Garnet Capital Advisors Blog

Excerpt: One of the most significant loan trends of the year is the increasing interest shown by overseas investors in secondary and tertiary commercial real estate (CRE) markets. The trend was highlighted by China Life Insurance Group’s midyear purchase of a 95% stake in 48 commercial properties throughout the United States, in cities such as Seguin, Texas, and Staunton, Virginia. Previously, China Life, like many overseas investors, has focused on trophy properties in major coastal cities in the U.S., but the soaring real estate prices there have made smaller markets look very attractive by comparison.

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One of the most significant loan trends of the year is the increasing interest shown by overseas investors in secondary and tertiary commercial real estate (CRE) markets. The trend was highlighted by China Life Insurance Group’s midyear purchase of a 95% stake in 48 commercial properties throughout the United States, in cities such as Seguin, Texas, and Staunton, Virginia.

CRE properties in secondary and tertiary markets are now more attractive than those in hot coastal city markets.

Returns Higher Outside of Primary Markets

In years past, international investors in U.S. markets have tended to concentrate on urban areas on either coast, such as New York, Los Angeles, and San Francisco — and on crown jewel properties in those cities. However, real estate prices in these markets have skyrocketed to the point where some global investors are looking for more affordable properties and a better return on their investment.

The properties in the recent purchase are valued at $950 million. They are anything but glamorous. The Texas property is leased by Caterpillar Inc. and the Virginia property is a FedEx Corp distribution location.

It’s a far cry from China Life’s earlier U.S. properties. In 2015, it partnered with Ping An Insurance to buy a large piece of a development in Boston’s Seaport District. In 2016, it partnered with a New York City developer to buy a $1.65 billion Manhattan office building.

But the secondary and tertiary markets offer good investment potential. The Wall Street Journal’s report on the purchase indicated that yields could be up to 3 percentage points higher in the less flashy locations. The economic growth of the U.S. over the last year has strengthened the market for these type of properties as well.

China Life is one of the biggest insurers in China. The purchase represents its taking a majority position in the CRE portfolio of St. Louis-based ElmTree Funds LLC.

ElmTree will retain the 5% stake and remain as property manager.

Returns on investment can be higher in these markets than in trophy properties.

A Strong Trend

As the China Life deal indicates, the purchase of U.S.-based CRE by foreign investors is a trend that shows no signs of stopping.

While data for 2017 will not be available for several months, data from 2016 showed a banner year for foreign CRE investment. Forty-seven percent of realtors saw an increase in international clients during 2016. China led the list, followed by Mexico and the United Kingdom.

Twenty percent of realtors closed a CRE deal on the smaller side, of less than $2.5 million, to overseas investors last year.

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