"We Love the USA" – Foreign Investors Still View US Real Estate Favorably
Global investment in US commercial real estate appears to be down from its peak in 2015 and maybe even its 2016 levels. But a panel of investors from around the world said they remain fairly bullish – or, at least, confident that good investments can still be found.
James A. Fetgatter, chief executive of AFIRE, chaired the panel titled, "An Enduring Destination for Capital: How Will Investment in the US Be Affected by Volatility at Home and Abroad?" at DLA Piper's Global Real Estate Summit on September 26, 2017, in Chicago. Fetgatter noted that foreign investors put US$28 billion toward US CRE in the first half of 2017 – down from the torrid pace of 2015, when $US95 billion was spent.
Asked whether decline could be chalked up to recent US political turmoil, including the election of Donald Trump, Fetgatter said his organization had asked investors several years ago whether the outcome of a US presidential election affects their investment decision. Eighty-five percent then said no.
"We were asked this question many times after Trump was elected, and we said no," he said. "I guess the assumption is that 2017 will be probably the same level or maybe greater than last year."
Belief in US Stability, Status as a Safe Haven
The panelists largely agreed.
"We are long-term investors – we love the USA," said Martin J. Brühl, managing director and chief investment officer of Union Investment Real Estate GmbH. "It's the depth of the market, the liquidity, the transparency. We also love your electoral system, whereby a president can only serve for two terms."
Meanwhile, the "core universe" for investment around the world is shrinking, Brühl said. This echoed a major theme of DLA Piper's 2017 State of the Markey Survey report, in which the US was identified as "safe haven." Seventy percent of respondents agreed or somewhat agreed that foreign direct investment in the US would be strong through 2017. They also said foreign investors would be the most active equity investors in the US in the next year, edging out private equity.
"We invest beyond the term of any one or two presidents," said Peter Ballon, managing director and head of real estate investments for the Canada Pension Plan Investment Board. "Not that we wish turmoil upon countries, but we're very much in a growth mode and volatility creates opportunity. When there's volatility in the US, we try to take advantage of it."
Ballon said "the wind at our backs" over the past 10 years was gone, however, and that real estate investors forget real estate will decline in value at some point. Other panelists also expressed caution, including a belief that some US asset classes are overpriced (notably, High Street retail in some markets) and that some corrections in rents were likely needed.
But with negative interest rates in many markets around the world and instability elsewhere, the US is still a good place to invest, Dino P. Christoforakis, head of North American transactions for AFIAA, a Swiss pension fund investment foundation. Christoforakis said there is a "very healthy return going core in the US."
"There's uncertainty, but there is uncertainty everywhere," he said. "We're also trying to be more defensive, but not overly defensive."
Asian Investors Can Handle Turmoil
Fetgatter asked Tinchuck A. Ng, international chair of the Real Estate Board at Cottonwood Management, whether Asian investors were attracted to turmoil, noting that they flocked to the United Kingdom in the months after that country voted to leave the European Union last year. "They don't seek it out, but Asian investors are somewhat accustomed to turmoil in their own countries, and take a long-term view," she said.
"When Trump was initially elected, there was a little bit of hesitation, particularly among the Asian families. Six months later, they're right back in the market," said Ng, who has said that strong opinions in many other countries about the new US president don't necessarily affect commercial real estate.
Good Investments Remain
The panelists said that despite the long length of the current positive economic cycle, judged by historic standards, good investments can still be found in the United States. Ballon said his organization hasn't invested in the top five US markets for several years, instead focusing on alternatives including campus housing. He said many foreign investors don't have the resources to do the due diligence required for those transactions, which requires travel to more remote parts of the US.
"We're getting returns for getting in a car and driving a few hundred miles to the campus," he said.
"There is something easier about investing in a big, shiny asset," Ballon added. "It takes as much effort to buy one building in New York for one billion dollars. That's easy for an institution to do. It does not necessarily maximize returns."
Christoforakis agreed that it can be difficult to successfully convince overseas investors to put their money into more far-flung parts of the US.
"I remember the first time I pitched a deal in Silicon Valley," he said. "The people sitting in Europe, they looked at things on Google Earth and said, ‘Wait a minute, there's no density here. I don't get it – why should we pay a 4.5, 5 cap rate?' It comes down to more education that needs to be done."