Letter of Intent - International Capital is Flowing - by Lee Silpe

International capital has been flowing into the United States at a large and ever-increasing scale, dominated by Canadian, Chinese, Australian, and South Korean sources. Canada, the largest investor into the United States, provided much of their capital through their REITs, which allow investors to take advantage of investment grade assets outside of Canada, where the lack of product has proven an issue, posting a 10% decline in the average value of REITs across the board last year. This led investment managers to search for yield across the border, accounting for approximately 30% of foreign real estate investment activity in the United States last year. Historically, many foreign investment groups have allocated their time and funds to class A assets, focusing on office buildings in CBDs; The GM building for example, was recapitalized by Chinese and Brazilian investors and One Chase Manhattan Plaza by Fosun International, a Chinese investment group. The new investment strategy seems is in search of even higher yield, sourcing office buildings in secondary markets and residential portfolios of both class A, B, and C assets. Their volatile economies and risk at home is mitigated by the lower risk domestically, even for class C assets if they are sizable enough. This has driven sovereign wealth funds and pension funds to invest in varying U.S. locations across diverse asset classes. QIC, an investment manager from Australia, purchased eight properties located in Nevada, West Virginia, and Pennsylvania in the past 2 years totaling just shy of $2 billion dollars. Capital is flowing, and assets just below investment grade present well to foreign buyers, where similar assets at home would be considered high investment grade. These economies of scale allow massive investment into the U.S., especially major metros, where we like to call real estate a safety deposit box with a view. Lee Silpe is the senior analyst at Berko & Associates, New York, N.Y.