Foreign Investors Bulk Up on US Properties as Inflation Rises

Article originally posted on CoStar on September 16, 2022

Korean Pension Fund Expands Partnership To Explore Additional Investment

Logistics properties have been the favored target for foreign investors this year. (Getty Images)
Logistics properties have been the favored target for foreign investors this year. (Getty Images)

Even as inflation has pushed prices and borrowing costs higher, foreign investors haven’t been shying away from U.S. real estate investments in 2022, at least so far.

The latest sign of increased interest comes from Korea, with the Korean Teachers’ Credit Union, a retirement fund for South Korean teachers, and the California State Teachers’ Retirement System signing a new investment partnership agreement doubling down on their original pact reached just this past spring.

In March, the two pension funds signed a $500 million joint venture to invest in U.S. logistics facilities. Under the new agreement, the pension funds will review starting a second joint venture to invest in a broader range of assets, according to a statement from Kim Sang-gon, chairman of the Korean Teachers’ Credit Union.

CalSTRS did not immediately respond to requests to comment.

Foreign investment in the United States is up at least a healthy 13% this year, according to CoStar data. Through Sept. 13, foreign investors have already logged $37.4 billion in purchases. With more CoStar research still be done, the amount could go higher.

Industrial real estate, the category the Korean pension fund and CalSTRS have targeted, has seen a 29% increase in purchase volume this year from foreign investors logging $11.9 billion in deals, up from $9.2 billion in the same time frame last year, according to CoStar data.

Inflation Hedge

Foreign investors have been using U.S. real estate as an inflation hedge, according to a report this month from brokerage CBRE. Industrial assets have been a particular favorite in that regard.

“With an overall vacancy rate of less than 4%, the U.S. industrial real estate sector will remain highly favored by investors and lenders, as will the multifamily sector,” CBRE said in its report. “The continued strong demand in the U.S. for multifamily and industrial real estate will drive further rent growth [in the second half of the year].”

Both property types can be repriced relatively quickly, which makes them a favorite in an inflationary environment, CBRE said.

Multifamily investment by foreign investors is up about 19% to $10.2 billion so far this year over the same time frame last year, according to CoStar data.

Falling out of favor for foreign investors this year has been the office segment. Office investment is down 38% this year to $5.8 billion, according to CoStar data.

While long-leased office buildings are still attractive to foreign investors, CBRE said they are more likely to turn their attention to other property types with similar long-term, durable income streams and fixed rent increases.

“In the U.S., the rising cost of capital resulting from tighter monetary policy, along with the broader economic and geopolitical uncertainty, has caused both buyers and sellers to reassess asset values and enter a period of price discovery,” CBRE said. “This is causing investors to become more selective about their preferred property types, locations, and expected yields.”