China, Mexico, Japan and Australia are just a few of the countries pouring capital into the U.S. apartment market, according to a number of speakers at the 2015 NMHC Apartment Strategies Outlook Conference.
“2014 was a transitional year where we started to see international capital flow into our market in a serious way,” said Kris Mikkelsen, managing director for Engler Financial Group.
“In the past, foreign investors put a risk premium on apartments versus other asset classes like offices because they didn’t fully understand our professionally managed apartment industry,” added Mikkelsen.
That’s changing, though, and the newfound appreciation for the dependable cash flow apartments offer “is set to unleash an unprecedented flow of capital into the sector,” said Allina Boohoff, executive director with J.P. Morgan Asset Management.
U.S. apartments are seen as a safe haven because the rest of the world is very volatile, and many foreign investors are more interested in preserving capital than maximizing returns, which could put downward pressure on cap rates.
Just because foreign investors are more comfortable with U.S. apartments, that doesn’t mean that there isn’t an educational component for both sides of the transaction.
“When you are thinking of working with foreign capital sources, you need to be culturally sensitive,” shared Clyde Holland, chairman and CEO of Holland Partner Group. “Rates of return are important, but being thoughtful and culturally respectful is top of the list.”
Underscoring the importance of developing strong relationships, David Schwartz, CEO of Waterton Associates, said, “Show up and be there, not just while you are raising capital. Investors respect the fact that you are invested in spending time with them.”
Make sure you do your homework, warned Schwarz, who said they used a placement agent in London to conduct their foreign road show and that they specifically avoided Europe because of their complicated security laws.
“In France, if you don’t solicit properly, you can go to jail,” said Schwarz.
Despite the challenges, more firms are tapping into foreign capital. “We get 90 percent of our capital from Mexico,” reported Ricardo Rivas, chief investment officer at Allied Orion Group.
Max Peek, senior vice president of acquisitions at Waterton, added that his company's last fund in 2011 was 100 percent domestic; its current fund will be just 65 percent domestic.
“One of the things we like about foreign capital is that they are looking at the long horizon,” said David Olney, managing director of Berkshire Group.
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