Foreign investors are losing their appetite for US real estate, according to the results of a survey commissioned by the Association of Foreign Investors in Real Estate (AFIRE). Overseas investors in US real estate say they will reduce the US percentage of their total global real estate acquisitions from 71% in 2004, to 55% in 2005, and make more acquisitions in Japan, eastern Europe and Australia.
However, the news is not all bad by any means. The investors, who collectively have nearly e300bn invested globally, say the overall level of spending will increase both globally and in the US. The survey was conducted by Kingsley Associates among AFIRE members.
The main reason for investors looking outside the US is one that applies in many well-traded transparent real estate markets – such as the UK. Nearly 60% of survey respondents this year said that it has become “very difficult” to find attractive real estate opportunities in the US. As a comparison, the previous survey found only 38% of respondents saying it was “very difficult”.
“It has been a challenging market, particularly for organisations like ours which are committed to offering both stable rates of returns, and the ability to sell in the future at a profit,” says Steve Zoukis, a partner at Jamestown, a German closed-end real estate fund with US assets of $4.4bn (e3.4bn), and AFIRE’s chairman of the board.
“However, I believe a significant part of the capital wave will remain invested in real estate, since some of the drivers are long-term phenomena, and the US remains of great interest to investors around the world,” he added. “The transparency, openness, and liquidity of the marketplace, as well as its huge size, will continue to attract large amounts of foreign capital.”
Despite the difficulty in finding new opportunities, investors responding to the survey still rate the US very highly. Washington, DC was voted as the foreign investors’ top global city and the best city for investment in US. New York also made
the list of top global cities with London, Tokyo
and Paris.
Investors still rank the US as the best location for real estate capital appreciation, with nearly half (45%) of investors ranking it the best.
For the first time since the survey was initiated in 1992, cities in south-eastern Florida are among the top five US cities for foreign investors’ dollars. Miami, Ft Lauderdale and West Palm Beach took fifth place, following Washington, DC, New York City, Los Angeles, and San Francisco.
“We see south-east Florida as an attractive, long-term market,” says Randy Mundt, president and chief investment officer, Principal Real Estate Investors.
“As foreign investors diversify both geographically and in terms of property type, the region will appear more frequently on foreign investors’ radar screens. Miami, in particular, has emerged as a 24-hour city with an internationally friendly business climate.”
As they purchase new US properties in 2005, survey respondents say that the majority of new allocations (51%) will continue to be concentrated in private equity investments with core strategies. Furthermore, investors also say they plan to shift more than 6% of their new acquisitions from REITs into private equity with both value-added and opportunistic strategies.
As a consequence of the difficulties in finding opportunities, investors are looking at different ways to place new capital into US real estate:
n 21% said they were seeking non-core and alternative assets;
n 31% said they were seeking operating partnership or joint venture investments;
n 23% said they were looking for off-market deals or making unsolicited offers.
While office deals make the headlines with big numbers, apartment blocks (multi-family) and retail properties remain foreign investors’ preferred properties for investment. Office properties were second-ranked, their best showing since 1999, when they took first place. Hotels and industrial properties were ranked respectively in third and fourth place.
After the US, the UK and France were regarded as the countries providing the most stable and secure real estate investments. The top three new EU countries targeted for investment are the Czech Republic, Poland and Hungary. Survey respondents said they would be shopping primarily for retail (78%) and office (72%) properties in these countries.
For the first time since the question was asked in 2001, Tokyo was named one of the three top global cities for real estate investment. Japan was also the second ranked country in terms of the potential for capital appreciation.
Interestingly, survey respondents believe that Japanese investors, who had been predominant players during the late 1980s, will be the third most active buyer of US real estate in 2005, following Germany and Australia.

In support of the US market
UK group Grosvenor, the private real estate company owned by the Duke of Westminster, has been investing in the US since the 1950s. Mark Preston, head of the group’s US operations, is AFIRE’s treasurer.
The North American part of the business was set up in the early 1950s and was based in Vancouver. The US operation is headquartered in San Francisco and is also heavily invested in Washington DC, Chicago and Los Angeles. Preston says this concentration is recent, based on a decision three years ago to focus on areas where the group had significant assets and market knowledge.
The group is still keen on the US market and believes it offers better risk-adjusted returns than many others, despite the fall in yields that has come from investors’ hunger for real estate. “The UK and US deliver similar total returns,” says Preston. “However the income proportion is higher in the US, which makes it less risky.”
Demographics also gives the US an advantage over Europe, its population is set to keep growing and its long term economic growth potential is ahead of Europe, which suffers from an ageing population.
However, the US is a crowded market and there is a lot of competition for deals. The real estate industry is wondering if yields can fall any further. Preston says: “It’s more uncertain which way the movement will be now than it has been for two or three years. It sometimes makes real estate people feel uncomfortable, but we may have underestimated the demand for income from other investors.”
The competition for deals has also made Grosvenor think differently about its bidding process. “One effect it has had is that we look at a piece of property and think – is this something we’ll really want to reach for? If it isn’t then we may well think there’s no point in getting involved,” says Preston. “You have to be certain you are prepared to bid hard for something otherwise you can go through the process and not get anywhere.”
However, he maintains it is important “not to say you want something at any price” and to stick with what you know. “Just because it is harder to find assets in our core areas does not mean we should be looking outside them to areas we don’t know so much about. We worry not so much about the prices being paid as the terms on offer.” Says Preston. “In some cases buyers are asked to remove the due diligence altogether or close within a couple of days. That might be OK for other investors but it’s not something we would be comfortable with.”