A pair of recent high-priced investment property sales illustrates the growing interest from cross-border capital in U.S. commercial real estate
In the latest acquisition, an affiliate of Oslo-based Norges Bank which administers Norway's oil-based sovereign wealth fund, Government Pension Fund -- Global (GPFG), has agreed to buy a stake in a New York City office trophy office tower for $684 million.
Boston Properties, Inc. (NYSE: BXP
) said it will sell a 45% interest in its Times Square Tower for roughly $1,200 per square foot to Norges Bank Investment Management (NBIM). The fund managed by NBIM ranks among the world’s largest sovereign wealth funds, with $737.2 billion in assets under management as of August 2013.
It’s the second large deal of 2013 for Norges Bank, which last year announced its intention to deploy $11 billion from GPFG into global real estate for the first time, and promptly backed up its words in February by acquiring a $1.3 billion interest in a five-building office portfolio owned by TIAA-CREFF.
Meanwhile, Korean investors have also been active. Groups like Korea Investment Corp. (KIC), South Korea’s largest sovereign wealth fund with $56.6 billion under management, and the National Pension Service of Korea (NPS) amongst several others have been actively pursuing core deals in top tier markets including New York, Washington, D.C., Chicago, Houston and San Francisco.
In late July, Principal Real Estate Investors, representing a consortium of Korean investors that included Korean Federation of Community Credit Cooperatives (KFCC) closed a deal for $370 million to acquire Washington Harbour, a mixed-use property in the upscale Georgetown neighborhood of D.C. from a joint venture of Rockpoint Group and MRP Realty.
And in late May, the pension service bought 811 Main Street, a shiny new 972,474-square-foot office tower in Houston’s CBD, from Hines for $480 million, or $493.59 per square foot.
In total, cross-border acquisitions by South Korean entities exploded from just $200 million in the first half of last year to $5.4 billion through June 30, 2013, eclipsed only by global funds and U.S. investors, according to the most recent Jones Lang LaSalle Global Capital Flows report. Four of the top 10 cross-border purchasers were Asia based.
China rose from $1.7 billion to $3.8 billion during the same period, while Norway jumped from $300 million to $2.8 million. South Korea and Norway entered the top 10 this year.
Foreign property investors have always scouted the U.S., drawn by the relative political and economic stability of the United States over many other international markets. But until recently, they often did more circling than striking deals.
That being said, direct investment by cross-border groups as a percentage of total U.S. CRE transaction volume has increased gradually from just under 2% in 2005 to about 7.5% as of second-quarter 2013 -- including an uninterrupted upward climb since 2008, the trough of the downturn.
As of second-quarter 2013, Asian investors trailed only Canada and Mexico groups in total U.S. acquisitions. Asian's total investments are about double those of both South America and Europe, according to CoStar data.
Foreign capital, notably investors from South Korea, the Middle East and Europe, has been particularly visible this year in large office CBD deals in New York, Chicago, Washington D.C. and other primary U.S. markets, according to Jones Lang LaSalle’s Third-Quarter Global Markets Perspective.
Analysts say the Manhattan deal with Boston Properties in particular could be a harbinger of future activity, since cross-border investors tend to progressively ramp up their activity with trusted partners.
In addition to keeping its majority stake, BXP will retain property and leasing management of the Times Square Tower. GPFG's minority stake underscores the caution with which foreign investors are proceeding this time around.
Unlike past forays into U.S. property markets, when non-domestic groups often invested alone (some say recklessly) and on occasion suffered heavy losses, offshore entities are now increasingly choosing to seek the security of a joint-venture partner or other arrangement in the current market, said Guy Benn, director of cross-border investments for Savills New York.
Not only is this often more tax efficient, but it also enables the investor to benefit from their local partner’s expertise, Benn said.
"Foreign investors are prepared to consider more structured investments, rather than the previous straight ‘I just need to own [assets] in America’ approach," said Benn, noting that groups are better educated, more sophisticated and perhaps more risk averse having witnessed mistakes made by investors in past cycles.
Some Korean investors are less inclined to take full control of a transaction and prefer to co-invest in U.S. deals, added Jason Park, a capital markets specialist who relocated from Savills in Korea to join Benn in the company’s U.S.-based cross-border investment team in New York.
"There is more of an openness to work through structured deals of some type, whether they are traditional joint ventures, preferred equity investments or even mezzanine investments," Park said, adding that the immediate need for stable income is another reason why some groups are prepared to sacrifice their share of capital appreciation on sale if current returns are high enough.