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Buying Abroad vs. Buying at Home

Financial press reports on foreign investors buying prime U.S. real estate, like a Canadian investor’s deal to buy a Manhattan office tower for $2.25 billion, prompted Lehigh assistant finance professor S. McKay Price to delve into the differences between foreign and domestic real estate investments.

“Big money is flowing across national borders,” said Price, an assistant professor in the Perella Department of Finance and the Collins-Goodman Fellow in Real Estate Finance.  “Investment companies are buying in places where their headquarters are not.”

Price was curious: Is there something different to buying abroad vs. buying at home? If so, what?

Articles in The Wall Street Journal and other outlets are often about foreign investors purchasing large, iconic buildings, Price said. But what hasn’t been clear is whether these real estate sales garner media coverage because the buildings are the more well-known and more valuable assets of a country, or whether they are the types of properties that attract foreign investors.

“Do they want the splashy stuff?” asked Price, who teamed up with Nathan Mauck, assistant professor of finance at the University of Missouri – Kansas, on the study. “Are they trophy hunting? When you go foreign, are you more likely to buy bigger?”

Based on the data, the answer is “yes,” Price said. Foreign investors gravitate toward larger assets.

The researchers culled data from SNL Financial, which includes 70,000 properties in 84 countries, purchased by 699 publicly traded real estate investment companies, headquartered in 38 nations.

Price said that while the data represents a snapshot of a moment in time – the holdings worldwide as of the end of the first quarter of 2014 – the asset portfolios show clear connections to a specific country, based on the location of each asset. This is a key differentiator, Price said, as other efforts to figure out what has an impact on foreign investment decisions usually center on the buying and selling of securities, which have less distinct geographic lines.

Next, Price looked at whether foreign investors are buying an entire property or a stake in a big building. When controlling such matters as economic activity, real estate investment opportunities, depth and sophistication of capital markets, legal framework, administrative burdens and regulatory limitations, and the socio-economic factors at home and abroad, Price found that real estate investors tend to purchase larger foreign holdings but own a smaller stake in those assets compared to their investments at home.

This could mean that firms are looking to make the additional burden of foreign investment worthwhile by putting their money into larger assets than they would domestically, Price said. Conversely, the smaller stake taken in the foreign holdings might indicate a desire by the publicly listed real-estate investement companies to reduce some of that burden by sharing it with other investors, he added.

Price and his team also looked at the impact of capital market development on foreign investment, finding that firms tend to invest more in their home countries if the capital market is strong. Foreign investment is more likely when the capital market in the property nation is less developed.

Until now, Price said, real estate research has looked at a variety of factors that would affect commercial real estate investment decisions and ranked the relative attractiveness of a particular country to potential investors based on investor protection, legal framework and the socio-cultural and political environment. However, such research has failed to differentiate between domestic and foreign investment dollars.

That’s where Price and Mauck came in. Their research will appear in a forthcoming issue of The Journal of Real Estate Finance and Economics.

The two are already into the next phase of their research, which will explore the relationship between foreign property investment and corporate governance. 

Why it matters:

Examining the differences between investment decisions at home and abroad may lead to a better understanding of the forces that are impacting our closely connected world economy.

Story by Jennifer Marangos

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New York Real Estate Deals

Manhattan Office Tower
1095 Avenue of the Americas
New York, N.Y.
Buyer:  Ivanhoé Cambridge,
Canadian property investor
Sale Price: about $2.25 billion
*Proposed deal announced November 2014

Waldorf Astoria
301 Park Ave.
New York, N.Y.
Buyer:  Anbang Insurance Group
Beijing, China
Sale Price: $1.95 billion

Time Warner Center
10 Columbus Circle
New York, N.Y.
Buyer: Related Companies,
GIC (Government of Singapore)
And (ADIA) Abu Dhabi Investment Authority
Sale Price: $1.3 Billion

 

Sources: The Wall Street Journal, Times Warner