Foreign Investment
Crossing Borders
Foreign Investors Search for Deals in North American Markets.
By John M. Stone, CCIM, CIPS, CPM |
In Charleston, S.C., a broker leases space for a new Bi-Lo grocery store in a local strip center, completing a transaction with an international company that has holdings in 28 countries. In Dallas a commercial real estate practitioner negotiates a new lease with 7-Eleven, a worldwide company owned by Japanese investors. These two examples illustrate some of the commercial real estate transactions today that transcend U.S. borders. Globalization and the speed with which information travels affect even the most local-minded real estate professionals, expanding opportunities for foreign investment throughout the United States.
When seeking investment opportunities, foreign investors are attracted to North America because of the region's political stability, economic leadership and innovation, and constant growth and turnover. Real estate is a favored investment because it offers high yields and the ability to leverage a greater amount of the purchase price or to assume attractive existing financing. The keys to maximizing these foreign interests are knowing what types of investments they are looking for and understanding their unique cultural and business practices.
Current Foreign Investment Climate
The North American Free Trade Agreement and other trade pacts have spurred new growth in cross-border investments throughout North America. Mexico's U.S. investments primarily are concentrated in border states, such as Texas, California, Arizona, and New Mexico, because of their proximity and shared culture. Canadian investments are found mostly in Sunbelt states, such as Texas, Georgia, Florida, Colorado, New Mexico, and California, due to their climate and economic growth. U.S. corporate users of industrial, retail, and office properties flock to Canadian markets such as Vancouver, British Columbia; Edmonton and Calgary, Alberta; Winnipeg, Manitoba; Toronto; Ottawa; and Montreal because their critical population mass makes them viable investment venues.
For many years, only major U.S. seaport cities attracted foreign investment funds. However, in the past 40 years investors have expanded their horizons to include major airport cities.
The Association of Foreign Investors in Real Estate, a nonprofit trade organization for the institutional foreign real estate investment community, recently reported that nimble foreign investors are placing funds into niche opportunities in U.S. markets where competition from domestic and foreign pension funds is less severe and yields are more attractive. Cities investors are choosing include Dallas/Fort Worth; Minneapolis/St. Paul; Kansas City, Mo.; St. Louis; Denver; Phoenix; Jacksonville, Fla.; Atlanta; Charlotte, N.C.; Memphis and Nashville, Tenn.; and Houston.
What draws investors to a particular North American market? Low prices and affordable labor contribute to Mexico's appeal for international investors. Attractive immigration and tax incentives make Canada's commercial real estate market a popular destination for European investors.
Overall, North America is still a huge low-density market when compared with Asia and Europe. If Congress votes to expand NAFTA's scope to include Central and South America, many more markets will open to a wider range of investors and users, probably changing existing investment patterns from an east/west to a north/south axis.
Competition From Abroad
The European Union is North America's biggest rival for international commercial real estate investment money. The unified European trade laws, standards, markets, and currency across a continent with high population density and economic prowess are the impetus behind NAFTA's possible expansion. Unified, the Americas compose a larger geographic area with more substantial natural resources, population, and untapped land for development than Europe.
The People's Republic of China looms on the horizon as another competitor for international commercial real estate investment money. It has the world's largest population and vast areas of land for potential real estate development. Already, agrarian land reform and the damming of the Yellow River to increase the country's electricity capacity indicate that China is strengthening its economic base. It could compete for foreign real estate dollars if more progress in private property rights encourages investment.
Properties Popular With Foreign Investors
In the United States, foreign investors favor the same properties as domestic investors. Foreign institutional money invests in hotels/resorts, central business district class A office buildings, major retail and industrial properties, and large multifamily properties.
In Mexico, hotels/resorts, industrial properties and complexes, and free-standing retail and office buildings are the most popular property types for foreign investors. Especially sought after are industrial maquiladoras, or foreign-owned company facilities in specially zoned Mexican border areas that manufacture products for reciprocal trade and to export. These operations generally involve U.S. industrial blue-chip companies in long-term leases with rent paid in U.S. dollars. Yields on such properties are significantly higher than those of comparable properties in either the United States or Canada. Maquiladoras also have helped upgrade the standard of living in Mexican border areas where they are located.
Crossing Cultures
Cultural norms and business practices differ drastically around the world. Understanding and appreciating these differences is the first step toward working with foreign investors.
As international business grows, cultural idiosyncrasies continue to determine how business is conducted. Before dealing with foreign colleagues, commercial real estate professionals should study their preferred cultural and business practices. For example, Germans and Japanese rarely use first names in business proceedings. In addition, many foreign cultures place a great deal of emphasis on business cards. For instance, German business cards often include academic degrees and company information, such as the date it was founded. And, although gift giving is almost universally accepted, it is critical to consider the client's culture when selecting a gift. For example, the Japanese view four of anything to be unlucky and the color white to symbolize death; therefore, giving a client from Tokyo four white teacups would constitute a major faux pas.
Religion also has an effect on international business dealings. Being sensitive to religious beliefs, holidays, and practices when arranging meetings is important, along with avoiding certain foods and seemingly innocent gestures.
Language can be yet another barrier to working with foreign investors. To prevent translation problems, avoid using slang and idiomatic expressions. If learning the client's language isn't an option, employ the services of a qualified translator or a bilingual commercial real estate professional.
Bridging gaps in culture, religion, politics, and business practices is easier for U.S. real estate practitioners today than even five years ago. The National Association of Realtors offers the Certified International Property Specialist designation for those who complete the educational program focusing on the essentials of international real estate. English-language newspapers from countries all over the world are available online, and numerous Web sites provide information on religions, currencies, methods of measurement, financing, law, and business practices. In addition, many major metropolitan areas now have cultural coaches who can advise about the dos and don'ts of other cultures. Several publishers print a vast amount of material about the business practices and tax policies in other countries. (See “Resources for Working With Foreign Investors” sidebar.)
It is advantageous to know conversion trends for multiple currencies. Whenever foreign clients invest in North American real estate, they actually make two investments -- in the local currency where the property is located and in the real estate itself. When foreign investors repatriate their funds, the exchange rate can make a drastic difference in their return. The real estate can perform brilliantly; however, if they have to exchange funds at an inopportune time during the currency fluctuation cycle, the results may be disappointing. Likewise, a real estate investment's performance may be lower than expected, but favorable currency fluctuations may make it profitable.
The Payoff
Expanding services to foreign investors can be educational, self-satisfying, and potentially lucrative. It may take more time and money to cultivate a relationship with foreign investors than with domestic ones; however, once the relationship has been established, it is likely to be close and long lasting.
In today's business climate, resisting international real estate opportunities can be as dangerous as resisting technological advances. Though it requires new ways of doing business, working with foreign clients is critical to remaining competitive in the years ahead. Commercial real estate professionals in all markets must embrace globalization and the opportunities for foreign partnerships.