Proud Partners
With cultural and economic differences, they, like other foreign investors, need guides. “The quality of the [local] sponsor is one of the classic issues in real estate, like location, location, location,” Duffy says. “That doesn’t change, regardless of real estate cycles.”
Having qualified American partners is one thing, but Köhler also wants to make sure they have a stake in the property. “In all of the cases where we structure a deal, we look for an operating partner that is also willing to invest a small portion by himself to avoid a conflict of interest,” he says.
Overseas funds don’t partner just on existing properties. They’re also interested in development. “We have seen offshore investors enter into development joint ventures,” says John Kessler, a managing director at Morgan Stanley. “Those programs can be in funds but can also be in direct programs with a developer partner.”
But not everyone needs a partner. “We have gotten into the management business as well,” Clauson says. “We found that we have better results self-managing rather than hiring management companies.”
This is a selling point for Lexington with its Japanese investors, says Paul Kim, the company’s general counsel. “Our firm has the infrastructure for purchasing and managing [apartments],” he says. “We can offer a long-term view to buying properties. We have control on how the assets perform.”
Second Thoughts
While foreign capital is definitely in the market, some think its influence is overrated. Count Jay Ballard, senior director of the Capital Markets Group for broker Cushman & Wakefield in Orlando, in this category. He says he hasn’t seen many foreign entities enter the Florida market. He thinks they’re either entering through American funds or not coming in at all.
On the West Coast, Joe Leon and David Young, partners in Phoenix-based broker Hendricks and Partners, see the same thing. “I have not seen any foreign equity coming in [in his market] unless it’s under some disguise?in a very small part of some deal,” Seattle-based Young says. “We’re not seeing it outwardly.”
Leon says the same is true in his Newport Beach, Calif., area. “It’s really not as prevalent as people think,” he says. “They talk about it and they act like it’s out there. But the reality is they are really not active in the market, at least in Southern California.”
One reason these brokers may not be seeing the money is because some is coming in through American funds. “I don’t know if the foreign investors are investing directly in American multifamily or going through American funds,” says David Libman, acquisitions manager for Fieldstone Properties, a property owner in Parsippany, N.J.
There are also legitimate issues that could force the foreign investors that are already in America to pull out or at least slow down. Hefty multifamily prices tags are one potential roadblock, specifically for the Germans.
“The going-in cap rate is very important for the Germans,” Köhler says. “Germans are interested in cash-on-cash yields because of their tax situation. They are not interested in capital gains because they are taxed on capital gains. They don’t have to pay taxes on cash-on-cash.”
For that reason, Köhler says Germans in particular are very cautious with American multifamily right now. “[Cap rates] are the biggest problem for us,” he says. “It was much easier a year ago than it is now.”
Prices aren’t the only things keeping international investors out of the U.S. market. Vandenburg says political factors also have an influence—specifically the tempest created when a Dubai-based company proposed to manage major American ports earlier this year. “Arabs have been coming in here forever, but they’re not doing it anymore,” Vandenburg says. “There’s a myriad of reasons, but I think the frosting on the cake was the Dubai ports thing. It’s a big issue.”
Others aren’t so pessimistic, though. They see a worldwide trend of putting capital in real estate, specifically multifamily. And where else is better to do this than the United States?
“We’re going to see more foreign capital looking at the multifamily sector,” Duffy says. “Typically, foreign capital has a tendency to lag domestic capital. In general, the multifamily sector has not received anywhere near the capital the office sector has seen. Now, all of a sudden, we’re seeing the tip of the iceberg with foreign capital coming into the apartment markets in the Western U.S.”
