Foreign Investment: Domestic Investors, Take Note

By Rick Sharga, Executive Vice President, Auction.com: The amount of foreign capital being invested into U.S. commercial real estate has skyrocketed over the last several years.
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While much of the press has focused on foreign buyers’ purchase of residential homes, the amount of foreign capital being invested into U.S. commercial real estate has skyrocketed over the last several years. From Korea Air’s office-hotel building in Los Angeles to China Vanke’s 61-story mixed-use tower in Manhattan, investors from Canada, China, Australia, Germany and Singapore are sinking large amounts of money into expanding their U.S. portfolios.

How much money? Recent reports show foreign investment exceeded $38.7 billion in 2013, marking a 40 percent increase over 2012. Proposed changes to the Foreign Investment in Real Estate Property Tax (FIRPTA) will likely encourage even more equity investments once approved. But why should domestic investors care? Aren’t foreign investors aiding the U.S. economy’s recovery?

Foreign investors with ample cash and few attractive investment choices in their own countries often view U.S. properties as attractive, safe, relatively inexpensive investment alternatives, and are willing to buy these properties at a premium. The trend has the potential to accelerate CRE price appreciation much more rapidly than would be considered normal, and can put domestic buyers, who are often looking for lower-priced properties or shorter-term ROI, at a competitive disadvantage. We’ve seen this happen in both the CRE and residential market before – most recently as a precursor to the housing bubble in the early 2000s. Left unchecked, we could be seeing the beginnings of another bubble, but in the CRE market this time.

While the limited inventory of properties in prime locations increases the competition for these assets, investors need to maintain their discipline, take a hard look at the underlying market fundamentals and not stray too far from what true market value dictates. Getting caught up in the feeding frenzy and contributing to the creation of yet another bubble, as we’ve been recently reminded, generally doesn’t end well.