SPECIAL FOCUS: INTERNATIONAL CONNECTION

APARTMENT FINANCE TODAY • MARCH 2008

Long-Distance Affair

An influx of foreign capital is targeting the U.S. multifamily market, helping to keep deals flowing through a downturn.

By Jerry Ascierto

In Dutch, the term for “apartment building” is “flatgebouw.” The Portuguese call them “cabeça,” and in Sweden, it’s “hyreshus.”

But a U.S. multifamily development by any other name would still be as sweet.

The weak U.S. dollar, along with diminished competition from domestic buyers, is providing a golden opportunity for foreign investors in the U.S. multifamily market. Indeed, many real estate investment firms in the United States have received an infusion of foreign capital in the last year and are striking while the iron is hot.

Behringer Harvard is one U.S. company riding this trend. Last May, the five-year-old real estate investment company received a $100 million investment from Dutch pension fund PGGM for joint ventures focused exclusively on U.S. Class A multifamily properties. In January, PGGM doubled the investment to $200 million, with an option to expand the investment by another $100 million in the future.

“It’s a good time for offshore capital to invest in U.S. real estate,” said Mark Alfieri, a senior vice president of real estate at Behringer Harvard. “The amount of foreign capital interested in U.S. multifamily has increased dramatically.”

PGGM, a retirement fund for Dutch health-care workers, is the second-largest pension fund in the Netherlands and the eighth-largest in Europe. The fund has been active in U.S. real estate ventures in the past—it has a majority interest in Equity Office Properties, the largest publicly held owner of office properties. But the Behringer Harvard joint venture is the first direct investment PGGM has made in U.S. real estate.

Since partnering with PGGM, Behringer Harvard has invested in 11 multifamily communities in mostly high-growth markets. The company’s strategy is to joint-venture in new construction ventures or purchase projects in the early stages of leaseup, which are up to 60 percent occupied. The company believes the first two funding rounds will yield about 30 to 35 multifamily developments in all.

Behringer Harvard partners with large domestic developers like Trammell Crow Residential, The Altman Cos., and Fairfield Residential, providing mostly equity, with some mezzanine debt, for developments built from the ground up. The joint venture focuses on high-end developments in markets with high barriers to entry, mostly in coastal states. It plans to hold the assets for seven to 10 years.

Thinning competition has opened up previously untapped markets for Behringer Harvard, as domestic equity providers continue to curtail their investment activity due to turbulence in the capital markets.

“Many developers that had relationships with one or two institutions are now outsourcing capital from other areas,” said Alfieri. “It’s created significant opportunities to enter markets that were untouchable in the past, like Southern California, markets that were always fully accounted for with institutional capital.”

Behringer Harvard has concentrated on the Washington, D.C., metro area, closing three new construction deals to build luxury apartments in Maryland and Virginia since July. The company also recently closed a deal in Fort Lauderdale, as well as adding properties in Atlanta, Dallas, Houston, and downtown Denver. The firm plans to focus on West Coast markets such as Seattle, Northern and Southern California, and Portland, Ore., in 2008.

A harbor for foreign capital Real estate investment firm Harbor Group International also has more foreign capital at its disposal to deploy on a growing multifamily portfolio. The Norfolk, Va.-based company was formed in 1998 when a predecessor company merged with BO-DA Investment and Trading Ltd., based in Tel Aviv, Israel.

As much as 40 percent of the capital in Harbor Group’s coffers originates offshore, a figure that has been growing in recent years. “We have seen a significant increase in institutional overseas investors—life insurance companies, pension funds, public companies who want to deploy excess cash in U.S. real estate,” said Richard Litton, Harbor Group International’s president. “We’ve now expanded our investor base in Israel in particular.”

Thanks to that infusion of foreign capital, Harbor Group has stepped up its multifamily acquisition activity over the last two years. In 2006, the company made $218 million in multifamily investments, but last year, that figure reached $380 million. Its investment target going forward is even more aggressive—the company plans to pour $450 million into U.S. multifamily developments in 2008.

Harbor Group typically holds properties for four or five years, concentrating on strong markets and newer assets built in the last 20 years. The company also rehabs older properties and has an in-house construction management arm that oversees that work. The company looks for an 8 percent cash return on its investments.

Harbor Group is seeing much less competition from domestic buyers of late, although the market for the highest-end properties in strong locations is still very competitive. “We are seeing now some pricing opportunities in B-class assets where we can buy at more attractive returns than was the case a year ago,” Litton said. “There are less bidders, and buyer terms are more favorable.”

Harbor Group owns and manages about 14,000 units in 35 apartment communities concentrated mostly in the Southeast and Mid-Atlantic, with some select Texas and Midwest locations. Since 2004, the company has invested heavily in Atlanta, Dallas, and Raleigh-Durham, making a combined 15 acquisitions in those markets. The company is also eyeing the Chicago and Philadelphia rental markets.

Growing trend

Behringer Harvard and Harbor Group International are only two players in a crowded field. Last March, London-based investment bank Dawnay, Day paid $225 million for a 47-building, 1,137-unit portfolio in Harlem, N.Y. The deal, which marked the company’s first foray into the U.S. rental market, also included seven condominium units in the East Village of New York.

And Dawnay, Day has aggressive plans to expand its U.S. presence to reach $5 billion in real estate investments over the next five years. The company has opened a local property management office, Dawnay, Day U.S. Real Estate Management, to help manage its North American expansion.

Babcock & Brown, an investment and asset management group listed on the Australian stock exchange, is another firm investing heavily in U.S. multifamily. Last year, the company paid $833 million to acquire BNP Residential Properties, Inc., an 8,180-unit apartment portfolio concentrated in the Carolinas and Virginia.

The acquisition brought Babcock & Brown’s U.S. multifamily portfolio up to 28,000 units, spanning nine states.

Analysts expect this trend to increase as the U.S. capital markets become more stable.

“Foreign investment is on the increase, and the weak dollar does make U.S. properties look pretty attractive to global investors,” said Robert White, president and CEO of market research firm Real Capital Analytics. “However, global investors are still a little skittish on our economy and need a little more comfort before we start seeing that capital flow in greater amounts.”

The Mortgage Bankers Association (MBA) is also helping to bring foreign capital to U.S. shores. The MBA has been in close contact with another trade group, the Association of Foreign Investors in Real Estate (AFIRE), to share information and help facilitate more international investment.

“The market overall is quiet, but a number of deals that are getting done are getting done with foreign funds and foreign investors,” said Jan Sternin, the MBA’s senior vice president of commercial/multifamily. “And I’m absolutely sure that we’ll continue to see international interest.”

The MBA’s International, Educational, and Capital Markets committees are working on an educational program for AFIRE that provides international investors with U.S.-specific real estate information—such as how to measure cash flow in some of the nation’s quirkier markets. “We’ll take parts of our originations courses and mortgage banking courses, and reposition it so that it’s really relevant to international investors,” Sternin said.

As the nation’s debt and equity markets continue to grow conservative and with the looming threat of a recession, the infusion of foreign investments should continue throughout 2008. “As long as we’re concerned about capital here, this playing space, where the dollar is weak, remains totally viable to foreign investors,” Sternin said.