Australian investors are attracted to the Southern California market for a number of reasons, one of which is the close resemblance between the Southland and their home country"

Jones notes that Southern California market conditions have created a hospitable environment for the office, industrial and retail investments that Macquarie has focused on here. For office and industrial, Jones points to the limits on further development opportunity, a situation that will inevitably lead to rent growth at existing properties. And retail investments are well served by the Southland's highly educated workforce and strong demographics in terms of per capita income.

"It has been a recovering market and foreign investors see it as a recovering market," says James Fetgatter, chief executive of the Washington, DC-based Association of Foreign Investors in Real Estate. He points out that 2005 was the first year that San Diego appeared as one of the top five US cities for real estate investment in the annual survey that Afire has been conducting for the past 14 years. Los Angeles also made the list, which marks the first time this Southland city has appeared in the top five since the mid-1990s.

Fetgatter says the Southland is a compelling market for foreign investors because of the port activity here and the increase in defense spending in recent years. "The government spending on defense contracting and pumping a lot of money into the economy has made the office and the retail markets strong, and that attracts investors," Fetgatter explains.

Indeed, office and retail top the lists of many foreign investors who are looking to procure assets in the Southern California real estate market. Many sizable Southland transactions involving foreign capital that closed in 2005 and the beginning of 2006 involved either office or retail properties, according to data from Real Capital Analytics. For example, in November 2005, UK-based Grosvenor picked up the River lifestyle entertainment center from J.H. Snyder Co. Grosvenor is planning a long-term hold for the 227,000-sf property, according to the firm's senior vice president of development Alan Chamorro, who describes the 100% leased, class A property as a "core asset."

"We will continue to look at office opportunities, but we're strategically spending more time looking at retail, which we think has better opportunities going forward," says Chamorro, who is based in Grosvenor's San Francisco office. "We are also looking at value-add and redevelopment plays and potentially joint venture opportunities."

According to Afire chief executive Fetgatter, when the foreign investors who responded to his organization's annual survey were asked what measures they are taking to successfully place new capital into the US real estate investment environment, 22.9% answered joint ventures and 17.1% answered increasing their relationships. Fetgatter notes that now, more than ever, foreign investors are "not willing to go it alone."

Dan Fasulo, who is director of market analysis for Real Capital Analytics, feels that given the overall US market conditions projected for the next several years, foreign investors will greatly benefit from joint ventures with locally based firms.

"The way that investors will make money in real estate over the next few years is to get the value from rent increases," explains Fasulo. "So this is going to make it a little more difficult on foreign investors who don't necessarily have a presence on the ground. Because of that it would be very advantageous to see a foreign investor team up with a local player who can really provide that type of inside knowledge."

Although the majority of the foreign investment community is receptive to the idea of joint ventures, investors from the Pacific Rim are still reluctant to use this structure, as Tom Nguyen of NAI Capital Pacific Rim explains. "The only way they'll do joint ventures is if they have a local Asian representative here that is a middle man who can lay everything out on the table in their language. A lot of the funds over there do speak English very well, but I think it's more of a cultural comfort level," says the Newport Beach-based executive vice president of NAI Capital Pacific Rim.

"A lot of private investors that I know would rather bring their own team over," adds NAI Capital Pacific Rim EVP Christine Lee, who is based in West Los Angeles. "I guess it's an issue of control or delegation."

When it comes to deal structures, there is one commonality shared by most foreign investors—from the Pacific Rim to Europe—and that is the tendency to use low leverage. "Most of them put substantial down payments, sometimes 50%-plus," says CB Richard Ellis first vice president and Asian market specialist Joe Lin of his Pacific Rim clients. And over at UK-based Grosvenor, Chamorro notes that many of the firm's properties have 50% or less leverage on them. "Generally we are around 50% leverage and some of our assets have no leverage on them at all."

Regardless of how they are structured, Southland deals will continue to attract substantial foreign capital well into the foreseeable future. As Fasulo notes, "Southern California happens to have some of the strongest fundamentals out there."