Foreign interest in American apartments grew dramatically in 2015, according to Real Capital Analytics (RCA).
The New York-based commercial research firm reported that apartment deals with international buyers grew 180% in 2015.
The view from the field backs up these numbers, according to Brian E. McAuliffe, senior managing director for Los Angeles-based CBRE Group.
“As we look at the stats, the attraction to the multifamily sector from all over the globe has been dramatically greater than it has been in previous years,” he says.
Safety is the top selling point for American multifamily. “We all think the U.S. feels a bit edgy in terms of economic performance,” says Alex Foshay, senior managing director of capital markets for NGKF Capital Markets. “To the rest of the world, it's seen as the best economy globally.”
McAuliffe sees the same thing. “The U.S. is supposed to have the most stable economy and considered a safe haven compared to the other markets,” he says. “In the last year, there was a really strong desire for a current yield. The multifamily sector, because of liquidity in the debt markets, provides excellent current yields and cash yields compared to some of the other alternatives.”
The money seems to be coming from all corners of the globe. “Canada continues to be extremely active,” McAuliffe says. “The Middle East, through sponsors, is another active group as well as Asia and you still get the contributions from Europe. We even have capital flows that are coming in from Australia as well and even South America.”
RCA said Canadian investors drove much of this growth even before the joint venture between Blackstone and Canadian-based Ivanhoe Cambridge bought Stuyvesant Town. “Even without this transaction, Canadian buyers would still be in the lead for the year with the $2.5 billion acquisition of Associated Estates by Brookfield contributing to much of the Canadian deal flow,” RCA wrote.
Beyond Canada, 2015 was a banner year for international investment into apartments. Deal volume from all other countries was 81% compared to 2015. European buyers contributed $1.8 billion, putting the continent in second place. Investors from the U.K. paced European multifamily investors followed by Swedish and Swiss investors. Smaller deals generally drove volume from the continent.
Despite warnings about sagging oil prices slowing Middle Eastern investment, the region produced the third most active buying segment in 2015 with total volume of $1.6 billion. Investors from Qatar and Bahrain paced the region’s apartment investment. Unlike European investors, they made a number of portfolio deals, according to RCA.
“The Middle East has numerous family offices who are acting in a flight to safety mentality,” Foshay says. “Multifamily is an attractive asset class to them. They have been buying in isolated instances to date, but we would expect that to be a growing area of demand.”
Sovereign wealth funds from the region have other objectives. “These groups are looking for good yield,” Foshay says. “For instance, they like the idea of buying into Houston. The Middle Eastern investor understands the cyclical nature of the energy industry.”
Asian groups continued to show interest in apartments, with Foshay singling out investors from Singapore. But Chinese investments into multifamily could slow as that nation deals with economic issues. “The uncertainty will really be in the capital controls [imposed by the state] coming out of China in 2016 and what that will create during the course of the year,” McAuliffe says.
But Foshay argues that the largest Chinese investors, such as insurance companies, weren’t touching American multifamily yet anyway.
“In China, they are not focused on multifamily,” Foshay says. “They don’t really grasp multifamily because its not an institutional asset in their country at this stage. The Chinese guys who are investing [in multifamily] are one notch down from big institutional investors. Their demand is not as strong.”
Room for Growth
But that also leaves room for growth in the future. “When those big [Chinese] institutions come in the U.S. multifamily sector, that’s when you will see a whole new layer of capital,” Foshay says.
Other more immediate factors promise to push growth even higher in 2016. The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), which imposes income tax on foreign persons disposing of United States real estate, basically penalized foreign investors for spending money in the United States. But those rules have been loosened, offering more potential for international investment.
“The changes in FIRPTA that occurred in December make it advantageous for international money to flow into the U.S. We look at that as a positive because it’s something that wasn’t as prevalent in previous years,” McAuliffe says.