By: Jeanette I. Rice, Americas Head of Investment Research, CBRE, Inc.
NEARLY ONE-QUARTER OF AMERICA’S CROSS-BORDER CAPITAL COMES FROM ASIA
The current state of the U.S. investment landscape is heavily influenced by real estate capital flows from across the Pacific Ocean.
Asia has become a major supplier of capital for American real estate, acquiring $7.0 billion of commercial real estate assets in the U.S. in 2014. This total represents nearly one-quarter of all cross-border capital acquisitions in U.S. real estate last year.
While this figure includes only direct investment of existing properties, the total would be considerably higher if investment in other vehicles such as funds, mortgage debt, residential condominiums, REIT stocks and development projects were included.
This ViewPoint focuses on the direct investment of Asian-based investors. It reviews the principal trends in Asian capital flows into U.S. commercial real estate, the establishment of Asian capital as a key source of cross-border capital and the central characteristics of Asian investment in the United States.
In absolute terms, Asian capital flows into the U.S. is still smaller than flows from Europe and North America — the latter represented by predominantly Canadian capital.
However, the total amount invested and the total market shares have both risen over the past several years.
For example, in 2007 the Asian share of the cross-border investment market was approximately 6%, at $1.5 billion. Since 2007, the region has gained market share almost every year. In 2014, the Asian buyers represented 24% of all cross-border investment in U.S. real estate.
The 2014 total of $7.0 billion actually represented a small decline from 2013 — down 5.7% from $7.4 billion. This was due, in part, to a handful of very large transactions closing in early 2015 rather than in 2014.
Despite this modest decline, CBRE Research projects that total direct Asian investment in U.S. real estate will rise steadily over the near term. This is based on a wide array of factors which include historical investment trends, current Asian investor sentiment and the recent sharp increase of Chinese interest and investment.
We also expect Asia’s market share of cross-border investment to rise over the next few years.
CHINA AND HONG KONG ARE LEAD SOURCES
Five investor nationalities dominated the market in 2014 and represented 93% of the total Asian investment in the U.S., as shown in Figure 2. China and Hong Kong ledthis group, accounting for more than half of the total. Japan and Hong Kong experienced the largest year-over-year increases. However, since Asian investments in the U.S. are typically large in terms of dollar volume, year-over-year differences are sometimes misleading.
The most remarkable story is China. China was hardly a player in the U.S. real estate investment arena until 2010, when acquisitions by Chinese investors first exceeded $100 million. By 2013, Chinese investment had reached $1.9 billion. Last year, China exceeded its 2013 total slightly, almost hitting the $2.0 billion mark.
These statistics do not include development site acquisitions. Real Capital Analytics (RCA) data suggest that Asian investment in development sites reached over $1.0 billion in 2014. The Chinese have become very active partners in development projects, additional capital that does not show up in the direct investment totals.
Los Angeles is a good example of this. In the Los Angeles marketplace, Chinese investors have not purchased many existing assets but instead have been primarily focused on multifamily. Two recent examples are the Greenland Group’s acquisition of the 6.3-acre Metropolis site in downtown Los Angeles and Dalian Wanda’s acquisition of the 8-acre 9900 Wilshire site in Beverly Hills — both part of larger transformational mixed-use development projects. While cross-border capital tends to partner with domestic development firms, in these two cases, and others in Los Angeles, the Chinese firms are handling the development process on their own.
ASIAN INVESTORS SHOW STRONG PREFERENCE FOR OFFICE AND HOTEL PRODUCT
As a whole, cross-border capital favors office product for investment in the U.S., and Asian capital’s preference is even higher. In 2014, Asian investors acquired $4.0 billion of office product, or 57% of the total, as shown in Figure 3.
Currently, the second favorite property type is hotels at 24% of total investment in 2014. This market share is higher than in previous years, but the average for the past decade is still notable at approximately 19%.
The preference for office and hotel assets is largely due to three factors. First, large office and hotel assets are more “scalable,” as investors can deploy more capital with each acquisition. Second, these U.S. assets are similar in design and operations to assets in other global markets that Asian investors are familiar with. Lastly, the office and, to a lesser extent, hotel sectors provide investors an ability to acquire “trophy” assets, which are not only high dollar, but are often high prestige and/or internationally known.
Direct investment in the other property sectors was relatively small in 2014, as it has been in the years prior. However, that may change in the near future. Scale has inhibited industrial investment in the past—single assets are typically too small to attract attention. However, there has been considerable cross-border interest in the industrial and logistics sector. This interest may translate into more investment into the sector in the future as portfolios become available. Also, notable is the recent acquisition of IndCor. The $8.1 billion entity-level acquisition, which is not included in our statistics, was by a joint venture between Singapore-based Global Logistic Properties and GIC (government of Singapore).
COASTAL METROS DOMINATE
In 2014, Asian investment was concentrated in four coastal metros; assets in Los Angeles, New York City, Washington D.C. and San Francisco made up for 75% of investment, as shown in Figure 4. Los Angeles alone captured 30% of the investment dollars.
While there is the sense that Asian investment is moving beyond the core markets, the 2014 statistics suggest that this movement is still very limited.
Asian investment in the other metro markets was limited to a very small number of transactions per market, sometimes just one. For example, fifth ranked Honolulu and Hawaii had two hotel investments by Japanese firms –— one in Honolulu and one in Maui. Asian investment in Houston and Kansas City reflected just one asset in each metro. The Asian geographic bias is in-line with expectations, considering that the majority of Asian capital flows are still fairly new to the U.S. market, and are, therefore, likely to remain mainly focused on the core gateway metros in the short-t to medium term.
ASIAN INVESTMENT RISING IN 2015
Asian investment is off to a strong start in 2015, with 20 closings totaling $2.75 billion on the tally sheet year-to-date (as of late March). The largest transaction, by far, is that of New York’s iconic Waldorf-Astoria Hotel for $1.95 billion by Beijing-based Anbang Insurance Group. Also notable is Tokyo-based Jowa Holdings’ acquisition of three $100+ million Manhattan office buildings. In addition, Asian capital sources have acquired 14 development sites for a total of $337.0 million year-to-date.
Not only is 2015 off to a strong start as evidenced by closed transactions, CBRE Research’s newly released Asia Pacific Investor Intentions Survey 2015 revealed that Asian outbound investment interest remains strong for 2015. Referring to future intentions, regardless of investment location, 56% of the Asia-based investors surveyed responded that they plan to invest more in 2015 than in 2014. Investors from Hong Kong and Singapore were the most enthusiastic in this regard. Chinese investors indicated that they are likely to be net sellers domestically, but net buyers abroad.
WHY INCREASED INVESTMENT FROM ASIA?
There are many factors for increased investment from Asia. Some of the “push” factors are the high pricing and low yield environments of the home markets. There is also the serious challenge of finding product at attractive pricing domestically.
Additionally, parts of Asia, including China, are currently finding themselves in somewhat challenging economic climates, which makes domestic investment less attractive.
Some of the “pull” factors include the more attractive yield and pricing environment of U.S. real estate. Certainly the strong U.S. economy and property fundamentals add to the interest and economic security of investment here. Long-term market characteristics,such as the political stability of the U.S., the generally positive business environment, low and fairly predictable inflationary climate and other factors add to the appeal.
Additionally, the U.S. provides Asian investors with portfolio diversification benefits. Having said that, the strong U.S. dollar vis-à-vis most of the Asian currencies could be a short-term detriment to investing in the U.S.
The devaluation of Asian currencies relative to the U.S. dollars varies. The yen is at or near the top for most severe depreciation; it has fallen from a recent (mid-2012) high of about 78 yen to the dollar to 119 today.
On the other hand, the Chinese yuan-U.S. dollar exchange has not fluctuated very much in recent years. However, mitigating the impact of weaker Asian currencies is the investment strategy typical among Asian investors which favors long-term holds.
Perhaps most important for stimulating future Asian capital flows to the U.S.,on the Asian side of the Pacific, are new sources of capital looking for investment opportunity. There have been legislative changes in Asia making it easier for Asian institutions to invest in the U.S., particularly insurance companies. Additionally, real estate allocations are rising in many Asian institutions which increase the need to find new investment opportunities.