Despite rising rates in the country, the US will continue to be one of the most attractive real estate markets for foreign investors, said panelists at the Global Leaders in Real Estate Summit held by EisnerAmper and iGlobal Forum on Wednesday.
The US Federal Reserve has raised rates three times in 2018 so far, most recently in September. But while interest rate hikes can cool the property market, given the higher cost of borrowing, the panelists largely agreed that foreign investors are unlikely to halt US real estate investments as a result.
The US is considered a safe haven even when the market is slowing, given its diversity of assets, high liquidity and transparency, said Michael Gately, Barings Alternative Investments head of real estate research, speaking on a panel about foreign investors in US real estate. Although European investors have grown more cautious about the US and Korean institutions have shifted their expectations as a result of rising rates and slower growth, foreign investors still find the US market to be attractive, Gately said. The concerns are not different from those of domestic investors and are mostly specific to the asset or neighborhood rather than the country as a whole, according to Gately.
Rising interest rates may not scare off foreign investors from the US market, but the trend is not without consequences. Metlife Real Estate Investors managing director and head of real estate equity strategies Mark Wilsmann has seen some firms with transitional or bridge loans struggle with rate changes. Some firms with maturing loans have had to raise more equity, get preferred equity or they have found themselves unable to meet their investment goals, he said.
As some firms struggle, others will find that the changing environment has generated dealflow.
“I think that the rising interest rate environment has actually created more opportunities,” said Jordan Slone, chairman and chief executive of Harbor Group International, a Norfolk, Virginia-based firm that invests in real estate equity and debt globally. “We’re seeing a lot of deals that we lost out on, but all of a sudden, brokers are calling us back because the deals blew up. I think that kind of thing will actually attract interest from foreign investors.”
A rising interest rate environment creates opportunities for some domestic and foreign real estate investors to acquire properties at a discount, he said. Interest rates can cause prices to go down, which in turn can cause cap rates to rise. In addition, higher rates squeeze debt surface coverage, which requires more equity to be put into the investment. This can be an advantage for those investors that have sufficient capital on-hand, he explained.