Foreign Real Estate Investment in U.S.
Commercial real estate is reaching an inflection point where valuations are not driven mainly by capital markets. Portfolios have been purged and repositioned in order to improve liquidity for strategic deployment of capital in primary and secondary markets. In 2015, expect market fundamentals and property enhancements to emerge as the primary drivers of total returns reducing the reliance on falling capitalization rates and high amounts of leverage. Equity and debt capital will continue to be attracted to this asset class, however, investment strategies will adopt a wider stance targeting a broader set of markets and property types.
The anticipated rise in interest rates redirected capital to alternative asset classes. Despite the diverse range of options, the search for yield is returning to cap rate compression, sustained momentum in fundamentals, and operational improvements to generate returns.
U.S. commercial real estate markets remains the most stable and the strongest opportunity for capital appreciation for foreign direct investment (FDI) according to the 2014 AFIRE survey, conducted in the fourth quarter of 2013 by the James A. Graaskamp Center for Real Estate, Wisconsin School of Business.
The U.S. offers a stable and secure market for foreign investment in real estate outranking the second country, Germany, by 50 points – the widest margin since 2006. The U.S. remains a reliably strong market for capital appreciation with a 26% margin beyond the next best country, Spain. Investors remain optimistic about U.S. investment activities.
The U.S. also leads the rankings for planned real estate acquisitions in 2014 with 48% of AFIRE survey respondents projecting a modest increase in their U.S. portfolio size and 20% projecting a major increase. No respondents projected a major net decrease.
Investors are extremely positive about the course of the U.S. real estate market. When asked how their perspective on the U.S. real estate market had changed since the beginning of 2013, 65% said it had remained the same; 30% said it was more optimistic. Click here to see assumptions about future events, as cited by AFIRE.
“Foreign investors continued and growing interest in the U.S. real estate markets reflects fully functioning capital markets for both debt and equity that provide access to a broad range of investment opportunities,” said Steven Hason, Managing Director and Co-Head of Americas Real Estate for APG Asset Management US Inc and the newly elected Chairman of AFIRE. “Within the U.S, investors can participate in investments ranging from predictable core investments in gateway markets to potentially higher-yielding investments in secondary markets. And, in today’s markets, the survey reinforces AFIRE members’ beliefs that the U.S. provides an advantage for both safety and stability.”
Asian businesses reportedly invested $14 billion in the U.S. last year, more than double the total investments in 2012. The actual amount of overseas capital streaming into U. S. real estate markets is significantly understated. Real Capital Analytics, a commercial real estate analytics firm, tracks deed transfers which determine transfers to overseas investors. The substantial investments made by foreign investors who partner with domestic operators are typically omitted.
Dan Fasulo, managing director of Real Capital Analytics, reports that foreign investment in U.S. commercial real estate has “exploded” in the last 24 months, much as it did from 1999 to 2001 and from 2005 to 2007. “It’s coming from every direction and every continent,” he said.
Last year, foreign investors made close to $40 billion in commercial real estate investments, 15 percent less than they did in 2007, says Fasulo, adding that this figure does not count investments in private equity funds. By mid-March of this year, the 2014 total had already reached $9 billion, with billion-dollar deals in the pipeline still to be counted.
Fasulo comments, “These are sophisticated investors. They are paying market prices, but not overpaying. As of now, the spigot is certainly on.” One example of investors’ broadening view: one of Fasulo’s German clients is investing in Pittsburgh, Chicago, South Florida and Las Vegas.
Equity capital from wealthy investors, institutional investors, global investors, sovereign wealth funds, real estate investment trusts (REITs) are becoming more comfortable with the improving market conditions and are opting for broader allocations in a wider set of investment strategies. Mainstream rhetoric has shifted from increasing interest rates to the availability of credit. Active debt capital players including primary lenders, banks, insurance companies, mortgage REITs, global real estate funds, and mezzanine lenders – and the commercial mortgage–backed securities (CMBS) markets are willing to consider investments that were previously avoided.
Opportunities in the next year will not come from financial structuring or the application of a healthy amount of leverage. Successes in 2015 will emerge where an improving economy with strengthening fundamentals meets an investor’s property operating skills. Whether it’s identifying opportunity in repositioning overlooked markets or property types, or applying management and operational proficiencies, the propensity of off shore wealth to find a home in the United States remains long standing.
Michael Lagazo has held leadership roles at some of the largest commercial real estate companies including Westfield Group and Forest City. Michael optimizes performance and drives financial results for top commercial real estate projects in the U.S. Among his projects, Michael managed a 1.7 MSF coastal luxury development and was a shopping center executive at Forest City’s 160-acre super regional center, Victoria Gardens. Highlighted inShopping Centers Today, Wall Street Journal, Commercial Property Executive, National Mortgage Professional, Michael holds an MBA as well as a dual Bachelor’s Degree in business.