Foreign Investors Look to Land for Profits

NEW YORK CITY-Foreign investors are interested in US commercial real estate, thanks to favorable exchange rates. Private equity firms and other funds are increasingly targeting land parcels in this country in anticipation of the next real estate cycle. Now, it appears that the twain is about to meet.

“We are seeing strong interest from the European market in the US real estate markets — with a particularly strong interest in land investments where there is a long time horizon and a low leverage play,” Anthony M. Graziano Jr., associate managing director with Integra Realty Resources, tells GlobeSt.com. The current woes of just about all residential builders are an added plus, as these firms are being forced to sell entitled land at deep discounts in order to keep shareholders satisfied, or even just stay afloat.

US funds, as well, are targeting land purchases for the same reasons, according to David Reiner, managing director of Capital Markets of Grosvenor Investment Management. “Homebuilders either have to write off the value of land they bought at highly inflated prices to more realistic numbers — or they need to sell it to get cash,” he tells GlobeSt.com.

He points to the December $525 million land bank JV between Lennar Corp. and Morgan Stanley Real Estate, in which Lennar will sell 11,000 lots to the investment bank, as typical example of this strategy. Another example is Duball LLC, a Reston, VA-based firm that is launching a $300 million fund with CMI Group to acquire land parcels in the Mid-Atlantic. Its goal is to acquire land in tracts worth between $5 million to $50 million. The fund has a $150 million equity pool that is leveraged by $150 million of debt.

“A lot of what is driving the shock in the housing market is the short-term requirement for public builders to close on entitled land,” Graziano explains. “That is hurting the balance sheets of public builders.” Foreign investors, in particular, have a long time horizon and the consensus is that the dollar will stay at its current levels for the next 24 to 36 months, he says.

“It’s an ideal confluence of events — the ability to buy residential land today at a favorable exchange rate and then be able to wait until the residential markets come back as the overall national economy gets stronger,” Graziano says. The growing number of funds focusing on land play is a reflection of this trend, he adds, as foreign investment dollars are co-mingled in these private equity funds.