Despite the recession, investors still see the US as providing the most stable and secure investments.Buoyed by some recovery in lending, cross-border investment into the country looks set to increase sharply, as James Fetgatter reports
Each year, the annual survey taken among members of the Association of Foreign Investors in Real Estate (AFIRE) provides a focused perspective into the buying patterns of institutional investors in real estate. AFIRE comprises nearly 200 members from 21 different countries. Respondents to the 17th annual survey collectively own more than $1trn (€720bn) of real estate, including some $380bn invested in the US.
Average portfolio size was approximately $18bn, with some $7bn invested in the US.After a year in which cross-border real estate investment fell substantially short of allocations, foreign investors in real estate expect spending to be significantly higher in 2009 than it was in 2008.
Compared with transactions completed in 2008, foreign real estate lenders say that in 2009 they plan to increase lending by 54% globally and by 58% in the US. In October 2008, equity investors had completed just above 50% of their planned allocations for the year; in 2009, these investors plan to increase investment activity by 40% globally and by 73% in the US.
These figures underscore AFIRE members' expressed confidence in fundamentals returning to the marketplace and their goals of being poised to participate once the equilibrium is re-established.
Although they ranked first, second and third respectively, Washington, DC, New York, and London were in a virtual tie as the preferred cities for investors' real estate dollars. With approximately half as many votes, Tokyo and Shanghai were cited in fourth and fifth positions. This year, five of the top 10 cities are in the US; in last year's survey, five of the top 10 were in Asia.
For 2009, respondents expressed a substantial preference for US real estate followed by properties in Germany, the UK, China, and Japan, virtually mirroring the countries targeted in 2008. Japan replaced France among the top five targets in 2009.
Respondents said US real estate provided the best opportunity for capital appreciation, but Brazil rose to second place from twelfth in 2007. However, the gap between first place US and the second preferred country widened in 2008. Brazil was followed by China, dropping a notch to third place. The UK took a significant leap to fourth place, and India fell slightly into fifth position.
With 53 percentage points, the US was also deemed the country providing the most stable and secure real estate investments, although this percentage has steadily narrowed over the past few years. Germany and Switzerland, with 11%, tied for second place, while Australia and Canada, each with 4% of the votes, filled out the fourth and fifth slots.
For future investing, India and Brazil were named the top two emerging markets, followed by China, Russia and Mexico. However, no respondent holds more than 10% of its portfolio in these markets. This was the first year in which emerging markets were ranked. In terms of geographic distribution, properties in the US, western Europe, and the UK continued to comprise the majority (77%) of investors' existing portfolios. However, increased holdings in Asia (ex Japan) and Australia by 4% each and Eastern Europe by 2%.
Office properties dominate portfolios both globally (43%) and in the US (42%), followed by retail, multi-family, industrial/R&D, and hotel/leisure properties. US portfolios contain slightly higher weightings of retail, multi-family, and ‘other' property categories.
In both 2007 and 2008, respondents said that US real estate comprised 45% of their portfolio. Almost all AFIRE members have a portion of their global portfolio in the US. Following two years in second place, Washington, DC emerged as the top US city (in addition to the top global city) for investors' real estate allocations. New York, the previous number one choice, is now ranked second followed by San Francisco and Los Angeles in third and fourth places.
In a surprise vote, Houston rose six places to emerge as the fifth top US city for investment. François Ortalo-Magné, chairman of the Real Estate department and Robert Wangard chair in Real Estate at the Wisconsin School of Business who conducted the survey on behalf of AFIRE, speculated that the selection of Houston was a response to the higher oil prices which were in effect when the survey was taken in October 2008.
Given their investment plans, it is not surprising that debt and equity investors had slightly different appetites for investment in the US versus other countries. Some 49% of respondents representing debt said they felt the US offered stronger opportunities than other countries, compared with 43% of equity investors.
Some 28% of equity respondents said their appetite was weaker compared with 11% of debt respondents.Survey respondents also indicated that finding attractive US investment properties is becoming less difficult. Only 18% of respondents said it was "very difficult" to find attractive US investment opportunities. This is the lowest percentage holding this opinion in the last five years.
As a comparison, in 2004, 59.4% of respondents said opportunities were "very difficult" to find. And for the first time since 2002, when respondents said "finding attractive opportunities was the greatest challenge to investing in the US", 3.3% of respondents said attractive opportunities were very easy to find, with another 14.8% saying they were "somewhat easy".
Multi-family properties replaced office buildings as respondents' preferred US building type. Office properties dropped to the second preferred choice after holding the number one slot for the past three years. Industrial properties remained in third place, but hotel properties slipped into fifth as retail moved into fourth.
For the first time, AFIRE members were asked about the value of ‘green' architecture as an incentive to invest. In response to the question: "Over the last year, to what degree has a building's ‘green' attributes influenced you or your clients' decision to purchase a particular property," 11% answered "significantly so", and 60% said "somewhat".
When asked if buildings with green attributes were worth a significant rental rate premium than they were three years ago, only 26% said not at all, while 61% said somewhat and 13% said significantly so.
AFIRE members have a common interest in preserving and promoting investment in cross-border real estate.
Founded in 1988, AFIRE currently has nearly 200 members representing 21 countries.