There was a time when foreign real estate investors migrated to South Florida like tourists to a theme-park gift shop.
They had plenty of money, were eager to spend, and there was an abundance of goodies on the shelf. Retail centers, office towers and warehouses were all on their shopping lists, and it seemed none was too pricey or too dowdy to buy.
While other areas of the country endured economic cycles that often brought periodic chaos to real estate markets elsewhere, South Florida could always count on international investors to propel sales and bolster commercial property values here.
No more.
With rare exceptions, offshore buyers are staying home to grapple with an economic meltdown and a credit crisis that began in the U.S. and has spread around the globe.
“A lot of the investors from areas such as Germany, Britain, Russia and South America had been showing much interest [in South Florida real estate] in the last two or three years,” said Rick Kuci, executive vice president and chief lending officer at Coconut Grove Bank. “But many of those investors are now on the sidelines, having lost money in their own countries. The international [investors] I speak to still think we are six to 12 months away from the bottom.”
Notable commercial real estate transactions in 2008 involving international investors
That’s not good news for landlords, brokers and bankers who’ve seen dealmaking stall as credit dries up, economic contraction grips the home nations of buyers, and currency swings take their toll.
The credit contagion that began in the U.S. this fall has infected almost every developed nation. More than $32 trillion has been lost from the value of global equities this year as the crisis sends economic powers like Germany, the U.K. and Japan into recession.
Like their U.S. counterparts, European banks and automakers are asking for financial bailouts. A decline in consumer spending in the U.S. and Europe resulted in Asian exports dropping for the first time in six years.
Like domestic investors, offshore buyers of the area’s commercial real estate — with a few notable exceptions — are especially hamstrung by a lack of financing, according to local players, who say the long-term outlook for the region depends on when investors return and how quickly activity picks up.
Acquisitions made with at least a portion of international funding have bolstered South Florida commercial real estate for years, especially Miami’s office sector. In the Brickell area alone, six major office buildings have been purchased with capital from foreign firms since 1998, Cushman & Wakefield senior managing director Tere Blanca said during a recent panel discussion about international investment in South Florida.
In what many in the business hope could signal rising interest from Asian buyers, downtown Miami’s office market got a boost last month when the New York-based subsidiary of Japanese investment firm Sumitomo Corp. bought the 34-story Miami Center office tower for $260 million, or $332.39 per square foot, from Crescent Real Estate Equities.
Sumitomo general manager Robert Obringer cited the trophy tower’s 96 percent occupancy level and the building’s long-term potential to go up in value.
The prospects for long-term income growth guided a German investment group’s decision to pay $31.1 million for a 59,155-square-foot retail condominium in Coral Gables’ Plaza San Remo. LIC Coral Gables Retail, whose principals are Heiner Franssen and Gunther Schleip of Berlin, paid $525 per square foot for the retail condo, which is leased to Whole Foods Market.
Like the few foreign investors still making purchases in the down market, the German group paid cash for the property.
Although local industry insiders point to the Miami Center deal as a sign that foreigners are still shopping here, grim economic news from the Europe, Asia and elsewhere indicates investors have enough worries at home to keep them away from South Florida.
A European Union official recently said “extraordinary measures” are needed to keep the Adam Opel unit of General Motors running. Mortgage lending in Britain declined 44 percent last month, compared with 2007. Major British retailers like Marks & Spencer and Woolworths continue to struggle. And German chemical giant BASF announced it is temporarily shutting down 80 plants worldwide and cutting production at another 100.
“European investment was helping fuel the real estate market here for two years after the domestic market already began to tank,” said Neisen Kasdin, a shareholder at law firm Akerman Senterfitt who specializes in real estate and land-use issues. “The big question that is always out there is will the Far East get involved?”
That’s unlikely since Asia’s troubles are quickly rivaling those of Europe.
Japan especially has been hard-hit. Mitsubishi UFJ Financial, the country’s biggest bank, just announced a 64 percent drop in first-half earnings. And the country’s exports fell 7.7 percent in October from a year earlier, the biggest drop since December 2001. Commercial land prices in Tokyo fell 6.2 percent from the previous year, according to the Japan Real Estate Institute. That was the first decline since 2004.
Japan has invested little in South Florida commercial properties since an earlier economic crisis of the early 1990s, Murphy said.
“The Japanese have never come back” since the 1990s, he said. “I know [Sumitomo] bought the Miami Center, but that was just taking advantage of a steal. They may come back as a result of that, but they have been inactive for so many years.”
Yet, some investors elsewhere in Asia are making purchases, according to attorney Tim Murphy, a partner in the Miami office of Shutts & Bowen. Murphy chairs the firm’s international/tax practice group.
“I cannot reveal any names of clients, but we have had some large-scale Class A investments out of China with no U.S. backers,” he said. “The difficulty in tracking those deals is it is really hard to separate companies from the owners. There are Chinese individuals who control large corporations that in the U.S. would be 99-to-1 [percent] publicly held. These investments are usually driven from the very wealthy Chinese.”
Although Chinese lenders have generally sidestepped the upheaval of Western nations, China, too, is experiencing a downturn. Economic growth fell to 9 percent in the third quarter, and growth in foreign sales fell in October. In Hong Kong, the territory’s economic growth shrank by 0.5 percent in the third quarter. The country announced a multibillion-dollar plan to stimulate its economy by targeting construction, tax cuts and social programs.
Still, South Florida commercial real estate brokers are reaching out to the Chinese players to initiate deals. CCIM Miami, a networking and educational group for real estate professionals, hosted a group of Chinese real estate and business investors last month.
Shift of power
While real estate experts predict that foreign investors who are waiting out the downturn will eventually come back, the balance of power could shift away from European investors who are dealing with their own credit crisis and a weakening euro. Europe is in a recession for the first time since the currency was launched almost 10 years ago.
Carolina Rendeiro, founder of Business Centers International, a Miami-based company that assists multinational firms in relocating to the region, said that during a visit to Italy, potential investors acknowledged the country is in the same economic downturn as the U.S.
“Italians are now using the big ‘R’ word, [admitting] they are in a recession,” Rendeiro said. “Our economic woes are their woes. Investments are starting to falter a bit. As the euro continues to come down,” U.S. real estate will become less attractive.
Investors from Spain — historically among the most active commercial players in South Florida — are feeling the pinch, too. Few are buying, and other deals they’re involved in are in trouble.
In July, developer Kenneth Baboun’s plans to build a major mixed-use project in Miami with a Spanish group led by Pedro Iglesias fell apart. Baboun sued Iglesias, claiming the investor owes him more than $25 million on a mortgage loan the developer provided toward the $35 million purchase of the 1-acre property at 1390 Brickell Bay Drive almost two years ago. The suit is pending.
Spanish buyers have been responsible for several of the year’s largest commercial deals in South Florida, though none since the credit market began to dive in September.
The real estate arm of Banco Santander last May paid $114 million for the 1401 Brickell office tower the bank currently anchors. The $606 per-square-foot price for the 14-story building was a regional record for office buildings.
The $34 million sale of the Standard Miami Beach spa-hotel at 40 Island Ave. in April was an example of a Spanish investor’s willingness to pay a premium to enter the South Florida market. Buyer Ferrado Group, based in A Cortuna, Spain, spent about $610 per square foot for the hotel, which sits on 2.33 acres. Ferrado Group officials cited the firm’s desire to expand in the U.S. and noted South Florida’s easy access to Latin America and the Caribbean and its long-standing commercial and political ties to the region.
Spanish investors remain interested in South Florida properties, according to Israel Alfonso, a shareholder in the corporate securities and real estate practice areas of Greenberg Traurig’s Miami office who primarily represents investors from Spain in real estate transactions.
“The global slowdown has affected international desire, but deals are still going on,” he said. “In Spain the answer is, yes, they are taking a step back, but the activity has not stopped. It is certainly harder to get deals done.”
Alfonso did not disclose any deals that recently closed or are in the works.
Players with sufficient money and a strong currency that could start picking up South Florida properties are in the oil-rich United Arab Emirates, Rendeiro said.
With that region’s wealth mainly accumulated from oil reserves, investors from Dubai and Abu Dhabi are looking to diversify, Rendeiro said.
Yet, no significant deals involving Gulf investors have taken place recently and even that region has problems. The price of petroleum has plummeted. Dubai’s debt has soared to $70 billion, more than 100 percent of its gross domestic product. Amlak Financial, the United Arab Emirates’ leading mortgage lender, temporarily stopped making new home loans. And Dubai’s state-owned companies face default on debt payments as the banking crisis curbs their access to cash.
Countering that was last week’s news that the Dubai Group plans to acquire discounted stakes in U.S. real estate. The Dubai Group is an investment company that manages more than $40 billion on behalf of Dubai’s ruler.
‘A beacon of stability’
Even South Florida’s status as a safe haven for Latin American investors is in jeopardy. No large commercial acquisitions have come from the region since the spread of the credit crunch.
Latin Americans have reason to be nervous. The area has been battered by a 40 percent drop in regional major stock indexes. Brazil, the continent’s largest economy, has seen its biofuel boom deflate as foreign investment has disappeared. About 10,000 jobs were lost in Sao Paulo state in October.
Despite the lack of deals, Latin Americans have not given up on South Florida, Cerezo claimed.
“Stepping back does not mean stepping out altogether,” he said. “I don’t think people are altogether abandoning deals. Perhaps they are looking at deals more carefully.”
As a result of political and economic turbulence in countries such as Venezuela and Argentina, and a lack of legal protection for real estate contracts in the region, Latin Americans view the U.S. as a “beacon of stability,” Cerezo said. The obvious geographic importance of South Florida to Latin America will also ensure real estate deals will not dry up.
“The cliche that Miami is the U.S. capital of Latin America still holds true,” Cerezo said. “When there is instability in Latin America, Miami is the place where people want to do business. Latin American investors are also feeling the pinch. When they are looking to find a sign of stability, they won’t find it in their own market.”
Long-term strategy
Local players warn that foreign investors looking for commercial real estate acquisitions in South Florida must avoid getting caught up in the desire to generate rapid returns.
A long-term approach could lead some foreign investors to a commercial sector they avoided in past cycles — land, Kasdin said.
Hong Kong-based Swire Properties, which built the Brickell Key mixed-use project, paid lender iStar Financial $41.3 million last month for 5.5 vacant acres on South Miami Avenue between Southwest Seventh and Eighth streets. Swire paid for the land in cash.
Click play to listen to Neisen Kasdin
A long-term investment outlook is not unusual outside of the U.S., said attorney James Shindell, a partner in Bilzin Sumberg Baena Price & Axelrod and chair of the firm’s real estate group.
“Other parts of the world are more patient with their money and take a longer view,” Shindell said.
“For 10 years, you could invest in real estate here, and the values would always go up. Those days are over.”
Eric Kalis can be reached at (305) 347-6651.
source: dailybusinessreview.com
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South Florida can't count on international investors to bolster property values any more
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