In December of 2015 the U.S. government eased a number of restrictions that were said to be suppressing potentially billions of dollars in foreign capital. Among the changes foreign investors are no longer restricted to holding only a 5% share in a REIT, they can now hold a 10% share without being subjected to paying income tax when selling U.S. real estate. Foreign pension funds also saw an exemption from paying taxes on investment gains.
These changes were predicted to help continue the flow of international capital. Even though it is still relatively early in the year, we decided to take a look at 5 different property types to see if the restriction change prompted more foreign investment in U.S. CRE and which countries were doing the international investing.
In the beginning of the year Bisnow predicted that multifamily and industrial would be the top targets as far as foreign investment goes and it seems they were right on the money.
The Middle East is definitely taking note and diving in on investing in multifamily. Starting as early as February, McCaffery Interests and Hines were getting financing from an Abu Dhabi wealth fund to build a 600 unit mix of luxury apartments and condos in place of the vacant Children’s Memorial Hospital. Two other Middle Eastern investor from Bahrain have also decided to announce the purchase of apartment complexes in Atlanta in mid-March.
China has always been a safe bet for foreign investment in U.S. CRE, but there has been some questions around their willingness to invest due to their economic slowdown. The good news is that hasn’t seemed to deter China’s largest residential developer. In the beginning of March, China Vanke paid $116M to get their hands on an old grammar school to convert to luxury condos in New York City.
JLL reported in Q4 of 2015 that “foreign appetite for retail remains selective” and from what we found that is definitely true even with the restrictions being lifted.
In our extensive search we came across one very recent transaction with Canada’s Slate Retail REIT to acquire Charles Town Plaza in West Virginia for $20.9M. That is all we could dig up so far for this year. Surely it isn’t the only foreign backed transaction that has happened, but we were hard pressed to find another example unfortunately.
2015 was the second-highest year for global hotel transactions at $85 billion, according to JLL. And they are predicting $37 billion for 2016 in the Americas alone. This first quarter is a good indication that their analysis is completely correct.
At the beginning of February Cindat Capital, a Chinese firm, bought a 70% stake in 7 Manhattan hotels which include Hampton Inn, Holiday Inn, and Candlewood Suites for $570M. About a month later Korea’s Paradise Group bought Orlando’s Downtown Embassy Suites by Hilton for $26M .
And if those weren’t a good enough start let’s go ahead and talk about the recent bidding war happening for Starwood Hotels & Resorts. Starting off at $12.2B offer from Marriott, A Chinese Anbang Insurance Group raised the bid to $13.2B, leading to a counter bid of $13.6B from Marriott. Anbang Insurance Group countered their counter with $14.1B and as of this writing Marriott has come back with a $14.4 BILLION bid.
Right before Anbang’s bidding war started they locked down a purchase of Strategic Hotels & Resorts for $6.5B. It is starting to feel like Anbang is single-handedly trying to reach that $37 billion dollar prediction.
The 2016 AFIRE Survey has office listed as fourth in preferred property types just above hotels in the US for foreign investment. Hotels is last, really? Maybe Anbang didn’t participate in the survey. Anyway, the first quarter in 2016 is backing office up as a lower desired property type. We didn’t find much on foreign investments in office since the FIRPTA reforms were signed into law with the exception of two examples.
The first is a deal that was set on the very day the reforms were signed into law between German institutional investor, Union Investment Real Estate and the Seattle-based Vulcan Real Estate. Union Investment paid $299 million for a fully leased (by Amazon) two-building office complex.
The second deal we found was between Bahrain-based Investcorp and Jamestown for a downtown DC office building in early March. Investcorp purchased the building for $180M which is slightly less than half of what they spent in December of 2015 alone for office and industrial space in the U.S.
Industrial properties were tied for first place with multifamily as preferred property types according to the AFIRE survey. Certainly in the past year it has been hot and predictions for the coming year are overwhelmingly optimistic and Germany has shown consistent interest in U.S. industrial properties. In fact all of the examples we found for the first quarter were of German based companies expanding their operations in the US.
In late January Mercedes-Benz, the German car manufacturer, announced that it would be developing a new 313,000 square foot facility in Grapevine, Texas which is in the DFW metro area to house a parts distribution center and learning performance center. A month later in February Dräger, a German based medical and safety technology company, pre-leased 40k sq. ft. in Houston.
A few weeks later in early March a German auto parts supplier, ElringKlinger Automotive Manufacturing, purchased an industrial warehouse along with 5.41 acres of adjacent land for $8.4M in Detroit.
One more German based company, Oelheld US Inc., purchased a 23,400 square foot warehouse and land in mid-March. Oelheld plans on making the new facility in Chicago their US headquarters as well as their manufacturing site and at the pace they are growing it wouldn’t be surprising to see a few more purchases come along.
Prior to the 2016 Q1 German buying spree of industrial properties, Japanese Daikin Industries started on the largest industrial project under construction in the U.S. They are currently building their new manufacturing and distribution facility in Waller, Texas just outside of Houston.
Foreign investment in U.S. CRE has been thought a safe haven for many countries and the relaxed restrictions are giving countries like Germany, Bahrain, and China the extra security they need to continue. We’ll see in a few more months if it has truly made an impact, but it is clear that a few property types are already reaping the benefits of the change in restrictions.