Several factors are behind the 'sudden on-rush' of capital from Asian investors into the US real estate market, the PERE Global Investor Forum in Los Angeles heard last week.
In a panel session on day one of the event, four experts held forth on conditions for large institutions – insurance companies and asset management companies included – to put capital to work in different parts of the country and different sectors.
The discussion led by Andrew Oksner, managing partner of Hong Kong and Los Angeles-based Campanile took in views from Ludwig Chang, executive director and co-president of China Orient Asset Management (International) Holding, John Ho, chief executive officer of Landsea Holdings Corporation, Paul Kang, president and chief investment officer of AltaCap, and Philip Feder, chair of the global real estate practice at law firm Paul Hastings.
Explaining the conditions leading to the surge of investment, they said that in China the real estate market was maturing, while more generally Asian investors wanted to improve their returns. A lot of Asian investors have had a recent history of “risky investing” in Vietnam, Russia, and Brazil for example, and did not do well. “There is a new appreciation for the risk return profile of investing into the US,” said Kang. “There is a tremendous amount of interest from Asian investors for getting into US real estate.”
The panel was held against a backdrop of studies highlighting the trend. A Jones Lang LaSalle study published last October suggested in 2014 through September 30, Japanese investors were the top foreign buyers of US hotels investing $1.92 billion, and Chinese investors became the leading source for development sites splurging $1.34 billion. And, just last week, it was predicted that over the next several years, potentially $50 billion could be injected into the New York market alone from Chinese entities. That estimate was provided by Bob Knakal, chairman of Cushman & Wakefield's New York investments.
The Chinese market, said the panel, was going through “its first real estate cycle ever” since a golden decade of real estate growth. A lot of Chinese wealth is from real estate and now the market is slowing down. Given market conditions and fierce competition, it is natural for non government companies to contemplate diversification, they added. Chinese investment into US real estate is also partly linked to wealth preservation while the Chinese government was also encouraging overseas investment, added the participants.
Landsea Holdings Corporation, which is a subsidiary of a well-known listed Chinese developer, is building a residential platform in the US in an example of activity. On the Jersey waterfront at Weehawken, for example, it is partnering with US giant Lennar on a 200-unit luxury condo project. Landsea is organizing pre-sales of units to Chinese customers at up to 30 percent of the units, helped by the popular EB-5 immigrant incentives allowing US visas to become available to certain investors. Landsea caps pre-sales to Chinese customers at 30 percent because it does not want to only grow Chinese communities, but rather build for the local market.
Korean entities, meanwhile, have been looking at the US for a long time, but have only just begun to invest significantly. A strategy that began by focusing on gateway cities such as San Francisco and Washington D.C., for example, is now evolving. Some Korean investors are seeking partners to help access real estate in non-gateway cities in the US. For their part, Japanese investors who got so badly burned in the 1980s, are now back – but they are looking at the residential development-side of the market.
The panel further explained that one thing Asian investors were trying to improve upon was speed. Nowadays, it is possible to get a “no” within a fortnight and funds within three months.
Asked whether there was in fact a “bubble” building involving Asian capital in US markets, the panel was not wholly united.
Campanile's Oksner and China Orient Asset Management's Chang appeared to be favoring an answer of 'no'. One key difference involving the Japanese at least, is that they used borrowed money backed by Tokyo land last time to fund equity deals in US real estate. This time around, it is different.