Rendering of Pier 4 proposal.
Another Boston trophy property, another foreign investor paying top dollar.
This time it’s retirement fund administrator AustralianSuper, which has agreed to buy a 49 percent stake in the 75 State St. office tower in a deal estimated at $300 million.
Substitute any high-profile address and a different deep-pocketed foreign institution, though, and there are many of the same elements. Two Chinese insurance companies paying a reported $333 million to develop a condo tower and 373,000-square-foot office building at Pier 4 in the Seaport District. The Norwegian government pension fund acquiring stakes in Atlantic Wharf and 100 Federal St. A yet-unnamed foreign entity agreeing to buy two parcels in Seaport Square, where a $700-million condo and retail development is planned.
“Boston is in a unique position,” said Michael Smith, a principal in capital markets at Avison Young. “While it’s always been a (global) gateway city, with the overheated pricing people are seeing in New York and with Washington, D.C., falling a bit out of favor, foreign capital is focused on Boston.”
If 2014 was a banner year for foreign acquisitions in Greater Boston – with $4.6 billion in cross-border capital flowing into the region’s commercial real estate – then 2015 is shaping up as a busier year for joint ventures and development financing. With fewer high-end properties on the market, foreign capital’s investment strategy is broadening to include financing of new projects.
“Out of necessity, they’re widening their parameters in terms of what they will and won’t do,” a local capital markets executive said. “The activity will be in development deals, certainly.”
Better Than Bonds
In an era of anemic government bond yields, commercial and multifamily real estate offers foreign institutional investors the potential for superior returns. And in U.S. properties, they perceive a safe haven from economic and political turmoil overseas.
While New York has been the city of choice for foreign investors in the past and still retains its leading position, Boston and San Francisco have emerged as more affordable alternatives with robust economies.
“Certainly the Asian capital in particular has a sincere interest in owning newer product, and one of the opportunities to get into that is through development,” said Chris Angelone, a partner at CBRE/New England.
Another preferred property type for Asian investors, according to JLL Managing Director Frank Petz: luxury condos.
“This allows them to get to profit quicker,” Petz said. “Rather than buying an apartment building where you have to invest, lease up and then you sell, here you just invest and sell.”
For the remainder of 2015, Canadian and Norwegian investors will remain the most aggressive buyers of office space, Petz predicted, with German and Japanese sources remaining active.
Chinese Insurers Bankroll Pier 4 Development
China is one of the fastest-growing sources of foreign capital, a byproduct of loosening government restrictions on overseas investment. In 2012, the Chinese government began allowing insurance companies to invest in foreign real estate.
Ping An Insurance Co. was the first Chinese insurer to take advantage of the liberalized regulations, acquiring the Lloyd’s of London building in 2013 for $394 million, according to a Bloomberg report.
Now it’s buying in Boston for its first U.S. real estate venture: the Pier 4 redevelopment at 130-140 Northern Ave.
Ping An and China Life Insurance Group are buying minority stakes in the 8-acre waterfront parcel where the Anthony’s Pier 4 restaurant operated for decades. New York-based developer Tishman Speyer acquired the property from New England Development of Newton in December for $70 million.
The Chinese insurers’ investments will jump-start construction of a $500-million development consisting of a 13-story office building and nine-story, 100-unit condo tower. Each of the insurers will own one-third of the project, The Wall Street Journal reported. The office building does not have any signed leases, according to a Tishman Speyer spokesman.
The deal reflects overseas investors’ willingness to invest in a broader and potentially riskier range of properties and deal types, said a local capital markets executive who asked to remain unnamed.
“What’s interesting now is that Pier 4, while it’ll be a high-profile development, isn’t an existing cash flow type of deal,” the executive said.
Directly across the street, a foreign institutional investor has a purchase-and-sale agreement for two parking lot parcels where a $700-million, 1.1-million-square-foot condo and retail development is planned. Boston Global Investors, master developer of the 6.3-million-square-foot Seaport Square development, and its partner Morgan Stanley, plan to sell the parcels after the project receives final city approvals, CEO John Hynes III said in a recent interview.
Foreign investors also played a dominant role backing what will become Boston’s second-tallest building, the 60-story Four Seasons Hotel and Private Residences under construction in Back Bay. International capital contributed 80 percent of the $750 million in project financing, developer Richard Friedman said earlier this year.
Interest In Recapitalizations
Industry sources say it’s unlikely the recent volume of transactions can be sustained, given the large number of trophy properties that traded hands in the past year. Foreign buyers typically have long-term investment horizons.
But a continuing source of activity could be recapitalization of office properties by owners looking to lock in gains after years of steadily rising prices. In the largest recent example, Boston Properties sold a 45 percent interest in two Boston and one New York office towers for $1.5 billion to Norges Bank Investment Management in late 2014.
AustralianSuper’s investment in 75 State St., a 31-story tower that is 98 percent leased, reflects the continuing demand for trophy properties. There are tax advantages in keeping ownership levels under 50 percent, and in partnering with U.S. landlords. Under such ventures, the U.S. company typically acts as managing partner and oversees leasing and management.
“They’ll work with the local operators who bring the local boots-on-the-ground expertise,” a real estate source said. “For the local operator, it’s a good situation as well, because they can monetize the value of their properties.”
