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CRE Finance World, Winter 2014

A publication of Winter issue 2014 sponsored by CRE Finance World Winter 2014 75 Although Middle Eastern capital appears institutionally organized, it does not face public reporting requirements. Without greater transparency, the pool of capital available is unknown. One thing, though, remains certain: as investors of Islamic background increase in wealth, Islamic investment structures will become more prevalent in U.S. markets. Asia Pacific Although American culture is sprinkled throughout Asian markets via Starbucks, McDonalds, and other brands, the distance between understanding cultural nuances is much greater than the physical distance as compared to different regions. A cultural faux pas can terminate a potentially fruitful business partnership before it has even begun. Americans are more transparent and upfront while Asians prefer to develop relationships over time. Asian banks have a minimal footprint in the U.S., as well, allowing very little exposure to U.S. opportunities from the start. Among international investors, Asian investors show a unique appreciation for industrial and logistics-oriented properties. They like the high yield and triple net structure many of these investments provide. However, their choice of investment requires the “sex appeal” of a primary market, such as San Francisco, New York, Washington D.C., Los Angeles, or Chicago. They also seem to prefer holding assets directly rather than indirectly through shares in a company or fund. As a whole, Asian investors are “addicted to yield” (Timothy Gan, DBS Bank). Many prefer REIT structures for their high returns and liquidity. They also tend to value current income over long term appreciation, and often choose to invest in high-profile and welllocated assets. Since the financial downturn of 2008, some Asian investors have viewed the US as an opportunity for “distressed,” potentially profitable assets. However, there is a great divide between such investors’ objectives and the actual real estate market. Often, Asian investors have proven less successful in the U.S. real estate market, primarily because their return requirements are incompatible with the dynamics of U.S. real estate. Among Asian investors there is a key difference in understanding how risk and return are underwritten in U.S. markets. In this respect, there is a clear distinction between the investment communities in Australia, Japan, and South Korea versus those of emerging Asian economies such as China, India, and Indonesia. Australian investors represent a strong, consistent source of investor capital due to the nation’s Superannuation laws. “Superannuation” refers to Australia’s mandatory public retirement scheme, which requires citizens to contribute to their retirement. Australia’s retirement system is unique in its use of private, compulsory contributions. Currently, employers are required to pay 9% of an employee’s salary and wages into a superannuation fund. Between 2013 and 2020, this minimum contribution requirement will increase to 12%. Strict government rules prevent access until individuals are older than 55. These funds may be organized in a variety of ways: employer-run, retail trusts, self-managed funds for small groups, and public sector employees’ funds. Consolidated, these funds represent over $1.4 trillion of potential investment capital (Saminather, Nichola. “Australia’s $1.4 Trillion Pension Funds Chase Property Assets.” Bloomberg. May 14, 2012.) According to the Australian Prudential Regulatory Authority, these pension funds have invested an annual average of 7% of their capital in direct real estate and 3% in REITs. Their real estate focus is core properties with sustainable income. With a limited supply of investment property domestically, the majority of this capital goes abroad. Of these funds’ investments, up to 20% is allocated for North American opportunities, including a minimum allocation for real estate. Korean investors have proven experience in their investment in foreign real estate, holding realistic expectations of return, especially when considering core assets. Korean investors have also shown proficiency in valuing assets, winning bids on acquisitions, and creating value in their investments. Many Korean investors have shown a willingness to hold real estate assets for 7 to 10 years and prefer lower leverage than others, usually 50%–60%. Their sources of capital include insurance companies, corporate pension funds, and sovereign entities. Because many of their technology companies have established successful U.S. subsidiaries, South Korea holds an established business and investment relationship with the U.S. For many years, they have observed the ways investments are made in the U.S. and have become familiar with the nation’s different regions, markets, and asset classes. Because of this experience, many South Korean investors have displayed quicker decision-making when presented with real estate opportunities that meet their requirements. Additionally, many Korean investors are educated in the West, or hire U.S. residents to help them navigate the local real estate market. Initially, they have shown a preference for direct investments, core assets, and primary U.S. markets. The Foreign Capital Marriage: Prenuptial Considerations


CRE Finance World, Winter 2014
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