Foreign Investment

It’s a Small World After All

World-wary investors shop for properties close to home.

Forget globe-trekking. When it comes to international investing, U.S.-based buyers are finding plenty of commercial real estate opportunities nearby as they shop for deals throughout Canada, Mexico, the Caribbean, and South America.

Although large institutions and real estate funds continue to be active in markets around the world, the majority of U.S. investors are choosing to stay closer to home. "In 2010, the world has become more regionalized due to the uncertainty and the unstable economic indicators such as employment and consumer confidence," says Kamil Homsi, CCIM, MRICS, president of Global Realty Capital with offices in New York and Dubai.

Backyard Bargains

That uncertainty has prompted many risk-averse investors to focus on opportunities within their country or region, Homsi adds. In fact, the U.S. and the United Kingdom are the only major countries that have seen a rise in property acquisitions by cross-border investors, while other countries throughout Asia Pacific and Europe, the Middle East, and Africa, or EMEA, regions have seen a sharp drop in foreign investment. For example, the percentage of property acquisitions by cross-border investors in the Asia Pacific region has dropped from nearly 45 percent to less than 25 percent in the past 18 months, according to New York-based Real Capital Analytics.

The global recession has prompted investors to be more cautious about not only the types of properties they are buying, but also where those properties are located. For example, Homsi is seeing a bigger divide between his two offices in New York and Dubai. The firm’s U.S. clients are focused on domestic investment opportunities, while clients at the Dubai office are focused on properties within their own backyard.

"Foreign investors are seeing plenty of opportunities within reach in their own region," Homsi says. "They don’t need to spend 14 hours on a plane and 10 days in the U.S. visiting properties when they can accomplish much the same thing with a three-hour plane ride and two or three days."

Many U.S.-based investors who have an appetite for international investing have narrowed their focus, at least for now, to the Americas. Although Canada continues to be an attractive investment market, U.S. investors increasingly are looking at emerging markets south of the border in Mexico, the Caribbean, and South America.

"Right now we have investors in the U.S. who are looking for high-value repositioning opportunities within the Caribbean," says Christopher Fojo, CCIM, president of Pan American Real Estate Advisors in Longwood, Fla. Fojo was based in Trinidad and Tobago for 18 years and specializes in the English-speaking islands of the Caribbean.

The Americas generated $39.7 billion in transactions above $5 million during the first half of 2010, which is an 83 percent increase in volume over midyear 2009, according to RCA. At the same time, the number of properties traded increased 12 percent, indicating a move toward larger transactions. Although the U.S. accounted for the lion’s share of transactions — 84 percent — other top markets outside of the U.S. include Toronto with about $2 billion in sales, Vancouver, British Columbia, at $834 million, and São Paulo, Brazil, at $733 million.

Island Hopping

International investor inquiries picked up significantly during first quarter compared to 2009, followed by a slight pullback in second quarter due to higher levels of uncertainty in the European market and more talk of a double dip, Fojo notes. "I’m hoping that by fourth quarter, we will work through most of those uncertainties and the activity level will continue to gain," he adds.

Fojo currently is marketing a portfolio of hotels in Barbados, Grenada, and Antigua. The owner is looking to cash out and redeploy those funds in other real estate activities. In this case, the owner is looking to sell the hotels, which range in size from 180 rooms to 260 rooms, either as a package or as individual properties. The sale is expected to fetch a price between $100,000 and $125,000 per room.

"When you think of the Caribbean, the immediate response is resort properties. That is the higher level of interest," Fojo acknowledges. "What I am trying to do is show some of these U.S.-based investors that there are other opportunities and commercial activities such as office buildings and retail facilities, particularly as they relate to some of the larger economies in the Caribbean such as Trinidad, Barbados, and St. Maarten."

For example, Fojo is working with a Trinidad-based insurance company to dispose of a large portfolio of distressed commercial properties. The plan is to split that portfolio into multiple packages that will be offered to U.S.-based investors. The 1.8 million-square-foot portfolio includes two 500,000–sf enclosed malls, apartment projects ranging between 100 to 300 units, and several office buildings.

U.S. investors are looking outside of the U.S. as a means to diversify their portfolios, identify real estate values, and stretch their investment dollars a bit further. Investors also are attracted to Caribbean investments for the potential tax advantages. Obviously, when money comes from the islands back into the U.S., investors pay U.S. taxes. But there are distinct tax advantages that exist throughout the Caribbean. The tax requirements vary with the individual countries, as well as the tax agreements or treaties that they have with the U.S. For example, on most islands there is no capital gains tax and the distribution of dividends is not taxed. So the pre-tax return going back to the U.S. is much greater.

Hungry for Capital

The capital constraints that still exist in the investment market are generating more business for some international brokers. "There are great opportunities in this market. Because of the capital crunch, I’m getting contacts that, normally, I would not be able to get," says Steven Wiegmann, CCIM, CPM, CRE, president of the Wiegmann Group/Prudential California Realty in Irvine, Calif. Because the stream of capital that had been flowing to projects in Mexico, Central America, and even South America has slowed to a trickle, more developers and owners are out pounding the pavement looking for sources of capital. As a result, Wiegmann is gaining an audience with top developers that would not have had time to speak with him three or four years ago.

Wiegmann currently is lining up capital for about 10 projects in Mexico, the Caribbean, and South America that are looking for funding. "All the projects have significant infrastructure in the ground and are looking for a joint venture partner or debt financing," he says. For example, one project is a new hotel and marina on St. Kitts. "What we do is get an agreement signed with a developer, and then find capital for them along the entire capital stack — both debt and equity," he says.

Investors ranging from high-net worth individuals to investment banking firms are looking for "broken" resorts that ran out of money to complete new construction, expansion, or renovation work. "Investors today have the funds," Wiegmann says. "They see good opportunities, because the prices are low, and they are ready to put in either joint partnership money or debt financing." However, buyers are focusing on deals with established developers and contractors who know what they are doing.

Other reasons that investor demand for off-shore projects is returning is the growing sentiment that the hotel sector is at or near the bottom, and the fact that the distressed property sales that many buyers expected to find in the U.S. have been slow to materialize. "International investors think they can get better returns outside of the U.S., and they have concerns about what our tax situation will be," Wiegmann says. Investors looking to put their capital in hotel and resort projects south of the border are still seeking high double-digit returns on their investments in the 20 percent to 25 percent range, he adds.

Alleviating Risk

Although investors are returning to the global arena, they remain highly cautious and selective. "Investors are becoming more educated and knowledgeable," Homsi says. "They want to know that a particular country has positive business indicators related to inventory, employment, transportation, construction, and consumer cost index."

Another concern for investors today is security. Countries that provide that security and minimize investment risk are proving to be more successful in attracting foreign investment. For example, Poland has adopted business practices similar to the U.S., notes Stanley A. Gniazdowski, CCIM, CRE, FRICS, president of Realty Concepts in Guilford, Conn.

Investors buying property in Poland can be assured of a chain of title and proper transfer of property rights, says Gniazdowski, who has been traveling to Poland and Eastern Europe as a real estate educator and consultant since 1999. By comparison, business is much different in the Ukraine, where the chain of title often is questionable and it is more important to have the right contacts and understand the business methodology in order to produce a successful transaction.

The security, stable economy, and strong workforce have helped Poland attract multinational corporations such as Dell, as well as boost its commercial real estate investment market. Poland recorded $1 billion in commercial real estate and land sales during the first half of the year compared with $416 million in sales in the Ukraine, according to RCA.

Wiegmann agrees that international investors are being more cautious and diligent. For example, buyers are not just requiring property appraisals, but they are being very selective in hiring internationally qualified experts to conduct those appraisals. "The same thing is happening on the due diligence," he adds. "Investors are doing thorough forensic accounting in terms of looking at the books and the data, and they want competent people working on that analysis."

In addition, while investors still want to be rewarded for their risk they are assuming in international projects, many have throttled back on exorbitant expectations. A few years ago, investors expected to double their money because of the rapidly rising prices. Some buyers were able to cash in on escalating prices and achieve that goal. But there also are plenty of cases where investors lost big. That history is motivating investors to be very selective in who they partner with, and ultimately, where they put their money.

Client Relationships Open Doors to International Markets

The global commercial real estate market is by no means a level playing field. Large firms such as Jones Lang LaSalle, Colliers International, and CB Richard Ellis dominate the international services business with established networks of offices and contacts around the globe. Yet there is definitely room for boutique and midsize real estate firms to grab a share of that global business, especially as that marketplace continues to expand.

International real estate can be a difficult niche to break into. Oftentimes, working in foreign markets requires special licensing, relationships, and market knowledge –- not to mention the ability to overcome hurdles such as language and cultural barriers.

One way for brokers to get a foot in the door is by using their unique access to clients. The opportunity for many brokers lies with their ability to provide referrals and share in fees on international deals. "Brokers can earn a referral, but at the same time they would be providing the client with a high level of service," says Kamil Homsi, CCIM, MRICS, president of Global Realty Capital with offices in New York and Dubai.

Typically the fee is negotiated based on a broker’s level of participation on a particular deal. For example, the co-brokerage or split on the fee is lower if a broker is simply passing on a client name and contact number. That fee increases if the broker is more involved in offering advice and working directly with the client, such as traveling with the client when they meet with the international broker, or traveling with the client outside the U.S. to view a potential investment property.

The global market represents a tantalizing growth niche for real estate firms. Even though international transactions have declined in the wake of the global recession, commercial real estate investment sales worldwide are expected to reach $300 billion in 2010, according to Jones Lang LaSalle.

"It is going to be harder for smaller firms to participate on that global field," says Steve Collins, managing partner for the Americas International Capital Group at Jones Lang LaSalle in Washington, D.C. Brokers need to show clients that they have market knowledge and access to information. But at the end of the day, it is still very much a relationship business. "If you have a client and a comfort zone with a certain person who has helped you do real estate in the U.S., and they need to do something in São Paulo or Tokyo, that relationship will still make a big difference," he adds.

In addition, new opportunities will emerge as the global market continues to expand and evolve. "Right now everybody is working with the major developers and investors," says Stanley A. Gniazdowski, CCIM, CRE, FRICS, president of Realty Concepts in Guilford, Conn. "But as economies grow and people start building more wealth, there will be secondary and tertiary investors getting into the market as their wealth grows and they will be looking to put their money somewhere."

Understanding the culture, laws, and business practices is key to doing business in any country. Gniazdowski has been consulting in Eastern Europe since 1999. "I quickly learned that a good consultant was a consultant who performed an immense amount of due diligence and worked to understand the customs of the people in that country, the banking regulations, laws for each country, and the methodology under which business transactions take place," he says. "The big mistake that most consultants make is not understanding how the business methodology differs from country to country."

Beth Mattson-Teig is a freelance writer based in Minneapolis.

Beth Mattson-Teig

Beth Mattson-Teig is a business writer based in Minneapolis.

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