Investor's Business Daily
To Buyers From Abroad, U.S. Looks Like A Bargain
Thursday January 3, 5:43 pm ET
David Devoss


Some windows on American wealth-making show a bleak scene. Home sales are off 20% and values in major markets are down 6.7% from a year ago, raising the risk that owners will walk away from homes worth less than they owe. And the once-mighty dollar has fallen against 14 of the 16 most-active currencies.

But that brightens the view of U.S. housing from abroad, which could in turn help support the market. Bad news here is a bonanza for foreign investors, who now view American real estate as a veritable buffet of luxury properties they never could have afforded a decade ago.

Europeans are among those discount-shopping, due to the dollar's nearly 10% drop against the euro last year, after prior euro gains.

"If you're buying property with euros you get an immediate 30% discount," said Craig Smith, chief executive of Swiss America, a Phoenix-based brokerage specializing in gold and precious metals. "Bottom line: Europeans can buy a $1 million house for $700,000."

And buying they are. More than $715 billion worth of foreign investment flowed in to the U.S. economy in 2006, the last year for which the Department of Commerce says accurate data is available. About $44 billion was spent on real estate.

Germany, Australia, Japan, the U.K. and Latin America were the leading sources of capital. But individual homebuyers tended to come from Mexico, Canada, India, China and the U.K. Foreigners have been buying homes with a median price of $299,500 and about half are for vacation use, a 2007 National Association of Realtors study found.

Most foreign investment in U.S. real estate has historically been commercial and in real estate investment trusts and other kinds of property-oriented securities. Though now many foreign investors are directly buying commercial and residential property -- and some of the interest in a hands-on approach results from disenchantment with "traunching," says Gary Painter, director of research at the University of Southern California's Lusk Center for Real Estate.

Investment Insecurities

Traunching is a securities practice in which a debt package, such as a collection of mortgages, is sliced up and sold according to different levels of risk and payout schedules.

"If an investor owns a triple-A security that pays up to the first 30% of value, then he's relatively safe," Painter said. But if someone buys a riskier cut of the package and the property goes into default before all the mortgage is paid, he says, "you might have a problem."

Some foreign investors didn't understand that they were buying a B-rated piece of an AAA security, Painter says. In such murky circumstances it's safer to buy property outright than to buy a portion of a traunched debt package.

No matter what motivates one or another foreign investor to buy direct in the U.S., it's clear interest is rising. Toward the goal of helping wealthy Germans direct-buy, Hamburg real estate firm Engel & Volkers plans to open 300 residential sales offices across the U.S. It already has locations in Florida, Connecticut and New York and aims to have 30 more offices on the East Coast by the end of the year.

California, Texas and Florida are the states receiving most foreign investment, with the latter perhaps benefiting the most. An increasing number of foreign investors are buying downtown lofts or condominiums close to state universities their children eventually may attend.

Research conducted by the NAR last spring found that 7.3% of home sales in Florida were to foreign purchasers. Sixty-five percent of the Realtors in the state reported that they had brokered at least one home sale with an international buyer.

There are two types of buyers in Florida, according to Jack McCabe, CEO of McCabe Research & Consulting in Deerfield Beach, Fla.

"We have the vultures looking for huge discounts -- they consist of hedge funds, investment banks and high-net-worth individuals. The second group is made up of Europeans and Canadians attracted by a favorable exchange rate and the declining property market," he said. "Everybody loves a sale."

Although half of the foreign homebuyers head for the southern U.S., the foreign investment trend is national in scope. Most Koreans and Chinese who buy American residences, for example, get homes in California. Canadians bearing loonies now at parity with the dollar head for Arizona. Money from the U.K. tends to be invested in New England and the upper Midwest.

Euro Economics

It's easy to see how the money flows by looking at Ireland, a country with a low corporate tax rate that in recent years has benefited from extensive investment by U.S. computer, software and pharmaceutical firms. Largely due to this corporate investment and rising disposable income levels it has produced for Irish workers, the value of Irish real estate has quadrupled over the past decade. Lending rates are 3.25% lower in Europe, so the Irish can borrow against their increased equity and use the inflated euros to bargain hunt in the U.S.

"If you can get a 30% premium, why wouldn't you invest here?" said Donal O'Brien, a Chicago partner for law firm Bryan Cave.

Perhaps the largest project undertaken by Irish investors is the Chicago Spire, a 2,000-foot tall hotel and condominium tower designed by Spanish architect Santiago Calatrava. Proposed for the Lake Michigan waterfront at the mouth of the Chicago River, the $2 billion project is the creation of Garrett Kelleher, chief executive of Ireland's Shelbourne Development Ltd.

The Chicago Spire shows that property investment capital that once went east from the U.S. to Europe has reversed flow. But O'Brien says Americans shouldn't worry.

"Foreign investment increases employment, supports property values, provides debt financing and creates commercial properties for the right tenants to lease," he said. "Foreign investment represents a strong belief in this country."