Investors' plans for real estate investment in 2010 show a new focus on a few select markets. James Fetgatter charts investor intentions
The year 2009 was brutal for real estate transactions. In spite of investor intent and planning, actual cross-border investment was at reduced levels across the board. In the US, foreign investment in real estate totalled approximately $2bn (€1.45bn) compared with $12bn in 2008 and close to $40bn in 2007. A lack of credit, lack of good investment opportunities, and general uncertainty about the markets contributed to a lacklustre year for real estate investing.
At the end of this dismal year, AFIRE conducted the 2010 Annual Foreign Investment Survey among its 200 members worldwide. The respondents to the survey own more than $842bn of real estate globally and $304bn in the US. The survey showed a renewed focus on selected countries and cities to the exclusion of many previously popular investment targets and an increasing appetite for careful investing.
When asked which countries provided the best opportunity for capital appreciation, just three countries received 90% of the responses. Fifty percent of respondents chose the US, 30% chose the UK, and 10% chose China. The remaining 10% was divided almost equally between Brazil, Germany, Canada and Spain. In 2006, only 23% of respondents named the US. The UK response is even more dramatic. In 2006, only 1.6% of the answers indicated that the UK provided the best opportunity for capital appreciation. China appears to be holding its own at 10%, having achieved this percentage in past years.
The fall of countries off the list was dramatic. This year, only seven countries made the list compared with 12 in 2008, and 14 in 2006. Brazil, which last year earned 15.8% of the votes, second to the US, is now in the ‘also ran' category. And India, which bested China in 2006, did not make the list this year. Investors indicated their intention to place almost all of their ‘emerging market capital' into China.
Three cities dominated the choices for top global cities for real estate. They are London, Washington, DC and New York City. The three also took the top places in last year's survey, but London has blasted ahead of both Washington and New York. Last year's rankings for these cities were very close, but this year London scored 40% higher than second placed Washington, DC. Further down the list, Hong Kong made substantial gains as a top global city, rising from 22nd place last year to 8th this year.
The beginning of the recovery
In the middle of 2009, when AFIRE asked its members to predict when the US commercial real estate market would begin to recover, 50% of the respondents predicted a recovery by the end of the second quarter of 2010. When asked the same question at the end of 2009, 50% now believe the recovery would start by the end of 2010.
Prospects for 2010
For 2010, on average, AFIRE members plan to increase their global equity investments by 46% over their plans for 2009. Their plans for the US are much more aggressive, with planned acquisitions 62% higher than plans for 2009. Planned acquisitions for 2010 compared with their actual acquisitions through the middle of the fourth quarter would be magnitudes higher.
The top five countries for investments in 2010 are the US, the UK, Germany, France and China, in that order. However, the US score was more than twice that of the UK, and the UK scored twice that of Germany. Among emerging markets, China was a clear first choice, scoring twice as much as the two second choices, Brazil and India.
Investing in the US
In the US, Washington, DC pulled further ahead of New York City as the number one city, scoring 20% higher than New York. The gap between the top two cities and the rest of the country has widened further than previous years. There was little other movement in the rankings of US cities apart than a slight upward move for Boston.
For the second year in a row, multi-family housing was deemed the highest ranking product type in the US. Hotels were the least favourite. The spread between the highest and lowest ranking products is the widest in years. Five years ago, the rankings of the five major product types were almost indistinguishable. Offices have maintained their second place popularity.
The US continues to be the country providing the most stable and secure real estate market. However, its scores have declined steadily for the past several years. For the first time in the 18-year history of the survey the US has slipped below 50%, scoring 44%. The financial crisis has obviously affected investors' perception of the US as ‘safe and stable'. However, it is also apparent that opportunities lie within this instability since the US showed substantially higher marks for capital appreciation. Second-ranked Germany received 21% of the votes and Canada 14%.
Banking on the US
International banks which are members of AFIRE said that by the middle of the fourth quarter of 2009, they had placed 60% of their planned debt allocations worldwide and slightly more than one-third of their US allocation. Their average loan size was $60m compared with $50m for the previous year. Almost all of the lending was in stabilised properties and high-yield mezzanine debt.
For 2010, AFIRE's banking members plan to cut their global allocations by 20% over 2009. However, even this level of planned activity will exceed their actual debt commitments for 2009. In contrast, in the US an increase of 83% is expected in 2010 over 2009 plans. As with equity investments, 2010 lending plans will be magnitudes higher than 2009 actual lending if all plans are successfully executed.
In the history of the AFIRE survey members' prospective plans are seldom fully achieved. This may be a result of a change of confidence in their strategies or a lack of available opportunities. However, expressed plans are indicative of attitudes. Only as we progress through the year will we see these attitudes validated or debunked.
James Fetgatter is CEO of the Association of Foreign Investors in Real Estate (AFIRE)