Every commercial real estate (CRE) investor in the United States should be intrigued about how and why foreign investors choose to put their money in the United States. If you ask commercial real estate agents or investors in New York City, in places such as the San Francisco Bay Area or Seattle. They will tell you that foreign individuals and companies frequently fight for the same opportunities that most of us are after.
As real estate professionals, we are always talking about the importance of domestic players in the CRE markets. As a change of pace, I would like to examine how foreign capital affects The United States’ commercial real estate markets. And how local Americans might take advantage of the new investment opportunities it creates. Additionally, I will take a closer look at how these opportunities might evolve in the future. Let’s get down to business.
Why is Worldwide Interest in US CRE Present?
Like any other type of diversified group, international investors have a wide range of individual motivations for investing in commercial real estate in the United States.
It is politically and economically safe to live in the United States.
Because of the instability in their countries of origin, foreign CRE capital has poured into the United States. Because of the risks associated with political and economic volatility, the world’s wealthiest individuals are increasingly looking for new chances abroad. When political and economic conditions are uncertain, the rich seek possibilities elsewhere. It is for them to mitigate some of the risks that come with instability. Government seizure of assets, political unrest-related losses, high taxes, and other financial harms caused by a flawed social system are all part of this.
Investors know that their property will not be taken from them without cause if they choose to put their money into the economy of the United States. They also know the benefits of the consistency of the economic system’s long-standing stability.
In Comparison to Many Foreign Property Markets, The United States Provides Outstanding Returns
The idea of what constitutes a “good” return for foreign investors might vary greatly, especially compared to the potential profits they might see in their home nations. To put it differently, their barriers to entry are lower than those faced by a typical American investor. They do not need to get the most money out of a deal to be successful. In terms of development or existing cash flow transactions, they aren’t necessarily seeking a notable return when they get started or get involved. A strong return is what they seek, although not usually the same one as local investors.
Since their yield expectations are smaller, they can manage to pay more, which is why you often see international investors outbid local investors. For example, a hypothetical development agreement. A 20 percent internal rate of return (IRR) may be the goal of a domestic firm, whereas a foreign group may aim for a 12 percent IRR. On the other hand, domestic investors might want a 6 or 7 percent cash return on a business that brings in money, while foreign investors might be happy with as little as 4 percent. That already has a significant difference.
Immigrating to the United States
Investing huge sums of money in the country, particularly CRE investments, opens the door to legal residency or citizenship, this is another reason for CRE interest in the United States. To qualify for citizenship under the EB-5 Immigrant Investor Program, investors must acquire or purchase shares in specific United States properties with a value of between $900,000 and $1.8 million. Because of this, many foreign investors in the United States are already well-known institutions or wealthy people who don’t have any trouble getting a US visa.
Alliance with Local Businesses
Frequently, international investors may collaborate with an American partner to divide the risk and understand how the United States market works. This goal is achievable by forming a joint venture development partnership. Sponsors can buy real estate assets at higher prices when they do business with international capitalists compared to US investors.
Because international investors often do not require the same returns as US shareholders, their incentives can also be high. Even though paying higher prices for assets means lower projected profits for local sponsors, their promotional budgets are high-priced. Also, the returns they must pay the international investors are lower. Overall, the two balance out which the local benefactor can participate in deals they otherwise would not have been able to.
In addition to the economic advantages of dealing with overseas investors, they also prefer to be more hands-off than US institutions and private equity firms. The time zone between a sponsor and their investors usually ranges from 9 to 13 hours, making it difficult for investors in other time zones to participate actively. Being a sponsor, you’ll notice that when working with foreign investors, they pay particular attention to partnering with US companies that uphold a proven track record.
Managing the property and carrying out a wide range of additional responsibilities are all delegated to their regional partner. As a result, more than half of the company’s underwriting is underwritten by its local partner. For the reason that the parent company failed to be hands-on and cannot act as a big brother, supervising and overseeing the company on a consistent and ongoing basis.
******************************
Come join us! Email me at mark@dolphinpi.us to find out more about our next real estate investment.