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Michael Campbell, CEO of The Carlton Group

The Role of Foreign Investors in Commercial Real Estate

Today's Guest - Michael Campbell, CEO of The Carlton Group

 

On today's episode, I welcome an absolute titan in the equity raising world: Michael Campbell. He's one of the brilliant minds behind the legendary Carlton Group, which is widely considered the top choice for financing high value real estate transactions.

Originally working out of New Jersey, it didn't take Michael long to find his way to the world of New York City real estate. In 1999, he began working with The Carlton Group, a company that's responsible for more than $140 billion worth of transactions during Michael's tenure alone.

Today, we explore the complicated world of international real estate investing. From the role of China in the global marketplace to why American investors often find themselves outbid in financing deals - we dive deep into the subject matter and leave no stone unturned. This is a must episode for anyone considering using foreign capital to finance their deals.

 

What You're Going to Learn

 

*  What Motivates Foreign Investors to Buy U.S. Real Estate

*  Why Foreign Investors Often Outbid American Investors in Real Estate Deals

*  What You Might Expect from a Foreign Partner on Your Commercial Real Estate Deal

*  Which Countries are Most Foreign Investors in U.S. Real Estate From?

*  Why China Has Moved Out of U.S. Real Estate Investments

*  The Real Estate Investing Preferences of Various Asian Countries

* The Preferred Asset Classes of Foreign Investors

*  The Impact of Foreign Investment on U.S. Commercial Real Estate

*  What You Must Know about the Cultural Differences that Effect Foreign Investments in Commercial Real Estate

*  And much more!

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Show Highlights

What Motivates Foreign Investors to Buy U.S. Real Estate

Adam: Why is there international interest in U.S. commercial real estate? What are the motivations that drive people to want to buy real estate here?

Michael: Mostly from the foreign investors it always has been the safe haven for them to make investments into the U.S. because they view the U.S. as a safe country versus their own, sometimes, or other opportunities that they have. That's probably one of the biggest reasons. They can also write a bigger check. A lot of these foreign groups, they want to write big checks, and it's easier to do in the United States than it is elsewhere because assets here sometimes are expensive, or you can buy big portfolios, et cetera. It's mainly because they view it as a safer haven for them to make investments and diversify.

Why Foreign Investors Often Outbid American Investors in Real Estate Deals

Michael: Yes, the returns that they require ... Obviously, their hurdles are lower than what traditional U.S. investors would be. So, they don't really have to get maximum return in a deal; they're looking to get ... They do development. They also do existing cash-flowing deals. They're looking to get a good yield, but it doesn't necessarily have to be a yield that American or U.S. groups would focus on, which is a lot of times why the foreign groups outbid the U.S. groups because the foreign groups can pay more because their [year] requirements are less.

For example, if it's a development deal, a U.S. group may want to get a 20-percent IRR. A foreign group, they could be happy with 12. If it's a cash-flowing deal, some groups in U.S., they may want to get a six-, or seven-percent cash return; foreign groups could be happy with four percent. It really depends on what part of the world they're coming from; especially from the European markets now, where they have negative interest rates. If they get a four percent, they're very happy with the returns they can get here. They're willing to ... That's why, if it's a foreign group bidding on an asset, typically, they're going to win the deal because they're going to be able to pay the most.

What You Might Expect from a Foreign Partner on Your Commercial Real Estate Deal

Adam: What kind of partners are they, Michael? Are they passive? Do they also want to JV or invest with a local sponsor and then operate by committee? Are they more hands-off? Give me a kind of ... Paint the picture of how they operate.

Michael: In most cases, the foreign investors are very hands off because typically, if it's in the U.S., it could be anywhere from nine to 13 hours in a time difference. It's harder for them to be hands on when it's like that, which is why it's very important that they partner- when they do partner, it's someone that has a track record because they're pretty much relying on their partner, locally, to execute the business plan, to asset manage their property, wherever they're doing. They rely heavily on the actual local partner. That's probably more than 50 percent of their underwriting is really underwriting their local partner because they can't be hands on, and they can't be the big brother, directing them, week to week, what to do, which gets to my other ...

Which is another point - that's why the local guys that we deal with that are looking for partners, they love foreign investors because they don't have someone over their shoulder, directing them, telling them what to do. They're the experts, so to speak - the local guy - and they get to do the right thing without having someone to tell them what to do, so to speak. As long as it's within a business plan that they approve with the investor, the foreign investor, they pretty much just run the show without having big brother pretty much watching over them.

Which Countries are Most Foreign Investors in U.S. Real Estate From?

Adam: Let's get a bit more specific. When we talk about foreign investors, which countries are particularly active right now here in the United States? Then, let's talk about the trends and how that's changing and how it has changed.

Michael: Okay, so who we deal a lot with, recently, who is very active in U.S. - Asian countries, which is Japan, South Korea, and Singapore. They pretty much have been the biggest replacement for China. As you know, China's ... Nothing from China in years. Singapore, South Korea, and Japan have pretty much filled the gap where China used to play in before. They're very active. They want to see- they want to do bigger deals. They want to do ... They want to do all the deals we show them. They want to figure out how to make it work. That's probably the most active, now, that we're dealing with on the foreign side.

That being said, there's also activity coming from Saudi Arabia, and the Middle East. Everyone knows about Abu Dhabi, and Dubai, and Kuwait, or whatever, but the real money from the Middle East is really in Saudi Arabia. I mean, that's where the real money is, and that's where, a lot of the times, they're coming in privately, so to speak; whereas they don't want to make big announcements that they made investments of certain deals; but the money's in Saudi Arabia, from the Middle East. That's where all the big deals are getting done with.

China Has Moved Out of U.S. Real Estate Investments

Adam: Tell me about how China has- or Chinese-inward investment to the U.S. has changed; because I was working for a Hong Kong-based fund not that long ago, and there was a lot of Chinese capital coming into the U.S.. So, just explain how that has changed and the kind of waves that you see in terms of where money is coming from over time.

Michael: Sure. I mean, mainland China, there's zero money coming into the U.S.; that's seen. You mentioned Hong Kong, which I always sort of put them- they're separate in my mind. Hong Kong, actually, there's still activity from some of the Hong Kong investors in the U.S. because they're not part of mainland China, so to speak. But China, itself, is like zero [crosstalk]

Adam: When did that stop, Michael? When did that stop because they've been a huge investor here in The States?

Michael: Who, China, you mean?

Adam: Yeah.

Michael: They probably stopped two years ago. They started slowing down two years ago, but last year, I'm not even sure if there was a deal done with Chinese equity investors in the U.S., and a lot of the assets that the Chinese investors own in the U.S., they pretty much have been forced to sell the assets from the government. They had to diverse out of the U.S. real estate; they've had to sell. A lot of times, they had to sell at losses, unfortunately, because they had to get out of U.S. real estate-

Adam: That's because of Chinese legislation, or Chinese regulation [crosstalk]

Michael: Correct. For the most part, correct. I mean, it's unfortunate. A lot of them paid very big numbers, especially in New York City office buildings, and they had to sell at big losses. We're talking about hundreds of millions of dollars of losses here just because they had to get out [crosstalk] They're done, right now, in U.S. real estate, China is-

Adam: Say that again? They're done - is that what you said?

Michael: They're done. They're done investing, right now, unless things change; but, right now, there's no new inflows from China.

Real Estate Investing Preferences of Various Asian Countries

Adam: That's interesting. So, you're seeing it picked up by a Japanese-Singaporean-South Korean capsule, primarily.

Michael: Correct.

Adam: Do these guys direct- do they prefer to invest directly, and buy assets directly, and then have a management company look after it, or do they invest as equity with a local sponsor?

Michael: It varies. There are some groups in Singapore that want to buy direct, and they want to run it themselves; some of the larger funds. But, for the most part, they still want to partner with someone local just because ... Especially if they don't have a presence, like an office here in the U.S.; especially, when that's the case, they want to have a local partner. Some of them do buy direct, don't get me wrong, but for the most part, they want a partner.

Adam: Is it equity, or debt, or a mix of both?

Michael: It's both. Probably equity is more from ... Equity comes from, like I said, all three countries I mentioned - Singapore, South Korea, and Japan. They all would do equity for certain deals. South Korea actually is probably bigger on doing debt; debt being first mortgage, and mezzanine on deals. South Korea, also, is a little bit more focused on the development deals.

Adam: Is that right?

Michael: On the debt side. On the equity side, they would buy existing deals, but on the debt side, for South Korea, they really are doing a lot ... We've actually done a lot of deals with them, where they do a first mortgage, and a mezzanine loan on a construction deal - from hotel, to office, to a multi-family project - which is good, and the reason why our clients ... Obviously, we can get a mezzanine loan from someone from here, but the rates are a lot cheaper than ... They're more competitive on the mezzanine pricing than a U.S. mezz fund would be. So, that's why a lot of these groups are using South Korean debt because it's just cheaper.

Preferred Asset Classes of Foreign Investors

Adam: So, what kind of asset classes, if you were to put them in any kind of hierarchy, what kind of asset classes are preferred by foreign investors, and what kind of geographical locations? You've touched upon that; let's drill down on that a little bit.

Michael: Sure. I guess there's always interest in Class-A office; Class-B office; Value Add. That's an asset class that they understand in their countries because they have them there. Multifamily is very interesting to them also, but I think, a lot of times, in foreign countries, they don't have a lot of rental properties themselves. I think everyone buys their individual condos; then, if people own their condos, they may rent it out, but there aren't a lot of entirely all-rental buildings in some of these countries because it's not what they do, themselves.

They're definitely interested in investing in that in the U.S. because they see and understand how that's a safer asset class for them. It's just something they're really focused a lot more on, recently - from ground-up development of multifamily to Value Add multifamily. Occasionally, they would want to do a Class-A stabilized multifamily project, or tower, but historically, they would do the Class-B Value Add, or development.

The Impact of Foreign Investment on U.S. Commercial Real Estate

Adam: What is the impact of foreign investment on U.S. commercial real estate? For example, volatility, or price inflation, et cetera ... Give me four components of the impact, if you like, of foreign investment-

Michael: For sure, what has happened, because of the foreign investor groups, it's made things expensive for certain asset classes. Multifamily, for example, it keeps getting more and more expensive because there's so much competition to buy the assets, even with U.S. investors; but now, you throw in a foreign investor who wants to start doing it, start making these types of investments, it makes it even more expensive because there's just more competition for the same product. We're seeing that in office buildings. We've seen that in multifamily.

I think we're starting to see more of that in the industrial-logistics aspect, because that's something also they  ... Everyone is- I think everyone in the world, probably, is now trying to get on the bandwagon, like the Amazon effect, where everything is online, so to speak; we need warehouses, logistics, all that's like a growing fields, and a lot, lot more interest keeps coming from investors to do those type of assets going forward. I don't think they have actually done a lot two years prior, but they're definitely focused on that asset class now.

Adam: Actually, that was ... We were talking about that - the different asset classes. So, industrial- what about medical office buildings, or senior housing, or any of these other asset classes? Is that something [crosstalk]

Michael: Senior housing, yes, because I lump that into the multifamily bucket because, to them, it's a rental apartment for a different age group. It's still active. Medical office, we don't really do any of that, so I can't really speak to that aspect of it. We have done assisted living, which is like the next level above senior housing, where it's more of a medical aspect to it; but that's probably the most we've ever done in the medical field, because we have plenty to do in the office, industrial, and multifamily. It's more of a specialized asset class - the medical offices.

The Cultural Differences that Affect Foreign Investments in Commercial Real Estate

Adam: For anybody who is about to engage, either through you, or otherwise, with foreign investors, describe the process, will you, of raising capital from foreign investors. Again, just through my own lens, I remember it was a very unusual experience, first dealing with Japanese investors, when I did. I didn't speak Japanese, then. I do now, but I do remember thinking the customs were foreign ... [crosstalk] It took a while to get used to that ... Give me some advice to- or give advice to somebody who is about to talk to a Singaporean, or South Korean, or some foreign investor.

Michael: That's a very good point. The culture is totally different than U.S. culture, or customs, in terms of the way they do business. In most cases ... We've been doing this for years, and we've gone to Singapore, Korea, South Korea, and Japan, and also in the Middle East for years. The way that they are accustomed to doing business is that they don't ... You have to get to know them. Sometimes, it can take a long time. You have to go to dinner with them, or go through their little [interpersonal] events they have in South Korea, where they have ... I forget what they call the rooms, but it's where you go out, and you have like a drinking party, so to speak with them at night to really get to know them and bond. It takes time to do that.

You really have to do that first before you can even get in the door for your deal. I always compare it to this - if you have a deal, a good deal in the U.S., you could take it to anybody here on Park Avenue by my office, any of the funds, and they will talk to you, even if you didn't know them, if it was a good deal. In foreign countries - Asia, and the Middle East - it doesn't matter how good the deal is, they're not going to talk to you first until they know you, like me, as a broker, not even the owner, for me to present to them.

It just takes a process to really get into certain investors to- for them to look at your deals and to fund it. We've been doing that for years, so we have a good relationship with all these investors. A lot of times what happens, as well - at least with us - is we work with one investor, either a high net worth family overseas, or even institution, and everybody knows everybody in every country, because their countries are small; so everybody knows everybody.

So, if you do a good job, and they like you, they introduce you to their friends. Even if it's an institution, they introduce you to their friend at this institution, or this high net worth family. That's really how we got a lot of our investor relationships overseas is just from referrals from investors that we dealt with, who liked what we did, and they would refer us to their friends. That's really how we cracked the foreign investors; because it was time-consuming to really do this, over the past 10 years, so it's now coming to fruition, obviously, a lot.

We continuously ... Obviously, by the way, we still get a lot of referrals from investors who introduce us to their other friends. It just keeps happening over, and over again, because there are so many [crosstalk] especially on the family office aspect ... I mean, a lot of institutions, worldwide, people know the institutions, but the family office aspect, there are a lot of billion dollar family offices out there that no one really knows about because they're very private. People don't want to know who they are; so they're very private. Now, how you crack into that is you get introduced by another family office that they're friends with and that just keeps multiplying and multiplying. That's how we found all of our family offices overseas is mainly through referrals from other family offices that they're friends with.

Adam: Michael, this is a very important point that you make. So, if somebody is looking to raise capital from foreign investors, and they're working with you, particularly, does the introduction through you cut any of that? I'm going to use an American expression, or at least a Western expression - does it cut that red tape, or is that sponsor still going to have to spend time to get to know the investor on a one-to-one level, et cetera?

Michael: It definitely cuts a lot of red tape because it gets them in the door to talk to the investor, to do the investment. But the investor's still going to want to meet ... They would definitely fly here. You don't have to go to Korea, or Singapore. They have no problem coming here to meet you, and they want to see your office. But it definitely cuts a lot of red tape.

We've done deals with foreign investors within 60 days from introducing them to the deal, plus the sponsor; then, 60 days later, we close. It's not a long, drawn-out process because we've cut a lot of that red tape out already by our relationships. We've earned the trust from these investors to know that we're going to present them with good sponsors, and good deals. So, they trust us, in that aspect, to spend the time with someone we introduce them to. They would spend the time and underwrite the deal and the sponsor faster than they would if the sponsor called them directly because a lot of times the sponsor [crosstalk] try to call directly, and they get nowhere.

Adam: That's right. You find a number on a website. "Hello ... Can I speak to the boss, please? I want to see if he wants to invest in my deal." [crosstalk] Doesn't work like that.

Michael: Right, exactly. It doesn't work ... It works like that on Park Avenue in New York, but not overseas.

Adam: Right.

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