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U.S.rates attract foreign investors

CHARLESTON, W.Va. -- Monday's deal between Charleston Town Center owner Forest City Enterprises, Inc. and the Australian-based QIC investment firm to purchase an ownership stake in the downtown mall comes during an apparent buying spree by foreigners in the U.S. commercial property market.

QIC, which stands for Queensland Investment Corp., is paying about $415 million and taking on a roughly equal amount of pre-existing debt to purchase a 49 percent stake in eight Forest City-owned regional malls, including the Town Center.

Forest City will still manage the day-to-day operations of the malls but will use the capital raised by the sale to pay down debt and renovate some of the properties.

The acquisition comes amid a growing wave of foreign commercial property buys.

On Tuesday, Bloomberg reported international investors poured in $7.97 billion to purchase U.S. commercial properties from January through April — a 25 percent jump from the same period last year.

Last year was no dry spell either.

According to an analysis from Real Capital Analytics Inc., the $27.5 billion in property purchases by foreign investors last year was almost six times the $4.7 billion low that occurred following the market bottom in 2009.

Analysts think the spree will continue.

"This is the tip of the iceberg," real estate adviser Sonny Kalsi told Bloomberg. "You're going to see a lot more capital coming in. They like where the U.S. is in the real estate cycle."

While rebounding is a factor, analysts also say the move is being driven by the current low interest rate environment.

Firms have lots of cash that they want to park in safe, high-quality investment products, but a 2 percent yield on a 10-year U.S. Treasury bond isn't that attractive.

This is where the annual income generated by leasing commercial property comes into play.

One way to measure investment yield in the commercial property world is to look at what's known as the capitalization rate. (Layman's translation: That's how much profit you expect to make each year divided by how much you paid for it.)

According to the Real Capital analysis, international buyers during the first quarter were expecting on average to net a 6.78 percent annual return on their properties.

The eight malls in the Forest City-QIC purchase have a capitalization rate of 5.75 percent based on forecasted 2013 net operating income.

While lower than the average return other foreign buyers were getting in the first quarter, that's still a far better return than treasury bonds. And there's the added benefit of property value appreciation over time.

Now, if you're wondering why QIC is only buying 49 percent as opposed to a round number like 50, or even 100 percent, look no further than the Foreign Investment in Real Property Tax Act of 1980.

The law, passed as an attempt to discourage international investors from buying up domestic farmland, requires foreign firms to pay taxes on the profits booked from buying and selling properties in the United States — but only if the firm owns 50 percent or more of the property in question.


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