Interesting Times

After Spending 2008 Largely On the Sidelines, International Investors Believe U.S. Financial Markets Will Be Among First of Global Markets to Bounce Back

Foreign investors expect to spend significantly more to acquire U.S. real estate this year than they did in 2008, according to the findings of an annual survey of investor attitudes by the Association of Foreign Investors in Real Estate (AFIRE).

Despite strong evidence that capital flows and transactions by foreign buyers slowed significantly during 2008, offshore investors plan to boost investments by 73% over the next 12 months, according to the survey of the association’s 200 members, which hold a cumulative $1 trillion in real estate, more than 37% of it in the U.S. Foreign lenders, meanwhile, said they intend to step up financing of U.S. purchases by 58% this year, according to the survey.

In general, members "took a measured stance towards new acquisitions" in 2008 because of the economy and ensuing difficulties in pricing deals, said C. MacLaine Kenan, executive director of real estate investment for Arcapita, an investment bank with offices in Bahrain, Atlanta, London and Singapore.

"As they expect more favorable investment fundamentals to return in 2009, our members are poised to move more aggressively on acquisitions," said Kenan, AFIRE's new chairman.

International investors pulled back toward the end of 2008, feeling the market was in for a period of readjustment, noted Stephen R. Collins, managing director for the international capital group at Jones Lang LaSalle.  "The reason you’re seeing more activity from these folks now is they’re thinking, ‘how much lower can prices in Manhattan go for the Plaza District?’ They want trophy assets in great markets,"

European banks in particular believe that the U.S. is going to bounce back first among the global financial powers, and want to get in on good opportunities early, Collins said.  "They’re going to invest in the gateway cities: San Francisco, Seattle, Los Angeles, New York, Boston, Washington, D.C.," along with a few other favored markets like Philadelphia and Chicago, he said.

With the excitement over the incoming Obama Administration and the renewed demand for space that comes with a change in government, Washington, D.C., has emerged as the belle dame among U.S. commercial real estate markets in most product types, and foreign investors ranked the Nation's Capital as the top city in the world for foreign investment. For the first time in two years, D.C. topples New York City, which falls to third behind London in the wake of the Wall Street meltdown.

Respondents once again ranked the U.S. as the country providing the most "stable and secure" real estate investments, by a wide margin at 53%. Germany and Switzerland tied for second most stable at a distant 11.3%, with the latter moving up from seventh place. Tied for third place were Australia and Canada, each with 4.8%, while the U.K. moved up three places to rank sixth.

Association members show "a growing confidence and interest" in U.S. real estate, said AFIRE Chief Executive Officer James Fetgatter, adding that their investment plans for the U.S. "resemble the flight to quality that is creating the demand for U.S. Treasuries." The main question, of course, is whether buyers will get beyond kicking the tires and make a deal.

Overwhelmingly, AFIRE members pointed to the U.S. as the primary target for their real estate investment dollars -- on average, 45% of their portfolio is invested in American property. In all, half of the top 10 global cities favored by foreign investors are in the U.S. this year. Other top cities include San Francisco, Los Angeles and Houston. Interestingly, half of the top 10 cities were in Asia last year -- however, Tokyo and Shanghai ranked a distant fourth and fifth place in the most recent survey, garnering about half the votes of the top three.

Houston’s high rank came as a bit of surprise, said Francois Ortalo-Magne, chairman of the real estate department at The James A. Graaskamp Center for Real Estate at the University of Wisconsin, Madison, which conducted the survey for AFIRE. The energy-rich city’s ranking may have been a blip in the data, a reflection of oil prices, which were still very high when the survey was taken in October.

Some 37% of those surveyed ranked the U.S. as the nation providing the best opportunity for asset appreciation. However, Brazil leaped 10 places into the No. 2 slot, replacing China, which fell into 3rd place. The U.K. jumped into 4th place (from 9th) and India fell to 5th place (from 3rd).

In another surprise, survey respondents said the multifamily sector was their preferred property type -- finally bumping office into second place after two years. Industrial, retail, and hotel assets rounded out the top five.

In other survey findings:

Respondents reported that finding attractive U.S. investment properties is becoming less difficult, with fewer than 20% describing it as "very difficult" -- the lowest percentage holding that opinion in the last five years. In 2004, nearly 60% described it as very difficult.

For the first time since 2002, when respondents said "finding attractive opportunities" was the greatest challenge to investing in the U.S., in 2008. Seven percent said attractive opportunities were very easy to find, with 18% describing it as "somewhat easy."

Asked to what extent a building's "green" attributes influenced their decision to purchase a property, 11% said "significantly," and 60% said "somewhat." Almost the same percentages said that green features were worth a rent premium.

Posted by John Bremner on January 20th, 2009 11:11 AMPost a Comment (0)

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