Foreign investors buy billions of dollars of prime commercial property in the U.S. every year. Where are they from?
Foreign countries continued their American commercial property shopping spree in 2006, providing more than 5% of the record $336 billion spent on U.S. office towers, apartment complexes, retail centers, and industrial buildings.
Half of the biggest U.S. single-asset real estate deals in history were announced or closed last year. In the same period, overseas investors spent a grand total of $19.96 billion on U.S commercial real estate—about flat from the year before, but five times as much as they spent in 2001, according to New York City-based research firm Real Capital Analytics.
"This whole globalization movement we've all been talking about so long? It's actually happening right now," says Dan Fasulo, director of market analysis at RCA.
The real story, however, may not be "how much," but "who," as in who bought the most U.S. commercial property last year. Though the players in the lineup of biggest foreign buyers remain largely the same as in recent years, the order is constantly shifting.
Leading the Pack
The Middle East topped the list for 2006. Last year, the wealthy region provided the biggest U.S. commercial real estate investors by sales volume, at $5.29 billion, according to RCA.
Some of the other top shoppers may be more surprising—Australians spent $3.78 billion on U.S. commercial real estate last year, the second-highest sales volume on the list. Germany took fifth place, with $1.97 billion in commercial real estate purchases.
The Pacific Rim region—Japan, South Korea, China, Hong Kong, Singapore, and Taiwan—was the third-biggest investor at $3.29 billion, marking an 891% increase from the year before. (RCA doesn't break out its data by individual country.)
Canada ranked fourth on RCA's list, with U.S. commercial real estate purchases totaling $2.57 billion, no doubt helped along by Edmonton-based Triple Five Group's $1.8 billion purchase of the Mall of America in Bloomington, Minn. Other massive U.S.-to-foreign deals in 2006 included Hong Kong-based Hudson Waterfront's $1.25 billion purchase of AXA Financial Center in New York, and Dubai-based Istithmar's $1.2 billion purchase of 280 Park Avenue in Manhattan.
"2006 was the year of the Middle East," says Fasulo. "They're looking for all sorts of hard assets to invest in." Investors from Middle Eastern countries such as Dubai, Bahrain, and Kuwait tend to be high-net worth individuals and families flush with petrodollars from the runup in oil prices in 2005, Fasulo explains.
Giant deals like Istithmar's Park Ave. buy helped the Middle East displace Australia, the biggest foreign buyer of U.S. real estate in 2005, with purchases totaling $7.7 billion that year. But the land down under retained a solid second place on the 2006 list, as investors and institutions continued to load up their portfolios with U.S. real estate.
With limited opportunity in their own country, which has only about 20 million people vs. 300 million in the U.S., Australians have naturally taken to investing in real estate overseas, explains Jim Fetgatter, chief executive of the Washington (D.C.)-based Assn. of Foreign Investors in Real Estate (AFIRE). Much of the capital is coming from the country's pension-fund pool, which has grown sharply since the mid-1990s, when a law was passed mandating that employers put 9% of their workers' gross salaries into retirement accounts similar to 401(k) plans.
Another Aussie Year?
Unlike the U.S., Australia doesn't have an established bond market, so investors look to U.S. real estate for stability, Fetgatter notes. Among the biggest Australian investors in U.S. commercial property are Macquarie Real Estate, Centro Properties Group, and Galileo America Shopping Trust.
In 2007 Australia may once again take over the top slot. According to the 15th Annual AFIRE Survey, Aussies are likely to be the most active buyers of U.S. real estate this year. 54% of AFIRE members, who collectively own $600 billion of real estate globally and $185 billion in the U.S., chose the country as their prediction for the most active foreign investor in U.S. commercial property for 2007.
Germany, a big player in the U.S. commercial real estate market since the mid-1990s, took second place in the AFIRE survey, with 27% of members choosing the country as 2007's most active investor in U.S. commercial property. AFIRE Investors' other picks for 2007 included the Netherlands, the Middle East, Ireland, Britain, Japan, and Singapore.
"There are different stories coming out of every survey," Fetgatter says. "It all ebbs and flows with what's going on with [the countries'] own economies."
Why is U.S. real estate whetting the appetite of international investors? The falling value of the U.S. dollar against the euro and other currency has little to do with the trend, Fetgatter explains, since most investors are long-term and will leverage with locally borrowed money.
Commercial real estate in U.S., however, is viewed as a safe and profitable investment by foreign investors. More than two-thirds of investors surveyed by AFIRE said the U.S. remains both the strongest and safest conduit for cross-border commercial real estate, and the country with the best opportunity for capital appreciation.
"It seems contradictory," says Fetgatter "But while, yes, you could invest in China and India and get better yields, when you factor the risk in, it might not be worth it."
Foreign investors are also finding it easier to find good real estate investments in the States these days. Two years ago, 60% of AFIRE members said it was "very difficult" to find attractive real estate investments in the U.S. In the most recent survey, only 37.5% checked off the "very difficult" option. Moreover, U.S. target acquisitions for 2007 by survey respondent showed a median increase of 53% over 2006 levels.
What explains the sudden change in sentiment? Investors seem to be passing less often on more risky investments; respondents to AFIRE's survey said "value-added" real estate could comprise 25% of their portfolio in 2007, up six percentage points from 2006.
"The U.S. is the first stop [for foreign investors]," Fetgatter says. "It's a deep, diversified, and stable market."
Click here to see which countries are the largest buyers of U.S. commercial real estate.