Foreign investors are shopping for real estate in the United States, looking for bargains on trophy properties in world-class cities.
“Over the last nine months, we've met with or talked with more than 60 new investors who have not invested in the U.S. before,” said Steve Collins, managing director, international capital group, Jones Lang LaSalle Inc., Chicago.
Mr. Collins added that he expects a number of U.S. properties to be snapped up in the second and third quarters. At that point, more capital will be in the market, which will increase sales prices, bringing more properties on the market.
Some 51% of foreign investors polled in the fourth quarter of 2009 indicated that the U.S. offers the best opportunity for capital appreciation, the highest percentage in seven years. By comparison, 37% of respondents identified the U.S. as the best place for capital appreciation in 2008, 26.2% in 2007 and 23% in 2006. The annual survey by the Association of Foreign Investors in Real Estate, a Washington-based trade association, was conducted in the fourth quarter of 2009.
The percentage of foreign investors who considered the U.S. the place for capital appreciation increased dramatically this year, said Jim Fetgatter, AFIRE's chief executive.
Foreign investors now think “there are bargains to be had,” he said. Survey respondents cited New York as one city where they have the potential of earning the highest capital appreciation on their real estate investments.
Core real estate in sought-after locations such as Washington, San Francisco and New York are coming down in price, hovering around replacement cost. Two or three years ago, the same properties were selling at well above the cost to replace them, Mr. Collins said.
International investors also are attracted to the U.S. because the real estate market is more transparent than it is at home, he said.
Although the year-earlier survey also revealed that foreign investors were interested in U.S. real estate, most were looking then for deep discounts. Those expectations have been tempered, said Mr. Fetgatter, adding: “They know they are not going to buy buildings for 50 cents on the dollar.”
There have been a few well-known deals. In September, one of Frankfurt-based Deka Immobilien GmbH's funds bought 1999 K St. in Washington, for $208 million. The following month, the family, whose company manufactures Jose Cuervo tequila, bought 303 W. Madison St. in Chicago for about $60 million, the first sale of a downtown office building in Chicago in 2009.
But there aren't a great deal of trophy assets on the market. Debtholders are in no hurry to unload the trophy real estate that has been turned in by former owners or on which they have foreclosed. They are willing to wait until they can sell the properties at higher prices, Mr. Collins said.
Still, foreign institutional investors have an edge on domestic buyers because they did not use as much leverage in the revved-up markets of two and three years ago, so debt is easier for them to obtain, Mr. Collins said. U.S. investors, saddled with the debt of a few years back, can get financing but with less attractive terms and higher fees.