As China Money Slows To A Crawl, The Rules Of Foreign Investment Have Changed
For foreign investors from growth markets like the Middle East and Asia, the charm of the Big Apple is being outweighed by its cost and culture.
“Back at home, [foreign investors] are duly fearful of being ripped off by anybody on this island,” Hodges Ward Elliott managing director Will Silverman said at Bisnow’s New York City Foreign Investment event in Midtown Manhattan yesterday. “The New York market moves very quickly, which is scary as a new entrant in the market.”
New York City is still the No. 1 destination for foreign capital in the world, according to this year’s AFIRE rankings, but it is no longer an environment in which foreign money — particularly from China — will buy anything in the market at any price.
This year, China has clamped down on outbound foreign investment, and firms caught flouting the new laws will be punished harshly, China First Capital CEO Peter Fuhrman said. While most New Yorkers in commercial real estate are aware of the capital slowdown, Fuhrman said they are probably not taking it seriously enough.
“I have the perception that the full weight and severity of these capital controls hadn’t been fully felt here,” Fuhrman said. “It’d be fair to say that the Chinese central government dropped a financial bomb on its businesses.”
One of the Chinese government’s chief concerns when instituting the investment restrictions, Fuhrman said, is over outbound investors getting fleeced while paying record-breaking prices.
“A concern of Chinese regulators is their investors have been really bad buyers,” Fuhrman said. “This can sadly be seen more and more in the larger real estate deals they have done. What they are extremely concerned about is just about every acquisition the Chinese have made, is they have overpaid severely and foolishly, and that has spurred a loss of a lot of Chinese sovereign wealth.”
While Chinese money will sit on the sidelines in the New York investment market this year, the hunger funds from other countries have for assets in Manhattan will likely not abate, and the inquiries about properties may grow, but it might not turn into a deeper buying pool.
“New York City is one of the hardest places to do business. The learning curve is very steep,” GreenOak Real Estate partner Mark Van Zandt said. “That doesn’t mean [most investors] aren’t bidding or talking to us, but when the rubber meets the road, there are very few who are set up to transact. You have to differentiate how many investors are really active and how many are just talking about it.”
Alexico Group chief financial officer Niso Bahar said most of the foreign investors active in the city now are the ones who swam with the sharks, were bitten, but survived. “They paid too much,” Bahar said, “and learned their lesson.”
Furthermore, the presumption that foreign capital is looking for a stable cash flow and a safe haven spot for money “has dissipated,” according to Liner LLP partner Jerry Neuman. It has been replaced with expectations of a profitable return, which means less risk and less willingness to overpay.
Instead, the pool of foreign investors in the city has deeply diversified its investment types. Bahar said while most people track foreign buyers by their direct investment, many of them also invest in private equity funds, and the money behind deals Blackstone or PGIM strike has a significant overseas component.
Mody Kidon, the chairman of Israeli Alto Real Estate Fund, said he hasn’t invested in New York City in years. Now, he’s focused on buying up value-add retail properties in the Sun Belt, particularly in North and South Carolina and Texas. Frank Lively, executive vice president at Wafra Investment Group, a subsidiary of a Kuwait sovereign wealth fund, said his owners are looking for higher yields in places like Nashville, Denver and Pittsburgh.
“In the major markets, there’s cap rates and pricing compression is making it very difficult to achieve the rates [investors] are used to,” Lively said. “You’ve got to go where you can find the opportunities.”
While the impact of Brexit was expected to result in a flood of money that was designated for London to New York, such a rush hasn’t yet taken place. At least in New York. Berlin shot up to No. 2 in the AFIRE rankings, CEO Jim Fetgatter said, the highest it has ever been, and a lot of investment that would have gone to London stayed in Europe instead of crossing the pond.
While Brexit and President Donald Trump's election could be potentially destabilizing actions, fraught with uncertainties, investors from the Middle East and Asia might not be as turned off as a result as some would assume. Israel "is already used to being this unstabilized area," Kidon said.
"Our clients in the Middle East are generally used to turmoil also," French firm LFPI managing partner Roland du Luart said. "It almost becomes an everyday, ho-hum kind of thing, unfortunately."