According to the latest AFIRE survey, New York and Washington, DC, are favourite destinations for foreign investors but the spread between the top two and other US cities is at an all-time high. The US is not as stable and secure as it was, as it has to compete for attention with more global cities. Jim Fetgatter reports
At the end of 2010, AFIRE conducted the 2011 Annual Foreign Investment Survey among its 200 members worldwide. The respondents to the survey own more than $600bn (€444bn) of real estate globally and $265bn in the US.
After narrowing their interest in emerging markets last year to China, international investors are placing additional emerging markets on their radar screens. Investors are showing increasing interest in Brazil and India. In fact the commonly named BRIC countries are back without the ‘R': Russia. So while the BICs are lighting the way, a total of 20 emerging countries were listed by AFIRE members as being considered for future investment whereas last year only 13 markets were mentioned. Vietnam appeared on the AFIRE survey for the first time.
When asked which countries provided the best opportunity for capital appreciation, the US captured an amazing 65% of the votes. To put this in perspective, in 2006 the US received only 26% of the vote, just slightly ahead of China at the time.
This year the second most favoured country for capital appreciation is China with only 10% of the votes, an amount consistent for China for the past few years. Significantly downgraded was the UK, which went from second place last year with 30% of the votes to 6% this year. The list of countries voted as best for capital appreciation was slightly longer than last year at nine countries but still falls far short of previous years, which included 14 countries.
"Compared with 2010, there is definitely a broadening of interest among emerging markets," said Ian Hawksworth, AFIRE's chairman and CEO of Capital & Counties Plc. "For those who were risk averse last year, China seemed a safe harbour for emerging market investments. But, for now at least, investors have become more comfortable diversifying into other emerging markets.
"Likewise, in the last downturn, London was the first market to recover, and while investment in the UK capital is still very active, it is not surprising that London has dropped to third place as investors expand their search to higher-yielding markets such as US gateway cities that offer attractive risk-adjusted returns."
The interest in the US seems to be much more highly concentrated in just two US cities, New York City and Washington, DC. It should come as no surprise that New York City and Washington, DC, are the "hands-down" favourite cities in the US. New York and Washington flipped places in this year's survey, with New York City taking top honours. The spread between these two cities and the third-place city, Boston, is perhaps the largest on record. The usual suspects, San Francisco and Los Angeles, round out the top five US cities.
As in last year's survey, the favourite US cities scoring drops off rapidly after the top five. There were no dramatic movements of other city preferences. The spread between preferences for these two cities and the other major cities in the US is at an all-time high. Furthermore, no other US cities are ranked in the top 10 global cities. This has happened only one other time in the past 10 years.
Fears of a double-dip recession in the US seem to have faded and sparked the increased interest in the US. According to the survey, over half of the respondents thought it less likely that the US would see a second recessionary dip. Only 8% thought it was more likely. Seventy per cent of the respondents said they planned to put more fresh capital in the US in 2011 than in 2010. On average they plan to increase their acquisitions by 21% in the US over plans for 2010. Investments in the US may be desired but is not necessarily easy. Over 50% of the respondents said finding investment opportunities in the US was difficult or extremely difficult.
In spite of this strong interest in the US, the total overall foreign investment into the US real estate market remained relatively low in 2009 and 2010, as indicated in figure 3. AFIRE members, however, indicated that they had completed 80% of their 2010 planned acquisitions in the US by the middle of the fourth quarter.
For 2011, the respondents indicated that they would increase their acquisitions in the US, Germany and China over and above their plans for 2010. The US, in keeping with other findings in the survey, should experience the largest planned increase in acquisitions, followed by Germany and China. No other country is shown to receive an increase in real estate capital allocation. Overall, the top five countries targeted for acquisitions in 2011 are the US, UK, Germany, China, and France in that order.
For the third year in a row multi-family housing is the preferred product type in the US for AFIRE members. And after several years of being the least favourite product, hotels made a dramatic jump this year and now rival retail as the second most popular product.
Offices, which comprise the largest holding among foreign investors in the US, are now ranked as the least favourite product type following a three-year trajectory downward from their peak in 2007. Multi-family's popularity may be attributed to a number of factors: availability of apartment acquisition financing, the difficulty of obtaining home mortgages, and the overall disruption of home ownership in the US.
The interest in US real estate is not confined to equity investing. Seventy-two per cent of the respondents said they had a stronger appetite for lending in the US than the previous year. Last year, 48% said they had a stronger appetite for lending. The vast majority of the foreign bank lending is for stabilised properties and mezzanine debt.
An interesting corollary to the assessment that the US ranks so highly on capital appreciation expectations is the belief that it is no longer as stable and secure as previously thought. The US is still the number one choice for stable and secure, beating every other country. However, the US score for stable and secure has been dropping for the past 10 years. Germany ranks second and Canada, at third, is rapidly rising in this category.
Four international cities seemed clustered at the top of the charts for best global cities for real estate investment. They are New York City, Washington, DC, London, and Paris. New York City has taken the lead with Washington and London grouped closely for second and third and Paris fourth. Consistent with the rankings for capital appreciation for the UK, London fell from an extremely high first place last year, enabling the two US cities to assume the top two spots in the world.
Interestingly, three Asian cities - Shanghai, Singapore and Hong Kong - were clustered just below these top US and European cities. Also of note and consistent with the expanding global interest, there were 28 cities mentioned in this year's survey, 11 more than in the past two surveys.
Jim Fetgatter is CEO, AFIRE