Doing Deals With Foreign Financing
“Access to capital” was the catch phrase of the day, not only real estate markets but also high finance. Many people had “hot” business plans with wonderful ideas, and “the inside scoop on a great deal”; in fact, the missing piece was access to capital to close it. Banks have been the traditional source of capital; however, with the advent of Dodd-Frank and Basel III, banks which normally originated business loans stopped for fear that these dollars wouldn’t come back. Now, there is so much scrutiny involved with the ABC alphabet soup of Federal regulators from the OTS, FHFA, and the SEC, to the Fed and the DOJ. As you can very well imagine, there are deals that need funding right now! Well, with the advent of foreign investors coming to the fore, a new breed of lender is here and want to make waves in the industry.
There is a purported $3 trillion in capital waiting to be deployed in the marketplace. I have seen this type of lender pursuing the lowest cap rates (NOI/sales price) in history and satisfied with low returns of 2% or less. Investors, both individual and institutional, are coming to the United States looking for deals and a higher yield. Individuals and investment funds from China are purchasing apartments, office towers, mixed-use properties, strip malls and power centers for their own accounts. The returns are paltry, ranging anywhere from 2-4%; yet, the rate of return (for the moment) is satisfactory, as many of these purveyors of capital have a low “hurdle rate” of required return on their investment.
I recently sat down at a coffee house with a gentleman with roots from the Middle East. As we were sipping coffee, he shared his connection with someone from his home country charged by the national government with devising a multi-billion dollar fund for real estate investments to invest in both debt and equity transactions. Obviously for his colleague to look abroad, opportunities in their home country must be scarce. Accordingly, they are fishing and trolling for all types of transactions in all of the four food groups (multi-family, office, retail, and industrial). As you can imagine, there are deals that need to be funded in all four groups, and this is an example of alternative financing to make deals happen. Just to be clear, this is not the only example of capital looking for deals from around the globe. Currently, sovereign wealth funds, international debt and equity funds, along with global hedge funds have an insatiable appetite for transactions, especially if they are providing double digit yields. It is just a matter of finding quality deals of quality and size that fit.
Our American yields are sub-5%, and are barely able to keep up with inflation and taxes. Hence, we are in the same boat as foreign investors. However, with creativity and an ever watchful eye that looks for good deals that make sense, transactions can be found that make sense on Class A and Class C properties in transitional areas which make sense for redevelopment.
In summary, foreign money is attractive when you have a good deal. Everyone wants to make a substantive yield on their investment, and American real estate is still one of the most reliable investments around. The foreign buyers have already come to make all-cash deals as buyers; now, they are looking to become creditors too. Who knows, with the right combination of a common sense business plan and a common sense debt fund, we could be in store for a whole new wave of lending.
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance; he can be reached at email@example.com.