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Perfect storm had U.S. Investors seeking real estate shelters overseas

Frankfurt Financial District

1 December 2014

 Driven by increasing competition from overseas in their home markets, North American investors are looking beyond their borders for good opportunities. Michel Rémy from Informa Canada* reports.

A sort of commercial real estate perfect storm is driving U.S. investors to pour their investment capital into foreign properties. There are two forces at work simultaneously — growing overseas opportunities and increasing overseas competition for highly desirable U.S. properties.

On the one hand, Colliers International reports in its 2015 Global Investor Sentiment Survey (GISS), “Low interest rates worldwide continue to drive the international investor’s ‘search for yield’ across all asset classes.”

But in the same survey, Colliers note U.S. investors are feeling the pinch on their home turf. They are “experiencing the other end of global investing as competition from overseas sources of capital intensifies in major cities.”

As the U.S. economy recovers, foreign investors are gobbling up prime properties in the gateway cities — New York, San Francisco, Washington and Seattle.

“They really like the gateway markets,” says Susan Wallace, executive managing director of the global investors group at USAA Real Estate Company. “Those are the four hottest markets, and out of those Manhattan is by far the most popular.”

In October, for example, the Chinese insurance company, Anbang Insurance Group Co., purchased the famous Waldorf Astoria hotel in New York, for USD 1.95 billion.

Foreign investors are also pouring capital into core U.S. markets: Los Angeles, Dallas, Houston, Chicago, Denver, Miami and Orange County, California.

Also in October, 12 investment firms bid on 1000 Main, an 837,000 square-foot office building in downtown Houston that used to be called the Reliant Energy Plaza. Only two of which were U.S. firms. The Los Angeles-based CBRE Group is marketing the tower. It received bids from European, Canadian and Middle Eastern investors.

Meanwhile, JLL experts at a recent Urban Land Institute conference in New York forecasted that 2014 foreign investment in U.S. commercial real estate would hit almost USD 50 billion. That’s up significantly from the record USD 38.7 billion in 2013.

On a national level, Avison Young recently reported that in the first half of this year alone, foreign investment in U.S. property was up by nearly 10% over last year. The real estate services firm said office properties accounted for half the 2014 investment amount.

This tidal wave of foreign investment in U.S. real estate — particularly in the gateway markets — is forcing U.S. investors to look beyond their borders for good opportunities.

“It’s very difficult to find excellent opportunities in Manhattan primarily because it’s being priced to perfection. In other words, the assets you purchase in those markets have to perform exactly as you’re underwriting them, or else you’re not going to get those types of returns that you’re expecting. And even then, they’re very low returns,” Wallace says.

According to the Prudential Real Estate Investors (PREI) research group, there’s good reason for U.S. investors to look abroad. PREI noted in its 2012 A Bird’s Eye View of Global Real Estate Markets that 75 percent of available real estate is international. Only 25 percent of available properties are in the U.S. The PREI report also noted that by 2021, 42.8 percent of the commercial real estate market will be in developing countries.

Another PREI report titled Why Global Real Estate Securities? notes U.S. investors “have many reasons to broaden their horizons into global real estate securities.”

“The sheer size and growing importance of emerging markets will produce a host of opportunities outside the U.S., while diversifying enables investors to gain exposure to the economic drivers in multiple regions and has historically produced superior returns without added risk,” the report says.

In the 2015 GISS, Colliers International found 78 percent of U.S. investors want to expand their real estate portfolios. However, 27 percent said they’re looking at investments in Asia, Europe, the Middle East and Africa.

“There are quite a few people who are looking to Europe for investments,” says Wallace. “London, Paris and now to a certain extent Germany, are very attractive to investors. Europe is in a recession. It’s just not growing. It’s kind of stagnating and it has actually back-tracked a little bit this year. So people are feeling like there are investment opportunities in Europe.”

Brad Olsen, president of North Carolina – based Atlantic Partners Ltd., adds: “An increasing number of Canadian and American investors are seeking interesting opportunities as the European economies have been slower to recover than the North American economies.”

“For new investments, we’re taking advantage of a very favourable interest rate environment,” says Daniel Gorzawski, vice-president of AIG Investments – AIG Global Real Estate.

This is particularly the case in Germany notes Gorzawski, who is based in London, U.K. “You choose a moderate leverage and you get fantastic financing rates, and then you can go out and buy assets like industrial warehouses where property yields are seven percent and you get financing for three percent.”

USAA recently made its first overseas investment, in logistics properties in The Netherlands. “We’re getting into the European marketplace through Luxembourg, which is the alternative to going directly into Germany but you can still work within the German market,” says Wallace.

Germany is considered the gateway to European markets. However, London is the capital city that U.S. investors are — or should be, at least — pouring their capital into when they are having to broaden their horizons. That’s according to London calling: investing in commercial real estate, a report by White and Case, an international law firm based in New York.

“The London commercial real estate market is currently seen as the primary ‘global city’ for overseas investors,” partner James Dodsworth says in the report.

In 2013, the report notes, there was USD 31.2 billion invested in London commercial properties. Of the total transactions, 72 percent were made by foreign investors.

As well, says the U.K. Investment Property Forum (IPF), property holdings by overseas investors increased 15 percent last year. In London, 29 percent of commercial properties; 58 percent of city offices in London proper; and one-third of offices in the West End and Midtown districts, are foreign owned.

The U.K. is extremely attractive because the corporate tax rate is to decrease to 20 percent in 2015. As there are no withholding taxes on dividends. But U.S. investors aren’t just calling on London.

Whether they’re going global because of attractive financing and corporate tax rates, or because of stiff foreign competition for domestic properties, U.S. investors are also turning to the Asian markets for opportunities.

“We think Asia is probably a market that will really switch on with global investors next year,” says David Hutchings, partner and head of European, Middle East and Africa capital markets at Cushman and Wakefield. “In Asia we’ve seen there was strong growth across a wide range of cities.” He cites Manila and Singapore as two examples.

“U.S. investors are going into Asia again. After the recession hit, they really pulled out of developing countries,” says Wallace. “There’s still risk there but they (investors) are getting a little higher returns because [Asia] hasn’t really come out of the economic recession as fast as some other areas.”

Another reason why U.S. investors have to look abroad is the simple necessity of keeping up with the global investment trend. “What we’re seeing is a totally global market,” affirms Hutchins.

He says Cushman and Wakefield has seen the strongest real estate investment growth in cities that are not among the top 25 choices.

“That’s the first time we’ve seen that in a number of years, and it’s a real sign of investors having faith in a broader spectrum of markets and looking around in each region for opportunities,” Hutchins says.

*Informa Canada offers 20 real estate conferences on the North American real estate markets annually. For more details, visit www.realestateforums.com

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