The concept of home country or home hemisphere bias has been well documented. Investors —even savvy institutions with truly diverse portfolios — tend to invest more heavily in local markets than abroad. This approach reflects anything from familiarity and risk assessment to currency headwinds as much as the added complexities of cross-border transactions.
That said, Asian institutional investors have been anything but averse to global investing, especially in the robust, liquid markets of the United States. For example, Japanese insurance companies, Singapore-based property investors and other sovereign wealth funds and Asian public pensions are all well-established participants in global markets, with a particular fondness for prime assets (especially office properties). But, more recently, South Korean-based capital, Chinese insurers and other Hong Kong family offices have also been showing an increased appetite for U.S. real estate. Unsurprisingly, the destination for much of this capital has been top-tier gateway cities. However, given current pricing and competition for assets, even second-tier U.S. locations are attracting interest these days.
What’s spurring this appetite for U.S. real estate? There are many reasons, but perhaps none as obvious as the negative yields offered by some sovereign bonds, thus forcing some investors to look overseas for alternatives. No matter how expensive pricing seems in the absolute, it’s critical to keep it in the proper context.
The reality is that there is still a seemingly attractive spread between U.S. real estate and 10-year government bonds in many large and liquid global markets where Asian investors participate heavily. As long as this spread remains, it’s likely that there will be an Asian institutional bid for quality U.S. real estate assets.
But how exactly is quality defined? By and large, the more conservative Asian institutional investors have been keen to focus on vibrant, coastal U.S. markets, such as New York, Boston, Baltimore, Washington D.C., San Francisco and Los Angeles, along with interior cities such as Chicago, Minneapolis, Denver and Dallas. Given that investors are taking on greater complexities with cross-border transactions, they tend to prefer Class A office assets in central business district locations, with limited lease rollovers or, at the very least, staggered expirations. For these types of top-tier assets, investors are willing to pay up and accept low cap rates.
In a low-yield environment, Class A assets that offer predictable and consistent income streams hold obvious appeal for investors trying to diversify assets or even match their liabilities.
Nevertheless, it’s always suspect to generalize on investment preferences and risk appetite, particularly with a capital base as broad and diverse as Asian institutional money. Thus it would be wrong to assume all the transaction activity is conservative capital chasing conservative investments. Since there are limits to what even aggressive bidders will pay for top-tier assets, some investors are showing a willingness to step a bit farther out on the risk spectrum, either by looking at new locations or perhaps assuming some leasing or capital improvement risk. Increasingly, moving out on the risk spectrum involves looking far beyond the typical central business district (CBD) office properties.
Appetite for U.S. real estate continues to ratchet up among many Asian investors despite high prices, fierce competition and even cap rate compression. In response, investors are stepping back to target new types of investments and locations. First it was prime office space in fabulous CBD locations and industrial portfolios nationally. Then we witnessed a willingness to consider second-tier cities or more complex deals, such as roll-ups of logistics assets. Now global capital is venturing even further into niche asset classes. What is obvious is that despite home-country bias, the world is becoming smaller and global investors are growing more bold and comfortable with every passing year and every transaction.
Global investment in U.S. real estate is bound to continue, despite concerns that anti-globalization campaign rhetoric might undermine fund flows and cross-border transactions. However, it’s important to distinguish rhetoric from reality. It seems to be in the best interest of investors everywhere to see funds flowing freely and unabated to the most liquid and transparent U.S real estate markets.
