CAPITAL CULTURES Indeed, offshore money gets more bang for its buck in America, but that doesn’t mean international investors are giving it away. They might have superior bidding power, as Dawnay, Day did in East Harlem, but you’ll probably pay as much for equity or debt from foreign financiers as you would with a domestic backer.
“Globally, we’re not seeing huge differences in capital prices,” says Bruce Batkin, president of New York-based Terra Capital Partners, which has about $3 billion of Australian, U.S., and Pacific Rim funds under management. “Increasingly, we live in one world, and the cost of capital is increasingly similar from one market to another.” As Collins puts it, “There is no such thing as dumb money. These are smart investors making calculated decisions.”
Still, there are unique characteristics tied to the money that’s coming from overseas that depend solely on the culture of its country of origin. For instance, a lot of capital flowing from Australia comes from that country’s compulsory superannuation fund—its pension system—which has grown to more than $1 trillion in assets. That money looks for core investments with steady returns. “Because it’s a small market over there, there are not a lot of places to put all that money,” Batkin says. “They’ve looked outward for stable, income-producing deals.”
Investors from the Middle East often want to add value to boost their return. “Money out of the Middle East tends to target value-add returns where they might buy a Class B-type product, and then upgrade it for mid-teen returns,” says Steven Kohn, president of New York-based Cushman & Wakefield Sonnenblick Goldman.
Those investors may also abide by certain Sharia principles, which are based on the teachings of the Koran, such as a prohibition on charging or paying interest.
That means those backers tend toward equity investments instead of debt. In fact, many Sharia principles—such as not supporting businesses that serve alcohol, or making sure money is used for ethically acceptable goods and services—makes the multifamily sector a natural choice. “Residential investments work well in that sense, because you don’t have financial tenants such as banks, and you don’t have the problems with alcohol sales that you might with retail or hotels,” Kohn says.
Specific tax considerations also come into play. If a foreign investor has less than a controlling stake in a company, he or she doesn’t have to pay U.S. capital gains taxes. That means foreign investors like to participate in private REIT deals and joint ventures up to the 49 percent mark—but not beyond it. “Certain foreign investors, such as the Dutch and the Canadians, may seek out that type of ownership structure,” Kohn says.
Wherever these investors hail from, though, one fact is clear—they’re here, and they like multifamily. “I’ve been doing this since 1985, and there are more foreign buyers and investors than I’ve ever seen,” says Miller at Eastern Consolidated. “Foreign money is strong right now, and the numbers prove it.”
Joe Bousquin is a freelance writer in Auburn, Calif.
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