Overseas Investors Eying Commercial Real Estate
As I noted in last week’s post, United States city property is gaining increasingly aggressive speculation from overseas buyers. The growing perception that American real estate is a stable growth holding has motivated a wave of foreign interest in domestic property holdings, with Chinese buyers among the most active investors. However, as a recent Wall Street Journal article notes, external property speculation focused on our big metros has taken a distinct character.
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Overwhelmingly, East Asian property acquisitions have centered near-exclusively on conservatively sized office complexes and retail space. While the While Street Journal cites a Real Capital report claiming that Asian private investors have beyond tripled the capital invested in 2012 within the first six months of this year (from $551.4 million to $1.9 billion), their real estate focus remains rigidly segmented. There continues to be a pronounced avoidance of residential property, while commercial and office property is being purchased with a pinpoint focus.
This ultimately seems predictable, as American residential property is prone to greater degrees of fluctuation and regional bubbling. Additionally, the overstuffing of residential property holdings into mortgage-backed securities leaves their capital evaluation far too indebted to the manipulation of various overarching hedge funds. However, job growth and new business development still remain far enough removed from the vagaries of the housing market, rendering commercial property an exceptional stable (and exceptionally smart) target for growth investment. Additionally, it seems that overseas interest in office property isn’t restricted solely to major wealth management entities, as minority stake or partial investments have become popular with private investors as well.
So What Might This Mean for American Property?
Ultimately, a diversity of foreign investment in American cities renders commercial real estate far less prone to price flux at the whim of a single owner. Much of the outrage following the 2008 residential property crash was directed at hedge funds that had aggressively manipulated valuation throughout entire metros. Considering that Canadian, Israeli, and now Chinese investors are claiming small investments or minority ownerships in larger holdings, it bodes well for price stability, and with it, the possibility of long-term value growth for commercial holdings.
We’re also witnessing an injection of foreign capital in U.S. metros as whole, which might remove the impetus from American buyers alone to encourage value growth in our large cities. The redirection of surplus wealth from Chinese buyers in particular could provide a gentle impetus towards value appreciation that only augments that provided by American speculators. Additionally, if American interest in commercial property investments flags at any time, growing attention from overseas buyers could stabilize local markets even if domestic demand temporary declines.