In real estate markets, a shift in international financing
April 8, 2015
We’ve often said that healthy real estate markets require healthy credit markets, because a healthy supply of financing provides a stable foundation for real estate projects to thrive on. Because of that belief, we are pleased to see signs of hardiness in today’s flow of credit. But we’re not merely talking about the sheer amount of available funding; we’re talking about the diversity of its sources.
In one example of this diversification, U.S. markets are showing signs of benefiting from a conspicuous rise in lending originating from emerging markets. Will these financing activities become a consequential part of the real estate funding picture? It’s a question we are folding into our decision making as we work on the portfolios we oversee.
The mutual benefits of cross-border investing
The growth of cross-border finance has several catalysts, particularly because the benefits are persuasive on both sides of the ocean. A brief look at the incentives for both sides of each deal:
- Foreign creditors (along with real estate buyers) gain access to attractive yields and the benefits of dollar-denominated lending. For firms that also buy properties, there is an opportunity to take part in the fundamental recovery happening in the United States. As economic data continue suggesting a sustainable recovery, U.S. property investments gain a competitive edge against those in many other parts of the world.
- U.S. developers and property owners reap benefits as well, because overseas interest in U.S. real estate contributes to supportive levels of demand. This increases the likelihood that U.S. landlords can sell at attractive prices and use the proceeds to finance other projects. What’s more, overseas lenders provide alternative sources of financing for developers to tap into, broadening their opportunities to pursue future growth.
The mutual benefits noted above help stimulate cross-border transactions, but they are not the only forces that are drawing overseas capital to the U.S. The adjacent graphic reveals a handful of additional developments that are behind the trend.
Overseas suppliers of financing are becoming an increasingly important part of the funding picture for U.S. real estate, and we are tracking them as part of our long-standing commitment to the notion that real estate markets pivot on the availability of financing. We are therefore optimistic when we see an expanding supply of credit, and financing that originates in emerging markets further strengthens our optimism.
We believe it’s fair to say that cross-border capital will be influential in the near term (and perhaps stretching out into the longer term). We expect the trend to be especially notable in competitive real estate hotbeds like New York, San Francisco, London, and Sydney. The supply of properties in these metropolitan areas, while up slightly, is still well below historical averages. Thus, with improving economics and continued favorable credit markets, we believe the outlook may remain positive for the U.S. and most other developed markets.
The views expressed represent the Manager's assessment of the market environment as of April 7, 2015, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.
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