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Finance

Buy America

Trouble abroad and relative stability in the states are making the U.S. an increasingly attractive place for foreigners to invest. Worth reports on what they’re buying and why.

BY Karen Hube | Finance | Aug 19, 2016
Buy America

Foreign capital has been pouring into the U.S. as investors look for the most stable, growth-oriented markets in a difficult global economic landscape.

A slumping economy in China, a crushing devaluation of the Russian ruble, a political corruption scandal in Brazil, an inability to ignite growth in Europe—these are just some of the challenges that are prompting investors in these regions to look farther afield for better prospects.

While such woes certainly have an impact on the U.S. economy, the country remains one of the world’s most attractive investment options, says Klisman Murati, an economic analyst at Global Risk Insights, an analytics firm based in London. The United States’ growing (albeit slowly) economy and stable dollar have prompted a sharp increase in direct investments, totaling $348 billion last year, up from $172 billion in 2014, according to the U.S. Department of Commerce. Direct investments can come from foreign companies to small holding companies established by ultra high net worth individuals or foreign individuals buying U.S. equities. “The corporate trend in direct investments is always matched by wealthy portfolio investors because it gives them a greater comfort level,” Murati says.

There are other lures at work, too: Strict U.S. banking secrecy laws for foreigners are a big win for privacy hungry wealthy investors. And then there’s the hugely popular EB-5 program, which grants immigration visas to foreigners who invest at least $500,000 in the U.S. and create at least 10 jobs. In 2014, for the first time, the annual maximum 10,000 visas had been issued by the State Department by August. Last year, the limit was reached by May.

“There’s a tremendous sense of urgency [on the part of investors] about getting money out of certain other nations,” says David Kuenzi, founder of Thun Financial Advisors, a Madison, Wis., firm that provides advisory services to foreign investors.

Companies and individuals in the United Kingdom, Japan and Germany are the largest foreign investors in the U.S., but there has been an explosion of capital coming from China lately, and investors from Russia, Australia, Argentina, Mexico and Europe, among other regions, are also parking assets here as a way to diversify from their home economies, which are wracked by uncertainties.

Which segments of the U.S. markets are benefiting most from foreign investment? The answers follow.

Real Estate

Foreign investors are snapping up commercial and trophy residential properties. Deals topped $87 billion last year, up from $5 billion in 2009, according to Real Capital Analytics, a real estate data and analysis firm in New York. Most of the surge involves transactions on the coasts and in major cities; the hottest market is New York, which accounted for 27 percent, or $23.5 billion, of the investments last year.

Wealthy Chinese have become an enormous presence in U.S. real estate, increasing their total investments from $195 million in 2006 to $15.3 billion last year, according to the Rhodium Group, a consulting firm in New York. They’re buying residential and office buildings, malls, storage facilities and hotels—often choosing a commercial sector with connections to their domestic market on which they can capitalize. “They might buy warehouses to support their trade operations in China,” says Clem Miller, portfolio manager for Wilmington Trust’s International Fund.

Given that Chinese investors have grown accustomed to double-digit returns, with real estate prices surging in some Chinese cities, why would they settle for more humdrum single-digit returns on U.S. real estate? “Wealthy Chinese are as interested in capital preservation as they are in growth,” says Robert T. O’Brien, head of the global real estate group at Deloitte, adding that they’ll take lower returns in exchange for the stability of U.S. markets and portfolio diversification. And there are other benefits: “Culturally, there’s a great deal of pride in owning real estate,” O’Brien says. “And we’re also seeing a number of wealthy Chinese investors whose children are of university age. They buy here so their children can attend U.S. universities.”

Hotels are one of the hottest attractions for foreign capital, particularly in New York, Los Angeles, San Francisco and Miami. While there are plenty of headline-grabbing deals such as the Chinese insurer Anbang’s $1.95 billion purchase of the Waldorf Astoria in New York last year, “there’s a lot going on beyond the trophy hotels, meaning the 50- to 150-room hotels or motels in a highly concentrated commercial area,” says Perry Wong, an economist at the Milken Institute in Santa Monica.

Investors from China, Russia, Kazakhstan and elsewhere buy these hotels and often make deals with tourist agencies in their home countries to ensure a flow of clientele. The deals are typically upwards of $30 million. “These types of purchases are seen as an easy entry into our markets and make a nice income producing investment,” says Edward Mermelstein, a New York real estate attorney. “We’re talking about billions of dollars of activity in terms of rentals of hotel rooms.”

New York's Landmark Waldorf Astoria Hotel To Be Converted To CondosChina’s Anbang Insurance Group, which recently purchased New York’s landmark Waldorf Astoria Hotel from Hilton Worldwide Holdings for $1.95 billion, has announced plans to convert as much as three-quarters of the rooms into apartments. Photo by Spencer Platt/Getty Images

Beijing-based China Cinda Asset Management bought seven New York hotels in a single transaction in April for $571.4 million, according to CoStar Group, a Washington, D.C.–based commercial real estate research firm. The hotels ranged in value from $42.3 million for a Holiday Inn in the Wall Street area to $112 million for a Hampton Inn near Times Square.

For many wealthy foreigners, the ease of investing in U.S. properties is appealing. “Everything is very standardized with real estate in the U.S., so it’s relatively easy for investors to get the expert legal help they need,” says Ross Milroy, owner of Ross Milroy Realty in Miami. “These people are sophisticated, and they know that U.S. real estate is a great hedge against their own economy.”

In Miami, trophy residential properties are being bought by wealthy Latin Americans, particularly from Argentina, Mexico and Venezuela. Some 50 percent of high-end Miami listings are sold to offshore clients, such as the penthouse in the exclusive Beach House 8 building. In May, the penthouse was purchased for $14 million by the Brazilian Mario Bernardo Garnero, chairman of Brasilinvest. There are indications that this trend may be peaking: Many early Latin American investors are now trying to sell their properties to turn a profit, creating a glut of condos for sale and pushing down prices.

Private Equity

U.S. private equity has been a growing target for foreign assets over the past three years, helping to drive the overall market higher than pre-2008 levels for the first time. In the 12 months through June of last year, private equity funds raised $288 billion, bringing total assets in funds to a new high of $2.4 trillion. “Many super-wealthy investors who already bought real estate are now looking for other ideas in the private equity space,” says Wong of the Milken Institute.

While two years ago energy was a major attraction for private equity investors, now capital is flowing across sectors, from Hollywood to healthcare.

A notable recent investment was a $200 million infusion by a Chinese holding company—backed by the Chinese investor Guo Guangchang—into Studio 8, a startup movie production company run by former Warner Bros. president Jeff Robinov. This deal is the biggest Chinese investment in a Hollywood studio, according to the Wall Street Journal.

Billy Lynn's Long Halftime Walk-Ang LeeNow funded by Chinese backers, Studio 8 is financing Ang Lee’s new film, Billy Lynn’s Long Halftime Walk, set for release in November, about a young soldier’s disenchantment as he returns from duty in Iraq. There is already Oscar buzz about the movie.

In April, UBS finished raising capital to partner with U.S.-based MPM Capital to invest in cancer research. Surpassing all expectations, the fund raised $471 million, all from foreign investors. This was a record for a so-called social impact fund.

While private equity takes patience—the UBS fund won’t kick off any returns for about a decade—“investors like the return premium they get for locking up capital,” says Andrew Lee, a managing director at UBS Wealth Management.

Private equity returns have outpaced the S&P 500 on a short- and longterm basis. According to the American Investment Council, the median one year return for private equity funds through the third quarter of last year was 6.4 percent, compared to -0.6 percent for the S&P 500. The median five-and 10-year returns were 14.4 percent and 11.8 percent, compared to 13.3 percent and 6.8 percent for the S&P 500.

Fixed income and cash

Given their meager yields, few in the U.S. are excited about fixed income or cash equivalents these days, but foreign investors have increasingly been shifting their safe assets to U.S. markets as interest rates elsewhere hover near zero or in negative territory. Over the 12 months through mid 2015, foreign assets in long-term U.S. debt rose $364 billion to $9.5 trillion, according to the Treasury Department.

Ten-year Treasuries are paying just 1.8 percent, down from 2.2 percent a year ago. “But when yields are negative or zero in Switzerland, Denmark, Germany and Japan, where else are you going to put your safe money?” Thun’s Kuenzi says.

True, higher yields can be found in emerging markets, “but emerging markets involve currency and political risk. The U.S. is much more attractive,” says Miller of Wilmington Trust’s International Fund.

Wealthy investors often look to the U.S. market simply as a safe place to store assets. “Sometimes the only goal is to hedge against the home currency and take no risk, because they’re already taking risk back home in their businesses or stock markets or real estate markets,” says Luis Pinto, an international wealth management advisor for Merrill Lynch.

“A Mexican businessman who has vacation homes in Colorado and Florida may see the peso fluctuate against the dollar by 30 percent more or less from year to year,” Pinto says. “He won’t want to risk that his dollar investments will cost him a lot more in peso terms, so he would hold a significant amount of cash in the U.S. dollar, to provide cash flow for the property costs.”

Technology and finance

Technology and finance are the darlings of foreign investors. Last year, these sectors received two of the biggest single shares of total foreign direct investments: Deals in finance topped $23.5 billion, and technology drew $17.7 billion, according to the American Enterprise Institute.

The Chinese, again, are arranging some interesting deals in the finance area. “They’re buying into firms to park their capital, then the firms are investing in China,” says Milken’s Wong. Why not keep assets in China and invest there? “Capital can be treated more favorably—like getting better credit preference—coming from outside sources than if you were Joe Schmo investing domestically,” Wong says. Chinese owners of a U.S. financial company would also have the freedom to invest as they want, without the restrictions that they would face investing from their home country.

The most common type of technology investment by foreigners is usually more straightforward. “High net worth investors prefer private investments in technology, but they aren’t easily accessible,” says Merrill Lynch’s Pinto. “So we often fall back to the more liquid opportunities in the stock market.”

Foreign interest in tech stocks has played a big part in driving up foreign assets in U.S. stocks for the sixth consecutive year last year, to $6.7 billion, according to the Treasury Department.

Renewable Energy

Wealthy foreigners willing to give up liquidity in exchange for yields of around 6 or 7 percent are looking toward U.S. renewable energy investments such as wind and solar production.

“Investors can’t always make the math work by investing in fixed income at such extraordinarily low rates,” says Heather Loomis Tighe, managing director at BlackRock. “So we’re seeing in particular Australians and Western Europeans interested in renewables. There are opportunities in their home countries, but the U.S. has an incredible amount of wind production, and a good amount of solar, as well.”

NaturEner Wind Turbine Farm TourWealthy foreign investors are seeking renewable energy opportunities, like the Acciona wind turbines that operate at the NaturEner USA LLC Glacier wind energy farm in Etheridge, Mont. Photo by Andrew Harrer/Bloomberg via Getty Images

Wealthy investors pool assets with pension funds and foundations to create a limited partnership that will buy the physical wind or solar energy production plants. The plants convert wind or solar power into energy, which is then sold to utility companies that distribute the energy to users. The income from the investment is derived from the annual sale of the energy to the utility companies. When the plants are eventually sold, usually after about 10 years, investors can realize a potentially high return.

BlackRock has raised about $2 billion from U.S. and foreign investors for renewable energy investments over the past four years, most recently for the purchase of a 211 megawatt wind farm in western Texas.

“The risks—which are how much wind is going to blow, and how much sun is going to shine—are not correlated to the markets,” Tighe says, adding that investors like to diversify between wind and solar and different locations around the U.S. “If it’s a low wind year in Texas, that may correspond with a higher wind year or a good solar production year elsewhere.”

For many investors these days, she adds, “it feels better to be correlated to weather patterns than economic factors.”

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