Trends in Global Real Estate Investment
Trends in Global Real Estate Investment
Matt Malone, Privcap:
Hi, I’m Matt Malone from Privcap. I’m very happy to be joined today by Sean Bannon of Zurich Alternative Asset Management, Aureon Herron-Hinds from RSM, and Peter Merrigan of Taurus Investment Holdings. Welcome.
Unison: Thank you.
Malone: We’re going to be talking today about the globalization of real estate capital; the influence of foreign capital flows on both the U.S. market and globally. Let’s start off with the macro view. What has been the impact of foreign capital? It started with the U.S. market, on both supply and demand, volume, so on and so forth.
Peter Merrigan, Taurus Investment Holdings:
I think what’s happening is that the U.S. has become, I hate to use the term “safe haven,” but it’s certainly a very desirable place on international basis to put your capital. Strong will of law, relatively stable government (despite what’s going on these days) and strong growth prospects. So, people from all over the world are interested in investing there on a comparative basis, rather than what they’re seeing in other alternatives.
Malone: Sean, what are you seeing?
Sean Bannon, Zurich Alternative Asset Management:
A lot of the same in terms of the strength of the U.S. economy. I think, relatively speaking, it’s viewed as a very attractive place for investment. There is a fair bit of question around geopolitical stability and what the U.S. has on offer: a safe haven, an efficient and very risk-adjusted, return-friendly place to park money.
Foreign capital went from something like $46 billion to about $90 billion or more … from 2014 to ‘15, down a little bit in ‘16, but as was transaction volume. The numbers have been very, very strong. I think, versus 2007, it was somewhere in the neighborhood of $70 billion. I think what we’re seeing is foreign capital holding its relative place in the pie chart as it relates to investment in the U.S., and it seems to be quite strong.
Merrigan: I might add that, after the crisis in 2008, a lot of people were hurt very badly in the emerging markets in particular. So, there’s a lot of uncertainty in Europe around the future of the euro. The U.S. was kind of the one area that seemed to hold a lot of promise and stability. That was attractive to most investors.
Malone: Now, Aureon, you sit at this from the perspective of the tax and regulatory and legal issues that relate to real estate and foreign capital. Can you talk a bit about, from your practice, what it looks like? Are you seeing the same sort of dynamic with this rapidly increasing amount of volume and interest in the domestic market?
Aureon Herron-Hinds, RSM:
Surprisingly, to Sean’s point, and with respect to regulatory trend and where there may be some concerns internationally, we are still seeing more of an increase on the U.S. side. [As to] the activity in particular, irrespective of anticipated tax reform and some potential concerns on the international front, we’re still seeing just as much activity. From a regulatory perspective, there have been some increases and there’s an anticipation that there will be more reform on the horizon, but I have not seen the impact in terms of what clients are doing. [It’s] still upward and onward.
Malone: Okay. Sean, talk a bit about the complexion of the foreign investor and how you see that changing in terms of types of markets, perhaps, they’re going into or the types of yields they’re expecting. Is there a higher level of sophistication than there might have been 10 years ago?
Bannon: I think there certainly is. In terms of the complexion of the foreign investment, by far, the largest net increase in terms of the share of foreign investment in the U.S. has been Asia. I think Asia has been far and away the largest net gainer, as it relates to their share. That’s Singapore, China—it’s a number of different countries.
In terms of, I’d say, the destination of that capital, I think if you were to look at 2001, maybe there were a handful of markets that attracted substantial foreign capital. Maybe there was a smattering of other opportunities that were deemed worthy of foreign investment. Now, I think that number is much, much higher—probably on the order of 15 or 20 significant destinations for foreign capital in the U.S. Also, what I would sense is that there is a more informed foreign investor, thinking about relative risks and returns, not necessarily relying too much on the cache of any given market. And thinking very critically about where you can be rewarded for placing capital and maybe some of the primary but not gateway or even secondary as opposed to primary locations.
Malone: Peter, is that view consistent with what you’re seeing from your own investors when you’re sourcing foreign capital?
Merrigan: Yes. There are a couple points that are very consistent. One that may be a little bit different from our point of view, which is that we’ve seen a big increase from the Gulf region in the last 12 months into our business. That’s actually been the majority of the increase, that we’ve seen—it’s from the Gulf and also from South America.
I would characterize that as being—I wouldn’t necessarily call it flight capital, but I would say it is that they’re seeing lack of alternatives and instability at home, so they are attracted to the stability and the yield available in the U.S.
Herron-Hinds: I think it’s an interesting point because, while they’re attracted to yield in the U.S., they also have to think about certain regulatory regimes that are new here in the U.S. in the last few years. That makes them pause and makes them need to think more about what could it impact and what the implication could be of the investment.
Things like the U.S. Foreign Account Tax Compliance Act, which was introduced a few years ago and is now requiring funds financial institutions to disclose certain information about their investors. Some instances require them to withhold on certain types of U.S.-sourced income that’s generated from those investments. There is the need to stop and think about, “What’s going to be required if I make this investment? Am I going to have to disclose information about my underlying controlling persons? And, if I do make those disclosures, what will it mean for them? Will there be a withholding component and now is the U.S. government going to have information about them that I don’t necessarily want them to have?” There is something to think about there.
Malone: What are the strategic reasons for sourcing foreign capital? Is it simply broadening the capital base? Are there other reasons why having a mix of both domestic and foreign investors—what are the other reasons why you might want to source outside capital? Sean?
Bannon: I think it certainly gives you a deep pool of capital to source from. It diversifies your capital base. Oftentimes, the risk profiles may be slightly different. So, as you think about the opportunities in the U.S. and the different markets, different property types and deal sizes, you can create optimal portfolios. Or, where you don’t necessarily have to limit your portfolio construction view to a certain balance sheet. You can create a fund that has various sources of capital and creates sub-funds that tailor exposures to different types of opportunities and different markets at different times.
Merrigan: I think it diversifies your capital, for sure. The other thing about it is that they very much value domestic management because they don’t have it, usually. As opposed to some of the other U.S. investors who probably know most of the markets very well themselves, foreign investors generally don’t. They really rely upon the manager. It’s a valued role.
Malone: Let’s talk a bit to what the challenges are. Aureon, you spoke to this earlier, but how have the changes (meaning the influx of foreign capital) influenced the complexity of deal-making in the U.S.?
Herron-Hinds: I think that with the influx, one consideration is not just some of the U.S. regulatory requirements, but also some of those equivalent regimes outside the U.S. that we’re now needing to take into consideration. I mentioned the U.S. Foreign Account Tax Compliance Act, but there are also common reporting standards now, which are equivalent regimes outside the U.S.
Where you have Cayman Island funds, for example, or we were talking about some of the Asian markets and even in the United Kingdom and Australia—they’ve all adopted the common reporting standard. That common reporting standard requires that information on those investors who are residents of those countries be disclosed. And that you comply with certain requirements and collect certain documentation, just like we’re doing here in the U.S. for FATCA.
So, having those investors means that, now, there’s an additional layer of regulatory requirements that we need to comply with and think about how we’re going to handle the reporting that’s required for those investors. I need to take a step back and say that the U.S. has not adopted this common reporting standard, because the thought is that we have FATCA (the Foreign Account Tax Compliance Act), but again, the U.S.’s regulatory landscape is changing. There is tax reform expected, there is some expectation that there may be some changes to FIRPTA, which we’ve had around for a while, but there may be changes there. So, those are all things to consider on a go-forward basis.
Malone: Peter, how has it impacted the management of your fund on a day-to-day basis, whether it be in the back office? Has it altered the way you have to do business? Has it increased the size of the staff?
Merrigan: It does. It’s expensive to do the compliance. We have a chief compliance officer and a chief financial officer who’s overseeing all the reporting and administrative exercises. It’s significant cost.