For Foreign Investors, U.S. Assets Are Attractive and Challenging

For Foreign Investors, U.S. Assets Are Attractive and Challenging

Now that the United States economy is back on its feet, and the U.S. is once again proving to be a safe investment in the midst of a volatile world, foreign investors are investing billions of dollars in real estate here. The continuing influx of foreign money—including Chinese, Korean, Japanese, European, Mexican and Canadian buyers—is not only creating competition for key assets, especially in the gateway markets, but is presenting new transactional challenges for foreign buyers, particularly when it comes to due diligence.

IVI International, a CBRE company, recently provided consulting services to the Chinese insurance company Anbang in its acquisition of the Waldorf Astoria hotel in New York City. NREI spoke to Robert Occhiogrossi, R.A., NCARB, LEED AP, managing director of IVI Assessment Services, about which property types and locations foreign buyers prefer, as well as the unique challenges they face. An edited transcript of that interview follows.

NREI: What changes are you seeing in how foreign investors are approaching U.S. assets?

Robert Occiogrossi: Foreign investors are dealing with fewer purchaser contingencies—meaning that in some cases there may not even be an opportunity to conduct due diligence. These investors are partnering with their diligence consultants such as IVI to develop a working strategy that gives them a high level of initial comfort before hard deposits and commitments are signed.

NREI: What types of assets are foreign investors most attracted to? How is this changing due to the influx of money from abroad?

Robert Occiogrossi: While foreign investors have traditionally been attracted to hotel, multifamily and office assets in U.S. gateway cities such as Los Angeles, New York, San Francisco, Washington, D.C. and Chicago, the increasing appetite for acquisitions may push foreign investors to look at properties or asset types they may not have customarily looked to as good investments in the past.

NREI: What non-traditional asset types are foreign investors pursuing, and what is their level of comfort with those types of investments?

Robert Occiogrossi: As long as there is value and a perceived good investment, we are seeing investment through opportunity fund vehicles that may dilute a foreign investor's direct participation in a transaction. The secondary markets might see involvement by a foreign investor in a JV equity stake. Like any client, once they start looking outside of their comfort zone, it is our job to advise them further about the building risk and environmental risk associated with same.

NREI: What are some of the issues that can halt a transaction from continuing, and how is IVI addressing these issues for foreign investors?

Robert Occiogrossi: If there are deal mechanics at play that might affect cash flow or deal viability, these will ultimately require a business decision to proceed with a particular transaction. On the vertical side, there may be specific building issues or red flags that need to be quantified within a shortened timeframe, or lack of comfort with historical and proposed capital expenditure plans. Our network of building specialists and experience with a multitude of building issues enables us to swiftly evaluate the situation, review available inputs and propose a solution.

NREI: Why is it more challenging to get acquisition financing now? Which types of foreign investors are most affected by this?

Robert Occiogrossi: If there is financing being sought at the backend of a transaction, this may require a specific handling of building issues and cost projections to incorporate the new borrower's plans. We have tools and methods in place that make this process run smoothly for foreign investors. The cost of capital does not seem to be an obstacle. Some large single-asset transactions that ultimately become securitized will undoubtedly be supported by a lending team, each with their own sensitivities and risk profile that must be considered.

NREI: What kind of strategies is IVI using to get clients comfortable when due diligence may not be possible?

Robert Occiogrossi: I would first clarify the question by noting “conventional due diligence” would be considered a full site visit, with a narrative report and complement of building system specialists. Good due diligence takes time, and it is this balance of time vs. client risk that needs to be understood and discussed. We oftentimes propose a hybrid solution: reduced observations, reduced reporting requirements, all with an understanding there is a tradeoff with this approach. When there is truly no opportunity for diligence to occur, we have the ability to run models of expected lifecycle costs to understand operational risk, but might also be able to offer opinions via third-party reviews of seller due diligence materials. We want to add value and build on the advantage of our relationship with leaders in the industry in our advisory role to our clients in this space.

NREI: How much of a problem is the lack of due diligence creating—do you foresee major problems down the road caused by this?

Robert Occiogrossi: This is really a tactic to force a hand in the deal, and it truly comes up as unquantifiable risk for the investor. If the plan is to reposition or add value to a project, there may be quite a bit of concealed or unanticipated conditions that could have otherwise been identified or flagged for review. This could impact investor returns or become an issue when it is time to sell an asset.

With respect to the Phase I ESAs, it is important to recognize that the US EPA Innocent Purchasers Protections under CERCLA are only afforded to those entities who perform “All Appropriate Inquiry” prior to the closing. As such, forgoing proper environmental due diligence can leave a property purchaser exposed to unforeseen liability in the future. 

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