It’s no secret that Asian capital investment in the U.S. real estate market has grown significantly, with nearly $13 billion in investment in 2014 compared with $2.4 billion in 2007. Yet, for Asian investors, not all real estate is created equal – and the types of properties and locations favored by this group have begun to shift over the past several years.
According to a recent Cornell study, risk-averse Asian investors during the last 15 years have consistently invested most frequently in office properties, which offer steady returns and stable cash flow. However, over the past three years, Asian investors are increasingly looking at industrial real estate.
From 2013 to 2015, Asian investors closed a total deal size of $14.3 billion in industrial properties as compared with $8.7 billion from 2008 to 2012. While the number of deals has stayed relatively consistent, the volume is increasing sharply. Why are Asian buyers becoming more interested in this sector?
According to data from Cornerstone Real Estate Advisers, which was collected in meetings with more than 50 major Asian investors, some Asian countries, like China, South Korea, and Japan, consider the industrial and logistics industry to be more advanced. These countries are rapidly growing their e-commerce industries, and therefore, need industrial real estate in the U.S. market in order to optimize their logistics. With 40 percent of all incoming ocean-going cargo passing through L.A. County ports, Asian investors are looking for distribution facilities in Southern California.
I recently had lunch with a top industrial office manager, who told me that it was a priority of his company to have an Asian broker in every major Southern California submarket. Today his top performing broker in Los Angeles County in 2015 was an Asian broker who has only been in the business for a few years. He remarked that this broker capitalized on loyalty among his fellow Asians to win clients and make deals.
When dealing with industrial real estate, space is a top concern. While Los Angeles has become increasingly popular amongst Asian investors in terms of volume and number of deals, inventory within the County limits is finite. Thus, these investors turned their attention east, to the Inland Empire, and south, to Orange County. Within the Asian investor community, certain nationalities have displayed a preference for certain submarkets, often in close proximity to a large expatriate community from their country. For instance, Vietnamese investors are now very active in Garden Grove, while Korean users often prefer Cerritos.
Hager Pacific has witnessed this growing trend up close. Over the last three years, virtually every industrial property that we have sold has been to an Asian investor. We’ve noticed certain preferences that are common among many of these buyers.
They tend to analyze and close deals relatively quickly, usually paying all cash. They are also looking for long-term investments and not simply to maximize their immediate returns. Aesthetics also matter highly to them. We have bought dilapidated properties and renovated them to the buyers’ liking. The properties also must have excellent feng shui and will be eliminated from consideration quickly if they are positioned poorly on the street or have certain numbers or sequences in the address.
These buyers show great professionalism – and I believe that their appetite for industrial real estate will continue at least into the immediate future, particularly if the international economy continues to remain weak, with global capital fleeing to the relative security of Southern California.
However, looking towards the longer term, the steady flow of Chinese capital into the U.S. real estate market could be at risk of slowing down in the next few years as China exerts more capital controls. While property-services firm CBRE Group Inc. recently estimated that Chinese investment in overseas commercial properties totaled $6.5 billion in the first half of 2015, the coming years might see lower investments if China is successful in combating capital flight.