February 2015 Issue
Given the impact of the financial crisis, it’s understandable that the level of investment into US real estate plummeted considerably, as it did in real estate markets the world over.
However, the real estate sector is now enjoying something of a renaissance. Both in the US and abroad, real estate is faring well, outperforming broader markets globally. In 2014, there was an abundance of inbound investment activity in the US real estate space, with investors primarily from Asia and Canada once again ready to commit significant levels of capital.
The market performed admirably despite the lower returns expectations currently permeating both the sector and the wider US economy. By the end of 2014, the level of foreign capital committed to the US real estate sector was believed to have surpassed the $39bn mark, a notable milestone compared with recent years.
Increasingly, foreign investors looking for a viable investment opportunity are eschewing other markets around to world to commit further cash to the US. According to data from Jones Lang LaSalle, foreign investment in the Americas grew 25 percent in 2014, surpassing the combined 15 percent rise seen in Europe, the Middle East and Africa and the 10 percent increase witnessed in the Asia-Pacific region. Foreign investment in the US real estate sector is following a trend of increased investment in the wider US economy. Jones Lang LaSalle expects foreign investors to have committed a total of $50bn to the US in 2014, up 29 percent on 2013. In mid-December, Allianz SE, Europe’s largest insurer, announced that it had joined with Manulife Financial Corp in a venture which will see the companies invest up to $1bn in US commercial real estate. Allianz and Manulife are the latest in a string of investors to have moved into the US market. AustralianSuper Pty, the country’s largest pension fund, also announced in December that it intended to join Principal Financial Group Inc as it looked to purchase a number of office buildings in the US.
For some, the US market has emerged as a particularly attractive location for real estate investment as it represents the most stable location to commit capital. The US economy’s recent performance has positioned the country as one of the most attractive investment locations since other countries, most notably in Europe, have struggled economically. The US has been more resilient.
“The most marked shift in investor behaviour has seen Asian investors leave opportunities in the UK and at home in favour of the US market.”
The most marked shift in investor behaviour has seen Asian investors leave opportunities in the UK and at home in favour of the US market. An overabundance of properties in China is one key driver for the increase in Asian capital entering the US. With commercial and residential developments springing up throughout China, supply in some areas of the country has vastly exceeded demand. Equally, astronomical property prices in the Asia-Pacific region’s key financial and commercial centres – such as Hong Kong, Beijing and Singapore – have made US targets appear all the more appealing. 2015 is likely to see more Asia investor groups acquiring assets in major cities in the US. New York, Los Angeles and Seattle in particular will continue to appeal to Asian investors, the latter thanks to the presence of notable internet companies Amazon and Microsoft. Looking back, 2014 was a significant year for investment in New York, as the region saw around $36bn worth of investment up to the end of the third quarter of 2014; by comparison, investment during the same period in 2013 was $14.6bn.
Canadian institutional investors have also gone on a spending spree. Although a number of Canadian pension funds have been keen to pursue opportunities in India and other markets, the most logical investment destination for Canadian capital is across the border in the US. According to data from Real Capital Analytics, Canadian investment groups have been the single largest acquirers of US based commercial real estate property since 2010. In November 2014, Montreal-based Ivanhoé Cambridge Inc announced that it had agreed a $2.25bn deal to acquire a 42-storey office tower at 1095 Avenue of the Americas in New York from the Blackstone Group LP. That deal is expected to complete in the first quarter of 2015.
With continuing financial uncertainty in Europe and the slowing of certain emerging markets, the US stands as an attractive investment destination for firms looking to enter or solidify their position in the real estate market. This is likely to persist throughout 2015, although the winding up of the US Federal Reserve’s quantitative easing program may have an adverse affect on overseas investment into the US real estate market. Only time will tell.
© Financier Worldwide
BY
Richard Summerfield