Foreign investors are suddenly drawn to industrial properties
Industrial properties, typically a sector ignored by foreign investors due to comparatively low lease rates and locations far away from urban centers, have now become a desired asset class for such buyers, including foreign pension funds and sovereign wealth funds, experts say.
There's been a surge of capital placed in the U.S. industrial market by such investors, a push that was likely to result in about $55 billion in investment sales in 2015, reports real estate services firm JLL. Office properties have typically dominated global investment strategies, but that lead has shrunk from 46 percent of the market in 2007 to 35 percent in the first half of 2015, according to a report from real estate services firm CBRE. The report lists infill, light industrial properties in markets with a considerable supply-demand imbalance as one of the best bets for global-based investors today.
Erik Foster, a principal at real estate ser-vices firm Avison Young, says industrial real estate is rivaling multifamily as one of the preferred asset classes for foreign buyers. He credits strong property fundamentals, increasing rental rates and a relatively low level of speculative construction.
"Historically, foreign investors have wanted to place large amounts of capital all at one time into the United States, such as in office buildings in New York City or Chicago," Foster says. "But given the cyclical nature of those investments, the funds have a need for stability that industrial provides."
SunCap Property Group and Blumberg Investment Partners, for example, recently announced a $600 million joint venture with Ping An Insurance Group of China to invest in a portfolio of logistics properties in core U.S. markets. The new venture intends to grow its portfolio and has identified an additional $400 million in assets for future investment.
Industrial portfolios are also being acquired through mergers and acquisitions. In early 2015, Global Logistic Properties and Singapore's sovereign wealth fund GIC wrapped up a $8.1 billion purchase of lndCor Properties, which held a portfolio of 117 million sq. ft. of industrial assets. One of the year's biggest deals included Prologis Inc. joining with Norges Bank Investment Management on the $6 billion purchase of KTR for a 70 million sq. ft. industrial portfolio.
Jack Fraker, vice chairman and managing director with CBRE's capital markets industrial practice, says all foreign countries are looking at investing in U.S. industrial markets, including interest from Asia, Europe and South America, specifically the pension funds of Chile and Colombia. Japanese pension funds plan to spend almost $2 billion on U.S. assets in the coming years, and industrial will be at the top of the list, Fraker says.
"Worldwide, I think if you ask the CIO at any pension plan or sovereign wealth fund, they will say that industrial definitely has a place in their diversified portfolio," he says. "Industrial has better returns than other asset classes, and it has a reliable and predictable cash flow. The properties don't cost as much to operate as office and hotel, and the capital expenditure is very minor compared to the rent."
REIT Red Light
In December, the U. S. House of Representatives approved legislation aimed at discouraging corporations from pursuing REIT spinoffs.
The end of such tax free spinoffs will generate $1.9 billion in additional tax revenue in the coming years, the Joint Committee on Taxation has estimated.
The legislation comes after a number of companies completed or considered such spinoffs.
In all, 15 REIT spinoffs have taken place since 2010, including eight in the past two years.
It was a particularly popular strategy for gaming companies, which split their real estate holdings from their gaming business.