Despite Global Uncertainty, Investors Still Flocking to U.S. Real Estate
October 11, 2016
As uncertainty permeates the international landscape, foreign investment into the U.S. continues. But complex issues could potentially complicate that flow, including the U.S. presidential election, recent Chinese capital restrictions, Brexit, and a lack of clarity on the future of the EB-5 immigrant investor program.
Returning to moderate the EisnerAmper Private Equity Summit annual foreign investment panel was Chesterfield Faring founder and CEO Lawrence Selevan, who asked six experts gathered at Chelsea Piers about their outlook for 2017 and beyond.
LFPI managing partner -- head of US Roland du Luart reported that his firm continues to raise money with European investors looking to invest in the U.S., despite the uncertainty and pricier assets. “They still want diversification as the main driver of their investments,” he said, noting that spreads are actually greater in certain European countries than in the U.S.
The wealthy petro states of the Arabian Gulf have been increasing their allocations quite dramatically for U.S. real estate both despite and because of global oil prices, said Noonmark Capital Partners principal Paul Homsy. There is a lot of liquidity there, and even though they have traditionally invested in their own region, they’re dealing with insurrection, civil wars, and lower property valuations—even in success stories like Dubai.
“Combine that with Brexit,” he said. “London was their main destination, and valuations are going down there as well. Investment into the U.S. has been increasing about 20% year over year.”
Even with China’s restrictions, the country’s investors still wants to bring capital to the U.S., noted Empire Global Ventures president Dr. Sam Natapoff. In the first months of 2016, $18 billion came from China to the U.S.—three times what it was the first six months of 2015. And there are $30 billion in pending deals from China, $9.5 billion of that in greenfield development.
“The opportunity is still there,” he said. “While the path is more complicated … this is still the port in the storm. And with a cheaper dollar, it’s still an enormously attractive location.”
While initially concerned about China and Brexit, CBRE Global Investors senior managing director Jeffrey Torto admitted there has been more clarity and that Brexit actually seems to be a net benefit for the U.S. He told the audience that he had met with a Korean capital source that very morning, and it said it was trying to sell out of London and move more of its money into the U.S.
“There’s still pent-up demand to come here,” he reported. “We’ve really seen some great growth in the past five years, and we’ll continue to grow. New York garners the greatest percentage of that.”
How about secondary and tertiary markets, asked Selevan?
De Luart pointed out that LFPI has been looking at investments in secondary cities, and there has been no pushback from its investors. However, there is a concern whether these markets have hit peak pricing. Many investors see primary markets as too expensive, he explained, and worry that the secondary cities may be overinflated and have higher downside potential.
While Gulf State sovereign wealth funds are still heavily concentrated on gateway cities, smaller institutional investors are looking for yield, which is harder to find in those primary markets, Homsy said. His firm has seen investment going into cities like Austin, Indianapolis, Cincinnati, and Nashville.
“They’ve actually gotten quite smart on these secondary and tertiary cities,” he noted.
Natapoff said he has even been able to source foreign investment into markets like New Mexico, West Virginia, Arkansas, and Arizona. “But the question is,” he asked, “can you bring the opportunity to the foreign investor that makes sense for them?” There are many manufacturers that want to move here, and the real turning point is the relationship they have with governing authorities.
Torto mostly deals with intuitional investors, like insurance companies. When he first started working with them, gateway markets were the focus. While they still want to invest in places like New York, there has been a shift—but it all depends on the type of investment. The insurance companies tend to focus more on yield, while sovereign wealth wants the best properties to own for generations.
One of the political debates surrounding the EB-5 program—which was up for reauthorization at the end of September yet will be part of the continuing resolution until December—is the Targeted Employment Areas (TEAs), which allow investors to invest at the $500,000 limit instead of the $1 million limit.
A vast majority of investors do invest in TEAs, reported Fragomen partner Chad Ellsworth, and states have had the discretion to set up those TEAs. However, he said that there is a perception in Congress that too much of the money is flowing to urban projects like New York and Los Angeles, and all of the legislative proposals out there have sought to restrict essentially urban projects.
“The federal government would take over designating TEAs, and there would be a preference for rural projects,” he explained. “If these changes go through—which we’ll know more about after the next election—I think we’re going to see fewer urban projects and a more balanced representation.”
Everyone has heard of EB-5, Selevan pointed out, but noted there have been a lot of regional centers that have been set up in the U.S., and well over 80% of them have not done a transaction yet.
CanAm Enterprises CEO Tom Rosenfeld argued that EB-5 has evolved to the point where everyone sees the potential, but a lot of urban areas and high unemployment areas aren’t getting their fair share of money.
“If can invest in a deal in Manhattan vs. Vermont, you’re going to go to Manhattan, because you’ll likely be in a better, safer position,” he said. “And you’re seeing pushback from legislators.”
The industry has raised $15 billion through EB-5 with a list pending worth $10 billion, and the only factor limiting it right now is the allocation, Rosenfeld said. He does think the program will stay, because it’s bringing in billions of dollars at no cost to taxpayers.
“There’s a huge political inventive for it, and even the people who aren’t happy with it are saying to fix it, don’t end it,” he contended. “We don’t know where it’s going, but it’s important for anyone considering it to wait and see.”
The idea of having EB-5 as part of the continuing resolution is to get us through the next election and see who the next president is, added Ellsworth. If it’s Hillary Clinton, he said, she’s promised to introduce comprehensive immigration reform within her first 100 days, which will likely look similar to the Senate compromise passed under the Obama administration and have favorable rules for EB-5.
“If it’s a Trump administration, it’s an open question,” he continued. “The program has bi-partisan support, but out of his top issues, EB-5 is not likely one of them. Regardless, the immigration service is going to act by regulation if there’s no legislation.”