World Chasing U.S. Yield With 25% Deal Jump: Real EstateHui-yong Yu and Kathleen Chu
Singaporeans, South Koreans, Israelis and Norwegians are accelerating purchases of U.S. real estate as a growing economy and rebounding prices lure yield-hungry buyers from overseas.
International investors made $7.97 billion in U.S. commercial-property purchases this year through April, a 25 percent jump from the same time in 2012, according to Real Capital Analytics Inc. Their $27.5 billion in deals in all of last year was almost six times the $4.7 billion low in 2009, the research firm said.
With deals including the tallest buildings in Los Angeles and Minneapolis, cross-border buyers are contributing to a U.S. real estate recovery that has seen prices by some measures reach new peaks. Sellers are taking advantage of the rising values and demand. Blackstone Group LP, the second-biggest U.S. office landlord, has said it expects strong interest from sovereign-wealth funds for properties it plans to sell starting this year.
“This is the tip of the iceberg,” said Sonny Kalsi, a co-founder of New York-based GreenOak Real Estate LP, which has advised Asian investors on deals. “You’re going to see a lot more capital coming in. They like where the U.S. is in the real estate cycle.”
Foreigners made 8.8 percent of U.S. commercial real estate transactions in the first four months of 2013, up from an average of 8.1 percent for the previous 10 years, according to New York-based Real Capital. The data measure direct purchases of physical buildings, not investments in funds or securities.
The figures don’t include the largest recent purchase by foreign buyers. The families of Chinese real estate developer Zhang Xin and Brazilian banking billionaire Moise Safra last week bought a 40 percent stake in New York’s General Motors Building. The transaction values the 50-story tower near Central Park at about $3.4 billion, according to CBRE Group Inc., the broker on the deal. The building sold for $2.8 billion in 2008.
In a deal announced yesterday, Ivanhoe Cambridge, the real estate arm of Caisse de Depot et Placement du Quebec, Canada’s largest pension-fund manager, bought the 47-story Wells Fargo Center office tower in Seattle for $390 million.
The makeup of foreign buyers is changing as wealth funds expand their real estate holdings outside their own countries. International investors in search of yield are also fueling deals in markets such as the U.K., France and Russia, according to brokerage Jones Lang LaSalle Inc.
Global commercial real estate investments topped $100 billion for the first time in five years in the first quarter, Jones Lang said in a report in April. New York, Washington, Atlanta, Houston and Los Angeles ranked among the world’s top 10 cities for cross-border deals, the Chicago-based company said.
“We’ve seen steadily increasing demand from non-U.S. investors,” said Max Swango, director of client portfolio management for Dallas-based Invesco Real Estate, which managed $52 billion of assets as of March 31. “The interest comes from all parts of Asia, Europe and the Middle East. You’ve got some relatively young, very large sovereign-wealth funds that are just starting to actively invest.”
Buyers are attracted to high-quality assets that offer better returns than government bonds, Kalsi said. For all commercial-property types, the average capitalization rate, a measure of investment yield, was 6.78 percent in the first quarter, according to Real Capital. The yield on the 10-year Treasury is hovering around 2 percent.
Demand for top-quality buildings helped commercial real estate prices rise in April above an August 2007 record, according to Green Street Advisors Inc., a Newport Beach, California-based research firm that measures values based on property appraisals. Another gauge, the Moody’s/Real Capital Analytics Commercial Property Price Index, regained 51 percent of its peak-to-trough losses as of March, the latest available data. That measure is based on repeat-sales transactions.
International investors are typically most attracted to high-quality buildings located in prime U.S. cities, such as the GM Building. Another midtown Manhattan tower, 650 Madison Ave., had a bid from a foreign buyer, according to a person with knowledge of the sale process who asked not to be named because the details are private. That building is under contract to be sold for $1.3 billion to New York-based Crown Acquisitions Inc. and Highgate Holdings Inc. of Irving, Texas.
“It is the large trophy deals that really move the foreign volume,” said Dan Fasulo, managing director at Real Capital.
Harel Insurance Investments and Financial Services Ltd., Israel’s second-largest insurer, was part of a group of investors that in April acquired the 57-story IDS Center, the tallest tower in Minneapolis, for $253 million.
“This was an iconic property and they just don’t come up too often,” said Terry Kennon, managing director of asset management at Hallandale Beach, Florida-based Beacon Investment Properties LLC, which bought the IDS Center with partners Harel and Menora Mivtahim Insurance Ltd., which manages Israel’s largest pension fund. “Minneapolis is a very vibrant town with a lot of Fortune 500 companies.”
In March, Overseas Union Enterprises Ltd., a Singapore-based commercial landlord and developer, agreed to buy the U.S. Bank Tower in Los Angeles, the West Coast’s tallest office building, for $367.5 million. Overseas Union didn’t respond to requests for comment on the purchase.
Canada has ranked as the biggest foreign acquirer of U.S. commercial real estate since 2010. Singapore moved up to No. 2 this year, from No. 7 in 2012, according to Real Capital. Purchases by Singaporean investors, at more than $1.9 billion through April, are already twice the $957 million recorded for all of last year.
Government of Singapore Investment Corp. last year invested in 101 California St., an office tower in San Francisco’s financial district, and in March acquired the Grand Wailea in Maui and four other resorts from a group including Paulson & Co. for $1.5 billion.
GIC, as the sovereign-wealth fund is known, had 10 percent of its assets in real estate globally in the 2012 fiscal year, and about one-third of total assets in U.S. investments of various types. The fund, which is prohibited from investing in its home country, doesn’t disclose total assets and declined to comment on its purchases.
South Korea is the third-biggest international buyer this year, up from No. 6 in 2012. Deals through April totaled $1.59 billion, exceeding the $1 billion for all of last year, Real Capital data show.
Mirae Asset Global Investments, a Seoul-based manager of $58 billion, last month bought a 31-story office building in Chicago’s West Loop district for $218 million, according to a May 17 statement. It was the South Korean company’s first purchase in the city.
“In 2006 and 2007, the Australians were the lead foreign investor. Today, Canadians are No. 1,” said Jaime Fink, a senior managing director at broker HFF Inc., which represented the seller of the IDS Center. “It all depends on how their local economies are going. The South Koreans are very active today, the Japanese less so.”
The U.S. is an investment target partly because it has about one-quarter of the world’s institutional-quality commercial real estate, according to Montreal-based Ivanhoe Cambridge.
“The New York market alone has more office inventory than the entire country of Canada,” said Adam Adamakakis, executive vice president for U.S. investments at Ivanhoe Cambridge. “The U.S. market, which is still in recovery, gives us access to opportunistic transactions. We are looking to further accelerate our U.S. expansion over the next several years.”
Ivanhoe Cambridge in November paid more than $360 million for a 49.9 percent stake in 1411 Broadway, a 40-story office tower in Manhattan, and in March bought 73 office buildings in California’s Silicon Valley. It’s investing $300 million to develop an office tower in downtown Chicago that would be the city’s biggest new project in five years, Adamakakis said.
Canadian deals through the first four months of this year totaled $4.2 billion, almost half of the country’s 2012 tally of $9.1 billion, according to Real Capital.
After the financial crisis, many foreign investors prefer buying buildings over real estate securities, said Philip McAndrews, head of global real estate transactions and joint ventures for TIAA-CREF. The New York-based asset manager has joint ventures with Norway’s sovereign-wealth fund to acquire U.S. office buildings and with the Dutch pension manager APG to buy shopping malls.
“What’s really attracting them is the level of control,” McAndrews said. With stocks, “you are a passive investor. If you’re a sovereign-wealth fund and you’re going to own 25 to 30 buildings in the U.S., you probably would like to handpick them.”
The venture with TIAA-CREF is Norges Bank Investment Management’s first foray into U.S. real estate. The sovereign-wealth manager said in February that it wants to have about 5 percent of its roughly $700 billion fund in real estate, and one-third of that in the U.S.
The influx of international capital would be much higher if not for a tax on foreigners who sell U.S. real estate if they’re the majority owner, according to GreenOak’s Kalsi. For this reason, many deals are structured so the foreign entity buys less than 50 percent of a property. Norges Bank, for example, owns 49.9 percent of its venture with TIAA-CREF.
The Foreign Investment in Real Property Tax Act, or FIRPTA, was passed in 1980 in response to international investors buying U.S. farmland, said Tony Edwards, general counsel of the National Association of Real Estate Investment Trusts, a Washington-based trade group. Aside from the 10 percent of gross proceeds from the sale of U.S. real estate withheld under the law, foreign majority sellers must pay additional U.S. federal, state and local levies that may increase the total tax burden to as much as 60 percent, he said.
As foreign demand helps drive up prices, many investors are paying a premium for fully leased buildings, which offer predictable income streams in lieu of big potential price appreciation, said Alex Berman, chief executive officer of Skokie, Illinois-based EPN Group. Elbit Imaging Ltd., based in Tel Aviv, was a founding investor in the company.
EPN Group last year sold 46 U.S. shopping centers to Blackstone and DDR Corp. for $1.43 billion. DDR agreed in May to buy Blackstone’s stake in 30 of those properties for $1.46 billion.
EPN was more focused on purchases in 2009 and 2010, when prices were lower, Berman said.
“There are some people who like stability and they were not so excited about the U.S. market three years ago,” he said. “Now they’re coming in.”