Foreign investors are boosting both the commercial and residential real estate markets in the United States through a series of little-noticed and often indirect transactions.
An example: the sale of about one-fourth of the first issue of $500 million worth of bonds by Financing Corp., the agency created by the Congress in August to pump money into the faltering Federal Savings and Loan Insurance Corp. that insures deposits in savings and loan associations. The bonds, yielding 10.73%, were bought by Japanese investors.
Legislation created FICO and authorized it to issue up to $10.8 billion in bonds, but no more than $3.75 billion in any year. FICO is expected to sell $400 million to $500 million worth of bonds every two or three months.
While these bonds are not guaranteed by the government, financial market participants generally regard them as having an implicit guarantee.
Thus, it's no surprise that the Japanese jumped on this big chunk of the FICO first issue. Foreign investors often are looking for higher yields on U.S. financial instruments than can be found in their own countries. Thereby, they are increasing the available pool of mortgage credit here.
Portfolio investment--stocks, bonds, and mortgage-related securities--account for about 75% of the $117.5 billion in foreign investment that comes into the United States annually. Of this, about $61 billion comes from West European countries, according to Sean Burns, a research economist with the National Assn. of Realtors.
However, the Japanese contribution alone is $30.5 billion, representing 25 cents of every dollar in foreign portfolio investment made here.
Many of these investments help real estate indirectly. "For example," Burns said, "U.S. savings institutions raised more than $7 billion in overseas capital markets, helping bolster the real estate industry and fund housing activity here.
"Likewise, mortgage-backed securities, Eurobonds issued by savings institutions, Ginnie Maes, and so on all contribute to housing."
Economists project that a total of almost $25 billion in foreign investment will reach the housing sector of the U.S. economy this year. Yet this figure doesn't tell the whole story, according to Burns.
"For the real estate industry, this investment has a snowball effect. It was sufficient to finance as many as 650,000 of the homes that were built last year," he explained.
"If we assume an average home price of $84,000, this leads to the conclusion that an additional $55 billion in new and existing home sales were made possible in 1986 by inflows of foreign portfolio investments."
Direct ownership of U.S. real estate or a business enterprise make up the remaining 25% of foreign investment. These often dramatic commercial and industrial property deals have captured the public's attention.
For example, a full-page ad this year in the Washington Post by a Japanese corporation boasted, "For the Shuwa Group, 1986 was a landmark year. Or, in the words of the Wall Street Journal, 'Now emerging is Shuwa Group, a family-owned developer that has awed the U.S. industry by snapping up $1.8 billion in real estate in a scant 12 months.'
"Our most significant purchases included architectural landmarks on both coasts--Arco Plaza in Los Angeles and the ABC Building in Manhattan. Currently, our holdings total 19 properties, including the Paine Webber Building in Boston. And the best may be yet to come."
Our nation's capital is another city which has attracted widespread foreign investment. One downtown developer here was outbid last year by foreign investors for the Olmsted Building, which has a commanding view of the White House from 17th Street and Pennsylvania Avenue.
Oliver T. Carr, developer, recalled that he initially offered $51 million, $1 million more than was being asked. He later went up to $52 million, but the landmark was sold for $53 million to Atlantic Freeholds, a partnership that includes two British pension funds and Grosvenor International Ltd., a 900-year old family real estate empire headed by the Duke of Westminster. Japanese investors were also involved in the contest.
In Washington, D.C., overseas owners--mostly British and Japanese firms--own at least 40 downtown office buildings, about one-third of the office space in the central business district.
In other major cities, foreign investors are also garnering interests in real estate projects by offering favorable financing terms or letters of credit.
"The dollar's decline against the Japanese yen has made U.S. real estate an especially appealing investment opportunity for Japanese investors," Burns said. "A large trade surplus has left many Japanese investors flush with U.S. dollars.
"They are seeking high-quality investments that offer security and an attractive long-term yield. Not surprisingly, the answer for many has been U.S. real estate."
Will those foreign investments continue in the wake of the stock market downturn and international monetary turmoil? Well, that remains to be seen.