The British Are Coming (and the Chinese and the Venezuelans, Too)
Robert Knakal March 21, 2013, 9 a.m.
The title of this piece is somewhat true when it comes to the foreign capital that is being poured into our local real estate investment market. If Paul Revere had been a real estate broker, today he would be saying, “The Chinese are coming … The Chinese are coming.”
Investors from China and many other countries have been scouring the city looking for investment and development properties that meet their criteria.
As demand drivers go, foreign capital has been gaining on that of domestic market participants. These include high net worth individuals, family offices and institutional capital in many forms. Foreign capital comes in the same three categories, but in this cycle we have seen high net worth individuals much more prominently than the other two. Interestingly, these investors are not primarily real estate investors in their home countries. They have been successful in other industries and have decided to diversify their wealth by purchasing commercial real estate assets. Why are they choosing the U.S.? Our debt as a percentage of gross domestic product is as high as it has ever been, our budget deficits are massive, our politicians can’t seem to make progress addressing structural economic deficiencies and our long-term debt was downgraded. In fact, since August of 2011, when S&P downgraded the U.S., our debt has grown by more than a trillion dollars and our deficits remain elevated. If the government were not suing S&P, it is very likely another downgrade would be coming, and not just from S&P. Still, foreign investors love the U.S., and particularly New York City.
When we were downgraded, rather than seeing our interest rates rise, they dropped like a stone as a flight to quality and safety ensued. Seems that while it became clear that we have a worm in our apple, there are more worms in the apples around the globe, which is motivating investment capital to seek the relative safety of our economy and our relatively stable political environment.
In preparing to write this column, I sent an email to all Massey Knakal brokers asking for the countries of origin of foreign buyers who have closed sales with us during the last 12 months, as well as the countries of origin of those currently looking at the properties we are marketing. I was shocked by the responses. Remarkably, we have sold properties to 14 different buyers from China, well ahead of investors from any other country. The highlight of these transactions was the $54 million sale of a 400,000-buildable-square-foot development site in Williamsburg that was sold to the Chinese government.
Other countries on the list of investors we have sold properties to recently include Canada, Mexico, Japan, Germany, United Kingdom, South Korea, Brazil, France, Taiwan, Netherlands, India, Venezuela and Singapore. Interestingly, these countries represent 14 of the top 15 of our country’s trading partners (missing from the list is Saudi Arabia). We have also sold properties recently to investors from Austria, Israel, Greece, Italy and Argentina.
The list of foreign investors who are looking at properties through us here but haven’t purchased anything through Massey Knakal within the past year includes: Australia, Chile, Colombia, Egypt, Ireland, New Zealand, Poland, South Africa, Spain, Switzerland, Turkey and the United Arab Emirates.
These lists are quite extensive, and somewhat surprising, given that FIRPTA (the Foreign Investment in Real Property Tax Act) adversely impacts foreign investors, who are taxed twice on real estate transactions. They do not have this tax treatment in any other type of investment vehicle. Nonetheless, these investors continue to pour into the market. The EB-5 financing program, which provides permanent visas for those families who invest at least $500,000 in a real estate transaction that will create jobs, has also boosted foreign interest in properties here.
Yes, the Chinese are coming, and so are investors from dozens of other countries who will exacerbate the almost constant condition of demand exceeding supply in the Big Apple. This is something sellers should be very thankful for.
Robert Knakal is the chairman and founding partner of Massey Knakal Realty Services; in his career he has brokered the sale of more than 1,300 properties, with a market value in excess of $9 billion.