By Joy Hou, Co-founder and CEO, Metis
Last year, over $40 billion of cross-border capital entered the US Commercial Real Estate market, a trend that is showing no signs of slowing.
Globally, the US remains one of the most stable countries in the world, and for that reason, capital preservation is the key motivation for investors to aggressively acquire assets abroad.
Furthermore, China recently approved a set of new policies that enable Chinese companies to invest overseas without prior approval from the Ministry.
This change further fuels investment interest from China into the US commercial real estate market.
Most foreign investors gravitate towards real estate in gateway cities as one of the most desired asset class because they are familiar with the area, and they are tangible.
When a large amount of capital infusion enters into the US, in an already competitive market, it is even more important for traditional US institutional investors to understand the impact of this trend and be proactively innovative in order to compete.
The industry typically generalizes “foreign” investors as a single type of investor, however, there are many types of investors with diverse objectives and constraints.
Major foreign investor types include sovereign funds, private equity, hedge funds, public companies, and family offices. Each type has their own sets of investment criteria and return expectation.
While the concept of investment appears fairly straight forward, the financial engineering commonly practiced by US based investors are quite complex to the foreign investors.
On the other hand, the currency exchange and tax factors are unique to foreign investors.
Also, their investment metrics and return expectations are measured differently, therefore it is extremely challenging for many US based investors to compete or understand the pricing logic executed by foreign investors.
For example, many foreign family offices who are looking to “park” their money for generations and simply do not care about the concept of IRR, making it is almost impossible for US based investors to compete.
The biggest challenge for foreign investors in building a successful portfolio is access to opportunities and local contacts.
Most of them have yet to develop trust or reputation in the industry that is large in size, but small in the number of active players. One of the advantages that US based investors have is the network of business contacts and intelligence that they have developed over a long period of time.
Most foreign institutional investors understand the importance of having local connections, knowledge, and support to be more collaborative.
Many have even begun to establish presences in the US, staffed with local professionals in order to gain reputation and the access to opportunities. Over time, as globalization continues, and the respective networks are interconnected, all players regardless of their origin will learn to collaborate and redefine the rules that work for them.
As the commercial real estate industry continues to evolve, and the world shrinks, technology will play an important role in providing better and faster access to people, information and opportunities.
Today, many professionals are wondering why there isn’t already an established online commercial real estate marketplace where buyers and sellers can meet and trade.
Commercial Real Estate is a complex business that is relationship driven and information intensive. It should never be commoditized by a traditional online marketplace platform.
Instead, the type of technology that will create the biggest impact are platforms that enable interconnectivity to take place on a deal and organizational level, so that access to information and better communication will help everyone involved throughout the life cycle of the investment: buy, invest, finance, manage, and sell.
Platforms like MREN could bridge the borders and promote collaboration regardless of where the participants are located.
A global commercial real estate platform that enables all stakeholders to establish their own private market network, while being connected to other networks will truly help the global real estate ecosystem.
Companies using the platform will gain competitive advantages by having the ability to collaborate, streamline communication, and manage information in an effective way, no matter the distance.
The Commercial Real Estate business is all about trust. While the type of capital or structure may change due to the origin of the capital, the people aspects of the business will never change.
To be the most successful, investors must find the best ways to collaborate with “new” participants of the real estate investment community to collectively create value for all.