Attracting Global Investors
Priced out of big cities, international funds seek new opportunities in secondary markets.
always have attracted foreign investors, and this trend is expected to
continue through year-end. Foreign investors accounted for more than
$5.5 billion in real estate in 2003, slightly down from nearly $6
billion in 2002. This drop in spending is not due to decreased
interest, but reflects foreign investors' difficulty in finding prime
investment opportunities in first-tier markets, such as New York and
Washington, D.C. As a result, many foreign investors are rethinking
their strategies and turning to secondary markets to find
Looking Beyond Big Cities
Although foreign investors have plenty of capital to invest, it has not
been easy for many of them to build U.S. portfolios. U.S. investors
targeting top properties often beat out foreign investors because of
their ability to respond quickly to opportunities, their knowledge of
the real estate markets, and their willingness to accept more risk.
D.C., New York, Los Angeles, San Francisco, and Chicago attract the
majority of large foreign investors; however, many small foreign funds
are shut out of these markets, prompting them to look beyond
traditional big-city markets. To find the deals they're seeking, many
are visiting second-tier U.S. markets, trying to understand what makes
these cities tick. Today more activity and due diligence is occurring
in San Diego, Atlanta, Denver, South Florida,and the Texas markets, to name a few.
investors primarily are interested in properties that qualify as top
local assets and meet their usual investment criteria ? attractive
high-quality buildings, credit tenants on long-term leases, and limited
rollover exposure. For example, a Hamburg, Germany-based open-end fund
operator recently purchased a $64 million office tower in downtown
Seattle ? new territory for international investors familiar only with
the top U.S. cities. The competition and high prices will continue to
drive many foreign investors to similar markets with the hopes of
picking up such opportunities.
Top Foreign Investors
German funds are the largest, most notable group of foreign investors
currently active in U.S. commercial real estate. Recent legislative
changes have increased the amount of capital Germans can invest outside
of the European Union, and, as a result, more first-time German funds
are entering the U.S. market. Many of these investors need to diversify
their portfolios and believe that they can find opportunities to meet
their goals in U.S. markets.
funds generally seek secure investments that offer stable cash flows
and are leased to credit tenants with minimal rollover. However, as
many markets heat up, such properties are becoming more difficult to
obtain at the prices that attract foreign investors.
investors have been the second most active group, acquiring more than
$2.5 billion of U.S. commercial real estate in 2003. Limited domestic
real estate investment options, coupled with the Australian
government's compulsory superannuation program, which requires
employers to contribute 9 percent of employees' wages to a retirement
fund, have fueled a U.S. investment wave. Direct investors in U.S.
commercial markets include the $500 billion Australian pension funds,
which seek stable, annuity-style returns over time and are administered
by external fund management organizations.
private Australian investors have been successful by entering into
joint ventures with U.S. operating companies. This strategy has proven
a good fit for both parties because it allows the Australians to deploy
their monies in a more-efficient manner and offers their American
partners a different source of capital and property management fees.
and Israeli investors have made a smaller splash in the U.S. commercial
real estate scene. British investors are interested in U.S. properties
due to the currency play: With the dollar still cheap compared to the
British pound, investors feel they are getting more for their money. In
Israel, the government recently relaxed restrictions that now permit
Israeli funds to invest up to 20 percent of their assets overseas
compared to 5 percent previously. Therefore, many are seeking
value-added opportunities, particularly in the New York market.
As prices skyrocket, yields drop, and competition increases in many of
the world's major real estate markets, more foreign investors will seek
opportunities in the United States. Though office properties
traditionally have been their top choices, more foreign investors are
educating themselves about other asset classes, particularly retail and
trend to watch this year is foreign investors' tendency to be more
creative in how they pursue investments. Many small international funds
will have to step outside of their comfort zones to compete for
properties by forming joint ventures with U.S. partners, pursuing
property recapitalizations, and looking at secondary market
opportunities. These strategies may create the momentum foreign
investors need to succeed in U.S. commercial real estate markets.