state of foreign investment in real estate, The

Real Estate Issues, Aug 1997 by McCoy, Bowen H

It is a special pleasure to write the introductory letter to this international edition, as I have had the privilege of engaging in international finance for 35 years. It is interesting to me that, while we pride ourselves on the large amount of international finance which has taken place over these years, in percentage terms, the relative portion of international trade and finance is probably less today than it was in the 19th century, when foreign capital flows supported the growth of nations such as the United States, Australia, India, and the African colonies. Indeed, if one goes back even further in time, the great French economic historian, Fernard Braudel, reports that the silver mines of New Spain (Central America) created such inflation levels in Spain that they literally bankrupted the nation.

Nonetheless, the nominal level of international capital flows is much higher than ever before. In my own experience, I have noted that, from time to time, various parts of the world have found themselves afloat in dollars for particular reasons, and their financial institutions seek ways to invest such surplus flows. This was a part of the "Italian miracle" in the early 1960s. The central bank in Italy dealt privately with a couple of New York investment banks to recycle roughly a billion dollars of such funds. The same situation occurred, on a larger scale, in the Middle East in the early 1970s and in Japan, on an even larger scale, throughout the 1980s. Typically, such capital flows are invested first in U.S. Government securities; then in high-grade corporate bonds; and, late in the cycle, in equities, joint-ventures, and real estate.

It is difficult to predict where or when such surplus flows will occur in the future. Japan and Eastern Europe at present are dealing with internal deficits and capital problems-with the exception of the Dutch, who continue to invest in U.S. real estate, particularly REITs. At the moment, mainland China is the largest beneficiary of surplus cash flows, about a third of which are coming in from overseas Chinese. Large amounts of investment capital will be required in Eastern Europe and the former Soviet Union, as well in developing market economies such as Southeast Asia, Indonesia, and India.

It seems to me less likely that the United States will benefit from foreign capital flows in real estate over the next five years to the extent that it did in the 1970s and 1980s. Real estate seems to come late in the foreign investment cycle, because of the lack of available data, lack of trusted third-party advisers, lack of liquidity, and possible lack of an investment return that compensates for all the above factors, as well as currency risk. The two areas most likely to attract foreign investment are REITs and Commercial Mortgage Backed Securities, because of relatively better price discovery and relatively better perceived liquidity.

As always, the best source for unbiased, expert advice in all these areas is your friendly CRE.

Bowen H. "Buzz" McCoy, CRE 1997 President

The Counselors of Real Estate