U.S. real estate continues to attract droves of foreign investors, lured by potential payoffs including safe and stable returns, and undeterred by potential risks such as possible interest rate increases. Which countries are the major sources of foreign investments in U.S. real estate? How are foreign investments impacting the U.S. market?
In advance of the Commercial Real Estate Conference 2015, Peter Ballon, Managing Director, Head of Real Estate Investments – Americas with the Canada Pension Plan Investment Board (CPPIB), talked with NAIOP about his perspective on foreign investments in real estate:
Ballon: The top factors driving foreign investment into the United States are a diversified economy with healthy employment growth that is propelling occupational markets, the market size and liquidity, and the country’s standing as a capital safe haven with strong rule of law. The volume of foreign capital invested in U.S. commercial real estate over the last 12 months was approximately $75 billion, which is 25 times that which flowed into Canada.
NAIOP: Name the top three countries that are big sources of foreign capital.
Ballon: Having consulted Real Capital Analytics for the latest data, I found the major sources of foreign capital to be as follows:
- Canada is the largest foreign capital source investing into the United States, having invested approximately $25 billion over the last 12 months. The most active investors have been Brookfield Asset Management, Caisse de Depot, and Canada Pension Plan Investment Board.
- Norway, through Norges Bank Investment Management, the asset manager for the Norwegian Government Pension Fund Global’s investments, has been the second most active country, having acquired approximately $12 billion of real estate over the last 12 months.
- Singapore, though GIC, the asset manager for the Government of Singapore, has been the third most active country, having acquired approximately $10 billion of real estate over the past 12 months.
China and Germany, largely through sovereign wealth funds and insurance companies, round out the fourth and fifth spots, respectively.
NAIOP: What are some examples of the types of opportunities and risks encountered by foreign investors?
Ballon: We are in a rising tide market that is lifting all boats. CPPIB is taking a strategic look at its portfolio and positioning it to withstand market cycles over the long term. We are taking this opportunity to prune our portfolio and exit investments in non-core markets and with non-core/scalable partners.
In addition, we are pursuing niche sectors with strong fundamentals and best-in-class management teams that offer compelling risk adjusted returns and are scalable. For example, over the last six months, CPPIB invested $1.8 billion in a student housing platform in the United Kingdom called Liberty Living, $150 million alongside Health Care REIT in a joint venture to acquire a portfolio of eight top-tier medical office buildings in Southern California, and $100 million in a mezzanine tranche secured by a market-leading portfolio of self-storage assets in Canada.
The risks that we see are pockets of new supply, interest rate increases, and foreign exchange volatility. Firstly, while supply growth has been benign for the last few years, deliveries in 2016-2018 could dampen market rental rates, in particular in the multifamily and office sectors.
Secondly, the Federal Reserve seems increasingly likely to “remove the crutches” and begin to raise rates in September for the first time in over nine years. The impact of a rate hike is uncertain on real estate transaction volumes and pricing, however, a hike is likely to be disruptive as investors calibrate their cost of capital.
Finally, foreign exchange fluctuations may impact foreign investors’ decisions. For example, investing into the United States today is relatively expensive given the strength of the USD, and as foreign currencies recover over time, investors may be deterred by foreign exchanges losses when converting back to their local currencies.
Hear more from Ballon and a panel of investment experts during Beyond the Border: Foreign Investment in and out of Canadian and U.S. Real Estate at the Commercial Real Estate Conference, October 13-15, in Toronto. See the conference website for details on who attends, hot sessions, and project tours.