Globalization is the process of businesses and economies operating on an increasingly international scale. Products, investments, and technology are shared more freely across international borders, leading to a more fluid investment landscape as more capital is deployed globally. While globalization encompasses a broad range of activities and trends, it interacts with the commercial real estate market in terms of investment capital flow, both domestically and abroad. Globalization allows for portfolio diversification by opening up the investment landscape across borders. And, according to CBRE, the US is the most attractive country for investment in 2019.
Read ahead to learn how global dynamics are impacting investment outlooks in the US and beyond.
More Foreign Investment Dollars Coming In
Due to the rising economic status of many nations across the world, more foreign investors now have access to capital that they can deploy in international markets. Historically, the US has been a prime destination for international capital, with China leading the way in American real estate investment. According to China International Capital Corporation (CICC), 2019 is expected to be a year of recession for China’s domestic market, driving Chinese investors to US markets that they deem to have a favorable risk-return profile. This capital influx is one example of globalization’s impact on the US real estate market. When other markets experience a downturn, US markets benefit from foreign investors with a broader view of the global CRE playing field.
China is not the only country pumping capital investments into US markets. Cross-border investments accounted for 18% of US real estate transactions in Q3 of 2018. As more business is conducted internationally, the share of deal funding that comes from outside the country rises. External funding is good news for struggling local economies that can benefit from a surge of development, and it also rewards the investors who can take advantage of additional options for building a diverse and risk-insulated portfolio.
Increasing International Investment Opportunities
The international flow of capital goes both ways. In 2018, China’s real estate markets attracted 43.8 billion US dollars in capital. As markets ebb and flow, investment dollars can move more freely to profitable markets, stabilizing the world economy and aiding in the advancement of less developed nations. Currency exchanges can be prohibitive to commercial real estate transactions, but globalization has led to more countries forming trade agreements that merge currencies. For example, the United Nations now consists of 193 member states, and all of these countries either have adopted or anticipate adopting the Euro as their national currency. Universal currency makes it easier to invest across international borders, leading to an increase in foreign investment.
For US investors, there are ample opportunities in markets outside of US borders that may provide value as portfolio additions. With this additional diversification, investors are better insulated from risk as their capital is tied up in assets across global markets. If one market takes an unfavorable turn, the investor can rely on a more stable return from other investments outside these markets that are not impacted by the same headwinds.
How to Benefit from Globalization
It is possible to make globalization work for you, but only if you are well informed and understand how international economies interact with one another. While we all benefit in passive ways from globalization, through products and goods that come out of an increasingly unified global economy via trade agreements, real estate assets require you to take action in order to profit. Thankfully, there are several ways to enter this market and increase your bottom line.
Acquiring International Assets
Acquisition of assets outside the US can be difficult due to language and currency differences. Some countries also have restrictions on who can purchase property. Working with an expert in these areas can help you determine if a foreign asset would benefit you. If you are able to navigate these hurdles, owning an asset in a foreign market can prove lucrative. As globalization progresses, the restrictions governing foreign asset acquisition will likely loosen as governments seek to attract capital and grow their local economies. You may want to keep a pulse on several foreign markets that interest you so that you are prepared to move when these changes do occur.
Attracting International Investors
Foreign investors may have less familiarity with market nuances than domestic ones, and this lack of awareness increases the risks associated with investing. According to Forbes, US CRE is known for its scale and liquidity, which allows investors more flexibility but also requires them to move at a faster pace when making investment choices. International investors may struggle to keep pace with domestic investors and can miss out on prime opportunities. To compensate, many turn to firms with clear-cut online offerings that provide detailed information in a convenient, concise way. Maintaining lines of communication can present a challenge due to different time zones and possible language barriers. This communication is essential to building trust with investors, as it provides the transparency that puts their minds at ease. However, most questions and concerns can be put to rest with a comprehensive investment profile that is globally available 24/7.
Globalization is increasing the interconnectedness of world economies and changing the landscape of CRE investment and development. As these transformations take place, those sponsors and firms who keep tabs on global dynamics are best positioned to leverage the globalization trend in their commercial real estate portfolio.
To learn more about securing foreign capital, check out our blog post: Meeting the Needs of Foreign CRE Investors