NEWPORT BEACH, CA—A panel of industry experts recentlyparticipated in a ULI Orange County/InlandEmpire-sponsored discussion about what is fuelingforeign investors' increasing interest in Americanmultifamily markets. Tom Warren,COO of Southern California Holland Group;Jerry Fink, co-managing partner of BascomGroup; moderator Dan Cashdan, seniormanaging director of HFF; Paul Lee, SVP ofLandsea Holdings Corp.; and BillZhou, managing partner of US-China Real EstateInvestment Center, discussed the rising steady stream offoreign capital flowing into the multifamily real estatemarket.

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Both Fink and Warren represent firms that have been activelyusing foreign capital for recent real estate deals, and Lee andZhou have represented investment groups from China and were able toprovide insight into the strategies and business plans of foreigninvestors.

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The panelists explained that during the 1990s and early 2000s,China's economy was growing at a steady rate, and real estate dealswere making between 50% and 100% IRRs with equitymultiples between three and five, so there was no need to lookoutside the country for deals. When the US housingmarket collapsed during the recession, Chinese investors saw anopportunity to take their money overseas. In conjunction with therecent slowdown of growth in China's economy, they began looking toinsert their money into US markets where they felt deals were saferand more transparent and cap rates were still favorable.

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There are three main pools of foreign-investorcapital: 1) government capital, includingorganizations like China Investment Corp. and China's StateAdministration of Foreign Exchange; 2) real estate investmentcompanies, banks and insurance companies; and 3) high-net-worthindividuals. The panel mainly discussed pool #2 and explained howforeign capital should be considered as an alternative totraditional institutional lenders.

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Because Chinese investors are still learning the methods inwhich real estate deals are executed in the US, their goal is topartner with US-based firms and establish a business relationshipso as to become educated on the real estate industry. In addition,they are interested in short-term deals with a typical holdingperiod of three to five years and a strong exit strategy. Becauseof tis, IRR is a major characteristic in decidingto pursue a deal. They appear aggressive in the real estate marketbecause they have the necessary capital to chase projects and stillbelieve the cap rates are favorable to generate stable returns.

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Right now, the panelists said, most Chinese capital is beinginvested 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 marketableurban cities, and it is an added bonus if that city offers a directflight to China. In addition, they pick cities where thereare strong educational institutions because oftentimes they havefamily members attending those schools. Currently, multifamilyinvestments are their main focus due to the steady returns andbecause it is a relatively safe and liquid asset class, but as theybecome more comfortable completing deals in the US, this will beginto shift to include more office andindustrial deals, which will open up manyopportunities for US firms looking for additional capital,especially if interest rates begin to rise.

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Carrie Rossenfeld

Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.