sovereign funds. In the Middle East, it has long been recognized that the oil commodities in the area will eventually be depleted. In preparation for that time, Middle Eastern investors are searching for long-term, sustainable businesses in which to invest their capital. Of all asset classes, they are most comfortable with “brick and mortar” investments as well as “cash flow yielding” portfolios. A distinguishing characteristic of investors from this region is the significant affect of their faith on investment decisions. A majority of CRE Finance World Winter 2014 74 investors in this region are Muslim and adhere to Islamic principles in their dealings. As such, many of these investors deal exclusively with organizations, structures, and opportunities that are compliant with Shari’a law. The first principal is to avoid paying or charging interest at all costs. The second requires investors to avoid ventures that are unethical, either because of their industry or financing structure. Shari’a law does not allow investment in business activities that include arms, alcohol, tobacco, pork, finance and insurance, gambling, or biotechnology engaged in genetic experimentations. Shari’a-compliant financial structures may not have a debt-to-assets ratio over 30%, interest income greater than 5% of gross revenue, and accounts receivable and cash comprising more than 50% of total assets. Muslims represent a quarter of the world’s population, yet only 1% of investment structures are Shari’a compliant, according to a McKinsey study. Still, there are numerous Shari’a-compliant funds organized by Islamic investors, international investment banks, and private American investment managers. Most Islamic investors prefer to invest in structures that are officially recognized as Shari’a compliant or invest in consolidated platforms which they believe represent their interests and respect their beliefs. In the United States, real estate investment typically requires great amounts of leverage. Because Shari’a law restricts investors to low-leverage assets, Middle Eastern investors tend to prefer asset classes such as multifamily and core office properties. Unlike investors from other regions, they do not limit themselves to any particular markets (“Mapping Global Capital Markets.” McKinsey and Company, 2009). Investors from this region consist of sovereign wealth funds and high net worth individuals. Institutional organization and fiduciary concerns are minimal. A distinguishing characteristic of these particular investors is that they have committed large sums of capital to establishing investment platforms, understanding the long-term value of consolidated asset management. Historically, investor groups such as Investcorp and Arcapita have taken the lead in the U.S. by establishing significant, well-respected platforms. Now, other firms are establishing management platforms with intentions of building scalable and influential organizations. Middle Eastern investment capital may be structured differently to avoid FIRPTA restrictions. Often, a company or subsidiary in the U.S. will be established. The Middle Eastern “parent” company will then lend it money. This “loan” is then invested in real estate. The Foreign Capital Marriage: Prenuptial Considerations


CRE Finance World, Winter 2014
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