Earlier this year, I took a trip across the Pacific to Australia to meet with local Asia Pacific investors and funds. This included a number of private and institutional investors, some of whom have already invested in US real estate, and many have not yet invested, but are actively looking for a suitable group to work with.
We have been able to identify some common core investment themes that are driving the overall increase in cross-border US real estate investment. Our investors’ responses match the results The survey was released in May 2021. By the Association of Foreign Real Estate Investors (AFIRE), in which 60 percent of responding investors indicated that they intend to increase their investment in US CRE this year. Interestingly, investors surveyed by AFIRE expect the largest growth in US net capital flows over the next three to five years to come from the Asia-Pacific region (up 71 percent).
Strong and stable harvest
Often, when returns on a particular local asset class begin to decline, investors turn to other categories or markets with a similar risk profile to maintain the returns they are accustomed to receiving. Recently, the commercial real estate market in Australia has been flooded with money from local pension funds, family offices, as well as new injections of European and Asian capital.
Rather than settling for lower returns — at roughly the same level of risk — the investors we spoke with sought to be creative in allocating their capital without taking on additional risk. The regular, stable cash flow that accompanies investing in a well-managed local project in the right location is the ideal solution for these risk averse investors. For investors with a background in real estate, the US also provides a number of opportunities for those looking to get a more detailed market assessment here.
Asset mix and strong markets
International investors who have long been attracted to trophy assets in major markets such as skyscrapers in New York and famous shopping malls are starting to notice other growing markets and asset classes in the US. Our foreign investors began to show interest in projects that they might have had earlier. overlooked due to the relatively unknown markets in which they were located.
This expansion of investment criteria is not limited to the groups we spoke with. In their recent Global Capital Outlook, Marcus & Millichap found that in 2011, the top 10 US markets that attracted the most cross-border capital accounted for nearly 77 percent of all real estate transactions carried out by foreign investors. By the first quarter of 2021, foreign investment in these top 10 markets fell to 58 percent of total U.S. real estate transactions.
This means that markets that previously received little attention (less than 25 percent of the allocation in 2011) are now starting to attract much more capital from foreign investors (almost 50 percent in 2021). These areas include cities and states such as Dallas-Fort Worth, Phoenix, Florida, and Georgia.
The report also indicates that international investors are also adjusting their asset allocation. Over the last year ended with the first quarter of 2021, 90 percent of international capital went to the acquisition of multi-family, industrial and office assets – roughly evenly across these three sectors. As a result, the share of cross-border investment in retail and hospitality, which used to be the darlings of foreign capital, fell sharply.
Favorable exchange rate
With the exception of those who have the ability to hedge their US dollar (USD) positions, most of our overseas capital sources are concerned about how an adverse exchange rate shift could seriously undermine the return on US investments.
However, since early 2021, the dollar has fallen against most of the world’s major currencies. This is due to several reasons, most notably the record low bond rates in the United States. While we do not claim to know what will happen in the future, the current fall in the US dollar does provide additional incentive for foreign investors to enter the US. market.
Take the Australian dollar (AUD), for example. The average price of the Australian dollar against the US dollar in 2021 is 77 cents, while the figure was 70 cents and 69 cents in 2019 and 2020, respectively. This means that, on average, every dollar invested in the US by Australian groups earns 77 cents in US dollars in 2021, up from 69 cents and 70 cents in previous years.
Direct access to markets
Our international investors are also starting to pay attention to macroeconomic problems in the US housing market, primarily the current supply shortage. This is partly due to general news coverage, but also to the fact that asset management banks act as conduits for large local funds such as Blackstone and Oaktree Capital Management. These investors, however, are large enough to invest on their own and prefer to use current macroeconomic topics without being tied to these funds.
Many of these investors have expressed concern that their profitability will decline due to excessive execution and management fees.
Favorable business environment and increased employment
While the US economy is not immune to downturns, it did better than most of the world’s economies during the pandemic, and this was seen by investors in countries hit harder by the pandemic. According to the latest data from the Bureau of Labor Statistics, the US economy added 850,000 jobs in June 2021. This level of job growth, which is often a leading indicator of economic health, gives foreign investors confidence that their capital will be better protected in the United States. than in other countries whose economies are still feeling the effects of the pandemic.
Record low interest rates in the United States also make local real estate projects more attractive to foreign investment, as the low cost of capital contributes to much higher net returns for investors, while projects do not have to incur large amounts of debt. Foreign investors, who often accumulate most of their wealth through real estate investments in their home countries, view passive investment in the United States as a redistribution strategy. Higher interest rates in the Asia Pacific region compared to the US are often one of the main reasons our investors pursue real estate interests here in the US instead of holding their capital in onshore projects.
In the context of the pandemic, many of our international investors found it difficult to close new deals simply due to the inability to get on the plane and see the project due to travel restrictions. As a result, we are seeing a level of deferred demand from these international investors and we are now laying the groundwork for the world to open up, hopefully sooner rather than later.
Benjamin Grosberg is vice president of Dekel Capital in Los Angeles.