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.
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