CHICAGO—Foreign investment in North American real estate is thriving, as established investors move in from other markets in search of greater diversification. This shift is occurring as the allocation of capital to real estate increases and the principles of portfolio management—including diversification—are applied by sophisticated investors. Portfolio strategy combined with pricing, supply and other fundamentals prompt investors to look outside of the UK, Europe and Asia to the North America for investment opportunities.

The types of foreign investors actively pursuing US and Canadian assets can be divided into three simple groups: sovereign wealth funds (SWF's), individuals with high or ultra-high net worths, and institutions. Each has its own unique investment criteria/strategies, diversification needs and yield requirements.

According to recent reports by JLL, Real Capital Analytics and others, five of the top 10, and three of the top five markets for international investing today are located in the US The top rated cities include Manhattan, Los Angeles, Chicago, Houston and Dallas.

Yet the attractiveness of the US market truly lies in its depth and diversification attributable to its sheer size. There are many specialized firms looking to shift away from premier markets, where pricing and competition will be higher and constrict yield potential, and tap into cities such as Chicago, Dallas, Denver, Houston, Raleigh and Atlanta, among others. These markets, and others that are emerging, offer strength and economic stability, without the lower yields prevalent in a top tier market, such as New York.

Along with this type of geographic diversification, investors are also creating new definitions for terms such as “trophy asset.” While the term historically has defined a prime, class A asset, typically in a large metropolitan market, there are new ways to define and expand that terminology.

Redefining Trophy

Foreign investors are looking beyond trophy locations and buildings to other key investment qualifications or characterizations, including:

Trophy Credit—Trophy tenants have strong, investment-grade balance sheets and trade for a premium above their bonds. Those tenants are attractive to investors because of their long-term viability and stability, including locations in secondary and tertiary markets.
Trophy Sectors— Like stock market sectors, they can be categorized first by defensive or growth industries. Defensive tenants (healthcare, government, housing, etc.) provide a great hedge against any future economic downturns or market fluctuations and certainty of income. Existing and emerging growth industries (mining, computer systems design, beverage manufacturing, life sciences, etc.) provide investors with tenants who will likely expand to increase occupancy or spawn new development.

In today's global economic climate, in addition to stocks and bonds, the steady income, growth of real estate and inflation hedge is appealing to almost all investors, regardless their country of origin. While there are nuances to the investment outlook for various tenants, sectors, asset classes and markets, investors will continue to search for risk adjusted returns and diversification will drive many decisions.

As citizens and business executives in the US, it is easy to be overly critical of our politics and our economy. Comparatively speaking, and in the minds of the rest of the world, there is great stability—political and economic--within our borders. There also is no shortage of product that is available, unlike other parts of the world. For these reasons, US real estate will continue to attract foreign investment.

Daniel Cooper is a Chicago-based partner and head of North American operations with 90 North Real Estate Partners LLC, an international real estate investment management and advisory firm. He may be contacted at dcooper@90northgroup.com. The views expressed here are the author's own.

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Foreign Investment Shifts Geographically for Greater Diversification

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