21 March 2018

U.S. Real Estate Attracts Foreign Investors

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Money managers are taking advantage of this source of cash — expected to surpass $39 billion by year-end — by partnering with foreign investors on direct deals and collecting capital for separate accounts. But the capital tsunami has a dark side: It is pushing prices skyward for all real estate investors.

U.S. real estate is attracting massive foreign investment, said Stephen Collins, president of Jones Lang LaSalle Inc.'s capital markets group-Americas, Washington. Jones Lang LaSalle estimates foreign investment in the Americas will grow 25% in 2014, far exceeding the combined 15% rise in Europe, the Middle East and Africa and the 10% increase in the Asia-Pacific region. And the firm predicts foreign investors will invest nearly $50 billion in the U.S. alone this year, 29% more than 2013's record $38.7 billion.

Pensions & Investments' annual survey of the largest institutional real estate money managers, showed that managers' investment in U.S. real estate for foreign clients jumped 33% to $62.1 billion as of June 30, almost double the 18% growth of the year-previous survey.

Foreign investors' interest in U.S. real estate is because the U.S. “is perceived to provide a stable environment in which to invest and is the best market for capital,” a recent survey of foreign investors by the Association of Foreign Investors in Real Estate, a Washington-based trade group, said.

But this wave of foreign capital has a downside. Foreign capital has been boosting prices in the 25 biggest U.S. office markets since the fourth quarter of 2012 — a low point in the cycle — with prices growing 8.8% in the second quarter of 2014 up from 3.2% growth in the fourth quarter of 2012, according to data from Jones Lang LaSalle. And it's not just flowing to the hottest markets. In the first nine months of this year, Hawaii attracted $1.98 billion of foreign capital; Northern New Jersey, $1.11 billion; and San Francisco's East Bay, $89 million. None was on the list of top U.S. markets for foreign investment in 2013.

Indeed, 71% of respondents to the foreign investors' survey indicated interest in buying properties in the so-called secondary cities in the U.S. because of an increase in economic fundamentals, such as rent and occupancy. For example, Washington continues to be a hot real estate market despite sluggish expected rental growth, limited occupancy rates and tepid demand for space.

Foreign investors have invested $2.29 billion in Washington this year as of Sept. 30, compared to $1.15 billion in the nation's capital in all of 2013, said the Jones Lang LaSalle report shows, using Real Capital Analytics Inc. data.

Canadian institutions have been a leading investor in U.S. real estate. In the three years ended July 31, more capital was invested in the United States by Canadian investors than investors from any other foreign country, said the Urban Land Institute and PricewaterhouseCoopers' Emerging Trends in Real Estate 2015 survey.

In the 12 months ended July 31 alone, foreign investors scooped up 12.7%, or $50.15 billion, of the $394.9 billion in total sales in the U.S., with Canadian investors accounting for close to $15 billion of the 12-month total, the report said. Indeed, 47% of Canadian investors' investment in U.S. real estate in the three years ended July 31 happened in the past 12 months.

U.S. office and apartment sectors were top on the Canadian's shopping lists, the Jones Lang LaSalle cross-border study shows. Canadian investors were the top foreign capital source investing in the office and apartment sectors with $3.72 billion invested in U.S. office and $1.28 billion in U.S. apartments in 2014 through Sept. 30. And Canadian institutions have large allocations, giving them more money to invest in real estate. Canada's largest pension funds have target real estate allocations of between 12% and 14%, among the largest in any major pension market, Jones Lang LaSalle data show.

The Canada Pension Plan Investment Board, Toronto, which oversees C$234.4 billion (US$206.9 billion) in pension assets, has a 12% real estate allocation, for example. By comparison, the $296 billion California Public Employees' Retirement System, Sacramento, has a 7% allocation. As of March 31, 35.1% of the CPPIB's C$24.6 billion real estate portfolio was invested in U.S. properties, the board's largest exposure to a single country or region.

The gush of money from outside the U.S. shows no sign of slowing down. Respondents to the ULI/PwC trend survey released last month expect equity capital in 2015 will increase more from foreign investors than any other capital source. And 81% of respondents to the survey by the Association of Foreign Investors in Real Estate indicated they intend to increase their portfolio of assets in the U.S.

Click here to access the full article on Pensions & Investments. 

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