Foreign money not yet a factor

ONLY A FEW DEALS HAVE BEEN DONE, SOURCES SAY

By Jessica Griffith

 

Despite a few recent, publicized deals involving offshore investors, foreign currency is making only a few inroads into the American medical office market.

While investors both large and small remain enamored with U.S. medical office properties – despite a flabby dollar – most buyers continue to be stateside.

Although a deal occasionally involves foreign money, industry experts say these investments do not have a significant impact on the market. In fact, less than 5 percent of the capital coming into the medical office market is from foreign investors, says John Smelter, senior director with brokerage firm Marcus & Millichap in San Diego.

“It’s more something to keep an eye on than a real trend at this time,” Mr. Smelter says.

“As the dollar continues to weaken, and I expect it to continue to do so, that might change,” he adds. “But right now, we have so much competition for this particular product type.”

Each property that hits the market attracts between 100 and 200 potential buyers, according to Mr. Smelter. With such high interest, the industry accomplishes little by introducing foreign capital.

“I don’t see any significant foreign interest,” adds Jeffrey Cooper, senior managing director at Granite Partners LLC in New York. “It’s more isolated deals.”

A smattering of interest

 

That’s not to say foreign deals are nonexistent. South American and Latin American firms are expressing interest in medical properties in Florida, says Tom Prakas, a broker and partner with the Prakas Group in Boca Raton, Fla.

Prakas Group represented Kaja Properties Inc. when the Deerfield Beach, Fla., company sold the Pompano Beach Medical and Professional Center to the Astra Fund, a Brazilian firm with offices in Miami Beach, Fla. The 26,000 square foot building sold for $3.8 million and Astra Fund plans to transform it from a for-lease building into medical condominiums.

“We’re seeing stronger and stronger interest from South American and Latin American firms,” Mr. Prakas says. “They are interested in moving money to America, and Florida is a logical base for them.”

He adds that these companies are attracted to all types of commercial real estate, not only medical office.

Another recent deal was the sale of Hackensack University Medical Plaza in Hackensack, N.J., to ProMed Properties, a subsidiary of the publicly traded Israeli real estate firm Gazit-Globe. Granite Partners represented the seller in the deal.

Gazit-Globe’s North American real estate holdings include 40 percent of Equity One Inc. (NYSE: EQY), a real estate investment trust (REIT) that concentrates on grocery-anchored properties. Gazit also owns a majority share of First Capital Realty (Toronto: FCR.TO), a Canadian REIT with a similar portfolio.

Gazit formed ProMed to expand its interests into medical properties, says Benjamin Robinson, director of acquisitions at Gazit Group USA Inc. in North Miami Beach, Fla.

“We see medical office as an opportunity to diversify into an asset class that we look at as stable and able to generate growth long-term,” he says.

ProMed paid $88 million for the 252,000 square foot MOB in Hackensack, and Mr. Robinson says the company has board approval to acquire up to $350 million in additional medical office space. 

“We’re looking at core purchases of on-campus medical office,” he says. “We want to leverage off that core product to do other arrangements with the hospital group.”

Although Gazit in the United States concentrates primarily on grocery-anchored shopping centers, Mr. Robinson sees a synergy between those types of projects and medical office buildings.

“Retail is anchor-driven and on a medical campus, the hospital is the anchor,” he says.

ProMed primarily is interested in medical real estate in the United States, although it will consider investments in other countries as well.

A foreign idea

 

The American market differs from most western countries in that its healthcare is not socialized, as it is in Canada and Western Europe. As a result, the American market has plenty of room for private investment.

By the same logic, European firms are not particularly interested in investing in U.S. medical real estate, Mr. Cooper says.

“I haven’t seen anything from Latin America or Europe,” he says. “In Europe, most of these facilities would be owned by public entities so investors likely would not be familiar with the product type.”

Offshore interest in U.S. medical office space is limited, Mr. Cooper says. The majority of it comes from Middle Eastern firms that abide by sharia, or Islamic law. These companies will not invest in any business that collects interest from its customers, and many office buildings house banks and other financial companies. 

“Medical office makes a lot more sense because of the nature of the tenancy,” says Olin Needle, senior vice president at Heitman LLC in Chicago. “It is difficult to find a commercial office building without financial service firms.”

In addition to pursuing medical, Middle Eastern firms also have shown interest in assisted-living properties in the United States, says Lewis Ingall, executive vice president at Heitman.

Heitman is witnessing some overseas interest, but only to the extent that real estate in general is turning into a global marketplace, Mr. Needle adds.

“Medical real estate used to be the domain of private investors, and then institutional investors such as pension funds and REITs got more involved,” he says. “Foreign investment is just an extension of that.”

Heitman served as an advisor for one recent Middle Eastern deal: the sale of the Marietta Medical Center in Marietta, Ga., to Kuwait-based Global Investment House’s U.S. real estate fund. It was Global’s third medical real estate purchase in the United States, and the company paid about $20 million for the 98,500 square foot building. Mr. Needle declined to comment on the deal.

A few other international companies have shown some interest in the market. In March, Retirement Residences Real Estate Investment Trust (Toronto: RRR-DBC.TO) of Mississauga, Ontario, purchased seven skilled nursing facilities in New Jersey. Retirement Residences paid Brandywine Senior Care Inc. about $100 million in U.S. dollars for the nursing homes, which contain a total of 1,169 beds.

A company representative declined to discuss the deal or any aspect of Retirement Residences’ strategy.

Australia-based Babcock & Brown is looking to invest in U.S. medical real estate but has yet to make any deals, says John Fahy of the company’s Greenwich, Conn., office.

Healthcare and medical office traditionally have been fairly insular markets, Mr. Robinson adds.

“It’s been a rather closed industry driven by local folks with contacts at the hospitals,” he says. “But as hospital groups look to move more real estate off the books, they’re seeing other capital come in.” q

Jessica Griffith is a business writer specializing in commercial real estate.