Home away from home
Asian investments in U.S. real estate amid an uncertain world
INSIGHT ARTICLE |
Despite various uncertainties in the global economy, Asian investments continue to flow into U.S. real estate and the West maintains its appeal as an asset-rich environment primed for growth. This report, jointly published with RSM Singapore and Knight Frank Singapore features an investment risk evaluation framework that will prove useful to both existing and potential investors in U.S. based real estate.
The concept of home country or home hemisphere bias has been well documented. Investors—even savvy institutions with truly diverse portfolios—tend to invest more heavily in local markets than abroad. This approach reflects anything from familiarization and risk-assessment to currency headwinds as much as the added complexities of cross-border transactions.
That said, Asian institutional investors have been anything but averse to global investing, especially in the robust, liquid markets of the United States. For example, Japanese insurance companies, Singapore-based property investors and other sovereign wealth funds, and Asian public pensions are all well-established participants in global markets, with a particular fondness for prime assets (especially office properties). But, more recently, the likes of South Korean-based capital, Chinese insurers and other Hong Kong family office money also has been showing an increased appetite for U.S. real estate. Unsurprisingly, the destination for much of this capital has been top-tier gateway cities. However, given current pricing and competition for assets, even second-tier U.S. locations are attracting interest these days.
What’s spurring this appetite for U.S. real estate?
There are many reasons, but perhaps none as obvious as the negative yields offered by some sovereign bonds, thus forcing some investors to look for alternatives overseas. No matter how expensive pricing seems in the absolute, it’s critical to keep it in the proper context. The reality is that there is still a seemingly attractive spread between U.S. real estate and 10-year government bonds in many large and liquid global markets where Asian investors participate heavily. As long as this spread remains, it’s likely that there will be an Asian institutional “bid” for quality U.S. real estate assets.
What exactly does “quality” mean?
By and large, the more conservative Asian Institutional investors have been keen to focus on vibrant, coastal U.S. markets, such as New York, Boston, Washington D.C., San Francisco and Los Angeles, along with interior cities such as Chicago, Minneapolis, Denver and Dallas. Given that investors are taking on greater complexities with cross-border transactions, they tend to prefer Class A office assets in central business district (CBD) locations, with limited lease rollovers or, at the very least, staggered expirations. For these types of top-tier assets, investors are willing to pay up and accept low cap rates.
In a low-yield environment, Class A assets that offer predictable and consistent income streams hold obvious appeal for investors trying to diversify assets or even match their liabilities. For example, in 2016 Japanese investors purchased Miami Tower, a 47-story landmark office tower designed by architect I.M. Pei, for a reported $220 million. The property was more than 90 percent leased at the time of sale and is well located in the resurgent Miami CBD.
Nevertheless, it’s always suspect to generalize on investment preferences and risk appetite, particularly with a capital base as broad and diverse as Asian institutional money. Thus it would be wrong to assume all the transaction activity is conservative capital chasing conservative investments. Since there are limits to what even aggressive bidders will pay for top-tier assets, some investors are showing a willingness to step a bit farther out on the risk spectrum, either by looking at a new locations or perhaps assuming some leasing or capital improvement risk. Increasingly, moving out on the risk spectrum involves looking far beyond the typical CBD office properties.
Take, for example, China's Anbang Insurance Group, which purchased New York's Waldorf Astoria hotel last year for almost $2 billion, and then followed up this year with an acquisition of Strategic Hotels & Resorts from Blackstone for a reported $6.5 billion. These notable transactions are just two examples of Chinese capital pouring into U.S. hospitality assets, which presumably carry a higher risk profile than the typical prime office acquisition.
Earlier in 2016, Singapore sovereign wealth fund GIC reportedly purchased a majority interest in Yes! Communities, a Denver, Colorado-based owner/operator of manufactured housing, for $2 billion. This came on the heels of GIC’s 2014 acquisition of the IndCor industrial portfolio for $8.1 billion and their $1 billion acquisition of the Hillwood Properties logistics portfolio. Once upon a time the notion of global capital chasing mobile homes in Middle America would be absurd, but not today. The willingness of foreign investors to invest in such a niche asset type in a faraway land demonstrates how global capital has been able to adapt and assess risks.
Appetite for U.S. real estate continues to ratchet up among many Asian investors despite high prices, fierce competition, and even cap rate compression. In response, investors are stepping back to target new types of investments and locations. First it was prime office in fabulous CBD locations and industrial portfolios nationally. Then we witnessed a willingness to consider second-tier cities or more complex deals, such as roll-ups of logistics assets. Now global capital is venturing even further into niche asset classes. What is obvious is that despite home-country bias, the world is becoming smaller and global investors are growing more bold and comfortable with every passing year and every transaction.
Global investment in U.S. real estate is bound to continue, despite the surprising U.S. presidential election results. In some circles, there have been concerns that anti-globalization campaign rhetoric might undermine fund flows and cross-border transactions. However, it’s important to distinguish rhetoric from reality. It seems to be in the best interest of investors everywhere to see funds flowing freely and unabated to the most liquid and transparent U.S real estate markets.
This trend is bound to continue, though not without risks and volatility inherent to global investing. For example, if Beijing makes good on its promise to restrict capital flows exiting China, it might impede one very active acquirer from U.S. commercial real estate markets. But, as ever, global capital is efficient and typically migrates to the best opportunities. It will be interesting to see which investor groups step in to fill any potential void.
This report was jointly published by RSM US, RSM Singapore and Knight Frank Singapore.