Over my 50 years of doing deals and observing the flows of capital, one thing is never changing, and that is that the sources of capital for US CRE are always changing. It just depends on which nation is in a capital growth mode, and which has seen its day go past. We saw the Arabs as the main source when they really controlled oil and wealth was flowing in to them so fast they had no place to put it other than London and the US. There were the Japanese when they were in their huge value run up for real estate and as their economy was booming, before it crashed twenty years ago. The Russian oligarchs (thugs) become instant billionaires after the fall of the Soviet Union and this group was able to gather up all of the prime assets of the Soviet Union and to then need a safe place to hide their wealth and to flee to. That was again London and the US real estate markets. Then came the Chinese as their economy opened up and capital was allowed to leave for foreign investment. Again, the ones who were intimately involved with the regime were able to gather up huge pools of assets and they also needed a place to hide all of the wealth and a place to flee. Singapore, Vancouver and the US become the top places for Chinese money to go. Then as the Chinese economy skyrocketed into a hugely successful export engine and as the peasants became urbanized earners, they all wanted a place besides Chinese apartments to put money so they would have safety and a place for them to flee. It is always the same. Wealth is created for a period of time in a specific nation, and the wealth gatherers want a place to keep it safe, and a place to send the kids to university, and for themselves to flee when the balloon bursts. The US and London have always been the place to hide. Switzerland is no longer the place to stash money as it once was. London and the US are much nicer places to live and far better places to send the kids to university. Singapore is safe and open to Chinese, but it is a tiny island. EB5 became a great vehicle for the scammers and syndicators in China to take advantage of the huge wealth creation for ordinary Chinese. US developers were the beneficiaries of this latest flow of capital. Israel has now slipped in as a new source of capital as that country has prospered and created real wealth for some. Europe is no longer a source of major capital investment and has not been for quite a while.
Now it is time for a new change. China has essentially shut the door to capital flight and EB5. The amount of Chinese capital flowing to the US this year is reported to be lower by 90%-95%. That is not going to change. China has locked the door for the most part. They have evolved like Japan did, into a nation that is way over levered and in serious capital issues and a slowing and evolving economy. China for now is no longer a source of major capital. In fact, with the forced sales of major assets owned by Chinese in the US, and the new capital constraint rules the US administration is placing on Chinese technology investments, the net flow might become slightly negative as those assets are sold off and the fund repatriated. In addition, universities in India, China, and Japan have improved immensely in terms of quality of education, although not yet to US high standards, so the need to send the kids here is less. The economies of India and China are also now so much improved that the opportunities for young graduates are as good or better in some cases at home, than in the US. Europe has a continuation of serious capital and economic, and now political issues. Capital from Europe left years ago and there is no longer the accumulated wealth remaining there as it left years ago. The Latin American money from Venezuela, Cuba, Columbia and Argentina left for Miami years ago and so there is almost none left to leave.
This leaves the US as the best source of capital and one that is improving as the economy continues to boom and as deregulation and tax reform take hold. Whatever else you might think of Trump, he has created a capital engine in the US and a regulatory environment that is conducive to capital formation and inflows of investment capital. There is a huge pool of cash in the US now and it is growing rapidly. Stock market gains, huge returns on CRE since the crash, and value growth in all areas since the election, combined with continued GDP growth of 3.5% or maybe over 4%, will continue to drive capital formation here. It also makes the US the best risk adjusted place to invest. Political turmoil in Europe is just beginning to unfold as Merkel weakens and loses control of the EU. Trump has shaken politics in the EU by forcing issues, at the same time populism is spreading fast in reaction to the flood of refugees and the threat to the European Christian culture that has prevailed for centuries. Europe is headed for a series of political crisis over the next decade as Germany loses control of the EU and ECB, and as the eastern European nations start to exert their influence. Macron is not Merkel, although he thinks he is. France is not Germany. China will remain a hard place to invest. Emerging markets are very risky due to geopolitical issues between eh US and China, and due to their continued dependence on commodities. India is just too corrupt for safe investment. Everywhere else is too small to provide good liquidity. The US is the only stable, liquid and safe place left unless you are willing to go way out on the risk limb.
The views expressed in this column are the author’s own and not that of ALM’s Real Estate Media Group.