At first blush, 47 buildings in East Harlem might not seem like an obvious choice for a foreign buyer making its first foray into the United States. But that's exactly where Dawnay, Day Group, a London-based real estate investment and services firm with more than $4 billion in assets, established a foothold on American shores earlier this year. The firm forked over $225 million to acquire the 1,137-unit apartment portfolio in the re-emerging area of Manhattan from long-time owner R.E. Group. In doing so, it trumped numerous domestic bidders in the deal. “They outbid the rest of the market on this portfolio by $25 million,” says Alan P. Miller, a senior director at New York brokerage firm Eastern Consolidated, which handled the deal. “It made a really big splash, especially for their first U.S. investment.”
In its announcement of the acquisition, Dawnay, Day said it would establish a broader U.S. portfolio. “The company is currently assessing similar types of U.S. acquisitions that will provide opportunities to create added value,” the firm said. In August, it followed with a $10 million purchase of two more buildings on Manhattan's Upper West Side. “Their appetite has just been huge for buying apartments here in the States,” Miller says.
NUMBER'S UP The numbers speak for themselves. Through the first nine months of 2007, foreign investors poured $2.6 billion into U.S. multifamily deals, eclipsing the record $2 billion in foreign-backed deals made during all of 2006, according to RCA. Volume is also up. While there were 53 foreign deals in all of 2006, 93 such transactions had taken place through September of this year. Yet those deals, which come from all over the globe, including the U.K., Canada, Europe, the Middle East, the Pacific Rim, and Australia, also come with a distinct set of challenges.
SURPASSING THE BUCK Right now, the United States offers a lot to foreign money. The dollar has weakened—it's dropped 9 percent versus the Euro since the beginning of 2007, is at its lowest point against the Canadian dollar in more than 30 years, and is at its weakest against the British pound since 1981. This means foreign investors realize an almost instant return on their money.
“They're getting more for their Euro or their Canadian dollar or their Yen than they were just a couple of years ago,” says Chris Finlay, managing principal at Mission Residential in Vienna, Va., who has seen more foreign investment recently in the Sunbelt markets where he operates. For instance, in May, Montreal-based Northview Realty Group paid Denver-based AIMCO $106 million for an 11-building portfolio totaling 2,381 units in the Carolinas. With the loonie trading on par with the greenback for the first time in 30 years, those kinds of nine-digit deals are more manageable for our Northern neighbors.
Combine the dollar's weakness with the relative economic and political stability of the United States amid global credit and liquidity jitters in financial markets, and you have a perfect storm of foreign cash lapping against America's shores. “Any time there's a glitch or concern in the markets, investors tend to revert to places within their comfort zone. We call that a flight to quality,” says Steve Collins, managing director of the international capital group in the Washington, D.C., office of global real estate investment management firm Jones Lang LaSalle. “As far as how you buy and sell property, there is not a more transparent country than the United States. Right now, you're seeing a lot of Australian, Middle Eastern, and U.K. money looking for a place to buy, and the States seems to be that place.”
Foreign investors aren't just putting their money into the shining cities on the coasts, either. Matt Wanderer, principal at Alterra Capital Group, a privately-held real estate investment firm in Miami, says he's seen stiffer competition from foreign buyers in places like Texas, Georgia, Alabama, and Tennessee. “In areas where I was competing mostly with locals before, now I'm seeing German pension funds getting in,” Wanderer says. “And it's not just on core assets, but on D class multifamily as well.”
CAPITAL CULTURES Indeed, offshore money gets more bang for its buck in America, but that doesn't mean international investors are giving it away. They might have superior bidding power, as Dawnay, Day did in East Harlem, but you'll probably pay as much for equity or debt from foreign financiers as you would with a domestic backer.
“Globally, we're not seeing huge differences in capital prices,” says Bruce Batkin, president of New York-based Terra Capital Partners, which has about $3 billion of Australian, U.S., and Pacific Rim funds under management. “Increasingly, we live in one world, and the cost of capital is increasingly similar from one market to another.” As Collins puts it, “There is no such thing as dumb money. These are smart investors making calculated decisions.”
Still, there are unique characteristics tied to the money that's coming from overseas that depend solely on the culture of its country of origin. For instance, a lot of capital flowing from Australia comes from that country's compulsory superannuation fund—its pension system—which has grown to more than $1 trillion in assets. That money looks for core investments with steady returns. “Because it's a small market over there, there are not a lot of places to put all that money,” Batkin says. “They've looked outward for stable, income-producing deals.”
Investors from the Middle East often want to add value to boost their return. “Money out of the Middle East tends to target value-add returns where they might buy a Class B-type product, and then upgrade it for mid-teen returns,” says Steven Kohn, president of New York-based Cushman & Wakefield Sonnenblick Goldman.
Those investors may also abide by certain Sharia principles, which are based on the teachings of the Koran, such as a prohibition on charging or paying interest.
That means those backers tend toward equity investments instead of debt. In fact, many Sharia principles—such as not supporting businesses that serve alcohol, or making sure money is used for ethically acceptable goods and services—makes the multifamily sector a natural choice. “Residential investments work well in that sense, because you don't have financial tenants such as banks, and you don't have the problems with alcohol sales that you might with retail or hotels,” Kohn says.
Specific tax considerations also come into play. If a foreign investor has less than a controlling stake in a company, he or she doesn't have to pay U.S. capital gains taxes. That means foreign investors like to participate in private REIT deals and joint ventures up to the 49 percent mark—but not beyond it. “Certain foreign investors, such as the Dutch and the Canadians, may seek out that type of ownership structure,” Kohn says.
Wherever these investors hail from, though, one fact is clear—they're here, and they like multifamily. “I've been doing this since 1985, and there are more foreign buyers and investors than I've ever seen,” says Miller at Eastern Consolidated. “Foreign money is strong right now, and the numbers prove it.”
Joe Bousquin is a freelance writer in Auburn, Calif.
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