NEWPORT BEACH, CA—A panel of industry experts recently participated in a ULI Orange County/Inland Empire-sponsored discussion about what is fueling foreign investors' increasing interest in American multifamily markets. Tom Warren, COO of Southern California Holland Group; Jerry Fink, co-managing partner of Bascom Group; moderator Dan Cashdan, senior managing director of HFF; Paul Lee, SVP of Landsea Holdings Corp.; and Bill Zhou, managing partner of US-China Real Estate Investment Center, discussed the rising steady stream of foreign capital flowing into the multifamily real estate market.

Both Fink and Warren represent firms that have been actively using foreign capital for recent real estate deals, and Lee and Zhou have represented investment groups from China and were able to provide insight into the strategies and business plans of foreign investors.

The panelists explained that during the 1990s and early 2000s, China's economy was growing at a steady rate, and real estate deals were making between 50% and 100% IRRs with equity multiples between three and five, so there was no need to look outside the country for deals. When the US housing market collapsed during the recession, Chinese investors saw an opportunity to take their money overseas. In conjunction with the recent slowdown of growth in China's economy, they began looking to insert their money into US markets where they felt deals were safer and more transparent and cap rates were still favorable.

There are three main pools of foreign-investor capital: 1) government capital, including organizations like China Investment Corp. and China's State Administration of Foreign Exchange; 2) real estate investment companies, banks and insurance companies; and 3) high-net-worth individuals. The panel mainly discussed pool #2 and explained how foreign capital should be considered as an alternative to traditional institutional lenders.

Because Chinese investors are still learning the methods in which real estate deals are executed in the US, their goal is to partner with US-based firms and establish a business relationship so as to become educated on the real estate industry. In addition, they are interested in short-term deals with a typical holding period of three to five years and a strong exit strategy. Because of tis, IRR is a major characteristic in deciding to pursue a deal. They appear aggressive in the real estate market because they have the necessary capital to chase projects and still believe the cap rates are favorable to generate stable returns.

Right now, the panelists said, most Chinese capital is being invested in bi-coastal cities such as Los Angeles, San Francisco, New York and Boston, with the intent of moving into Washington, DC, and Austin, TX. The strategy is to invest in strong marketable urban cities, and it is an added bonus if that city offers a direct flight to China.  In addition, they pick cities where there are strong educational institutions because oftentimes they have family members attending those schools. Currently, multifamily investments are their main focus due to the steady returns and because it is a relatively safe and liquid asset class, but as they become more comfortable completing deals in the US, this will begin to shift to include more office and industrial deals, which will open up many opportunities for US firms looking for additional capital, especially if interest rates begin to rise.