NEWPORT BEACH, CA—It's no secret that foreign investors are bullish on US real estate. But which foreign investors are having the biggest impact on our market, and why is real estate here so attractive to them? Kerry Vandell, director of the Center for Real Estate at UC Irvine, will be speaking about these and other subjects at this week's California Association of Realtors conference in Los Angeles, “The Real Estate Summit: Partnering for Change,” along with other representatives for leading real estate research centers at California's top universities. We caught up with Vandell to discuss the issues he'll be broaching at the conference.

GlobeSt.com: What foreign investment dollars are having the biggest impact on US real estate?

Vandell: Traditionally, at least in recent years, Canada has been the largest foreign investor in US real estate, but there's been a real increase by the Asian countries and the various funds from those countries. China and Russia have become big players, Singapore through its sovereign wealth funds, Malaysia and Australia. And Norway has recently become one of the largest investors in US real estate through its sovereign wealth fund. Countries are making use of their oil revenue and trying to put 5% into real estate—and more in US real estate recently.

GlobeSt.com: Where geographically is most of this money going?

Vandell: Traditionally, most of the foreign money allocated for US real estate has been invested in gateway cities like New York, San Francisco and Washington, DC, but more recently we've seen an increasing proportion in Houston, Los Angeles and Miami (which has a Latin American flavor to it), and they're talking about some of the money going into Austin and other knowledge and tech centers like Silicon Valley. If you're focusing on California, the biggest amount historically was in the San Francisco area at first, then Silicon Valley, but more recently Los Angeles is coming in from a variety of sources and sectors. This also includes the Greater Los Angeles area of Orange County.

GlobeSt.com: On which sectors are they concentrating?

Vandell: When you look at the sectors, you might think of the high-end, triple-A office buildings, but foreign investment has moved substantially beyond that. Last year, a lot of foreign money went into multifamily, and this year it has been on less jazzy industrial properties. For the most part, these are not class-B properties (they are investment grade. They're moving more into value-add a little bit, but they're typically investing for the long haul—they're not flippers by any means. They're bidding down cap rates by this activity, and class-A cap rates in some major cities are below 4%.

GlobeSt.com: Why are foreign investors willing to drive up prices and drive down cap rates in order to own here?

Vandell: The reason they can do this is because they don't have all the strictures. If they're holding a property for several decades, they can accept the risk. One thing that's often overlooked: a lot of single-family residential is being bought by foreign nationals, and it can be urban condo or suburban high-end markets. A lot of capital moving out of China into investments elsewhere is motivated by future holding and possibly for family members. This has happened before to a degree—in the late '80s, this was going on in the Bay Area.

GlobeSt.com: Why are foreign investors seeing US real estate as a good bet?

Vandell: These folks can pay all cash, and strict mortgage qualification standards in this country have put a damper on new-home and family-home construction and the ability of people to transact domestically to buy their first home. This is attracting institutional and foreign investors. One of the factors is that institutional investors use a transparency index that deals with risk and other issues related to real estate, and the US has one of the best transparency indices. The rule of law is enforced here black money exchange is minimal in the US, and we have a very transparent process in terms of acquisition, so they have a greater confidence in their ownership position.

Also, the dollar has gotten stronger relative to many currencies, so they're trying to get an additional pop through currency appreciation. It's not true in every case, but many European currencies are much weaker than before.

In addition, there's a sense that the US is in a sweet spot in terms of growth in the economy. The demand for real estate is clearly related to the growth in the economy. As the economy grows, the demand for hotels, industrial—virtually all of the sectors—increases. China is slowing down somewhat, and many European economies are not doing well—along with Latin America—so from that standpoint, it looks attractive, too.

And finally, there's EB-5. I have students in China from well-to-do families who are actively involved in this. They started their own programs where they bring this money in and it's pooled for larger investments. EB-5 is one of the major sources of capital for real estate development in the state of Vermont, which has formalized this process. They like to get their money out of the country as quickly as possible—that's a driver, too—but there are also restrictions holding the money back.

GlobeSt.com: Are foreign investors impacting values and the amount of distressed real estate?

Vandell: To the extent that there's a large stock of distressed real estate, it's not primarily where their money is going. This is not a major focus of foreign investors, so there's less of an impact there, although it's clearly having an impact on non-distressed properties. There's a huge demand from foreign buyers for condos in New York City, and we see some of that here in high-end areas. This is certainly having an impact on values and driving cap rates down. Yield is more important to domestic investors than to foreign because they're looking at longer hold periods.

Sovereign wealth funds have become so important. Basically, all the sovereign wealth funds diversified into many different types of investments, but this never happened in the US. In the Middle East, China, Norway and other European countries, Australia, Japan and Singapore, they all have sovereign wealth funds that have been a major source of investment capital. They recognize investment-grade CRE especially—it's really a global market now. It's broadly diversifying across the world.