Monday, April 4, 2011

Sovereign wealth funds, among others want a share in expected U.S. rebound

Tie-ups between real estate investment managers and foreign investors are expected to grow rapidly this year, as investors around the world seek to get in on an anticipated U.S. commercial real estate market recovery.

Foreign investment in U.S. real estate more than doubled last year, to $13.37 billion (from $5.6 billion in 2009), according to a real estate investment firm Jones Lang LaSalle. And this trend is expected to continue through 2011 at least.

Foreign investors — including a larger number of sovereign wealth funds than have been seen in a couple of years — are not only committing capital to commingled funds and separate accounts, but also are increasing joint ventures with U.S.-based real estate investment managers and investing in U.S. real estate investment trusts, industry insiders say.

For example, roughly half the new investors in U.S. real estate investment firm Shorenstein Properties LLC's recently closed Shorenstein Realty Investors Ten were foreign, a greater percentage than in prior funds, sources familiar with the matter said.

And within the past month, TIAA-CREF and AREA Property Partners, formerly Apollo Real Estate Advisors, linked up with foreign institutions to invest in U.S. real estate.

The number of planned U.S. real estate deals by foreign investors so far this year already surpassed the number of completed deals in 2010. According to a February survey by the Association of Foreign Investors in Real Estate, more than 70% of foreign investor respondents plan to invest more capital in U.S. real estate than they did in 2010. What's more, respondents ranked the U.S. as the country where they expect the most increase in the value of their property investments in 2011.

The U.S. accounted for 36.3% of the global commercial real estate market — significantly larger than the next nearest country, Japan, which accounted for 12.5% at year-end 2009, said Alex Peace, spokesman for the Investment Property Databank, London, in an e-mail.

TIAA-CREF executives see interest in U.S. investments coming from sovereign wealth funds mostly from Hong Kong and other parts of Asia, as well as Scandinavia and other parts of Europe, plus the Middle East, said Phil McAndrews, New York-based TIAA-CREF managing director and head of real estate portfolio management.

In March, TIAA-CREF and the A$71 billion ($71.7 billion) Future Fund, Melbourne, Australia, formed a joint venture to co-invest in real estate in the U.S., said John Panagakis, managing director and head of asset management business development at TIAA-CREF. As part of the deal, Future Fund is buying a 50% interest in 685 Third Ave., New York, a building TIAA-CREF bought last year for $190 million. TIAA-CREF would not reveal the size of Future Fund's commitment to the joint venture.

“The driver (for foreign investors) is U.S. real estate marketplace fundamentals. Supply and rental levels are improving,” Mr. McAndrews said. “As foreign investors examine the U.S. real estate market as an investment opportunity, they see a marketplace that has an upside. ... Most sectors are poised for strong recovery.”

Most people think the U.S. real estate market is coming off the bottom and values are rising, said Max Swango, managing director in the Dallas office of Invesco Real Estate. Foreign institutions believe the U.S. is in the early stage of a recovery, and they want to get in on it, he said.

There is no question that interest from Europe and Asia in U.S. real estate has increased, Mr. Swango said. “We've seen allocations into our funds and we are talking to (foreign investors) for potential separate accounts.”

Invesco Real Estate executives have also been in talks with foreign investors about co-investing with U.S. investors and joint ventures with real estate operating companies.

In March, AREA Property Partners sold a 35% minority non-controlling stake in its firm to National Australia Bank Ltd., Melbourne, to get access to institutional investors in Australia and New Zealand, said Lee Neibart, AREA's global CEO.

“Demand is way up from three years ago,” Mr. Neibart said. “Certainly, property values have increased dramatically. More institutional investors are seeking stable core properties so values are moving up.”

There is also a greater ability to finance investments, Mr. Neibart added.

REITs also are seeing capital flowing from foreign institutions.

“We like the diversification of clients. It helps capital move around the globe,” said Michael Torres, CEO of Oakland, Calif.-based Adelante Capital Management LLC, a REIT manager with more than $2.5 billion under management. He anticipates a “natural flow” of capital from foreign institutions, including many that already participate in the U.S. REIT market.

“Increases come sporadically,” Mr. Torres said. “We've had (investments from) mineral-rich economies like the sovereign wealth funds of Norway and Australia ... and recently more of the Chinese institutions.”
Prospects aren't good

But the prospects for direct investment by foreign institutions aren't as good. Over the past decade, direct foreign investment in domestic real estate typically only accounted for 10% of total transactions annually, noted Dan Fasulo, managing director of New York-based real estate research firm Real Capital Analytics Inc. Most investments by foreign institutions are made through REITs and commingled funds, which are not tracked, he said.

U.S. regulations are the reason for the low level of direct investment by foreign institutions, Mr. Fasulo said. But Adelante's Mr. Torres said judging from conversations he has had with federal officials, he expects those restrictions will ease.

Still, in the first three months of 2011, foreign investors purchased some $2.5 billion in U.S. real estate, with most buyers coming from Canada and the U.K. By comparison, foreign investors accounted for $9.6 billion in U.S. purchases in all of 2010, with Canadian and European investors investing the most, according to data supplied by Real Capital Analytics.

“The U.S. is a hot market,” said Steve Collins, Washington-based managing director for Jones Lang LaSalle's international capital group. “There are new sources of capital trying to get seats at the table,” which includes sovereign wealth funds and pension funds from the Asia-Pacific region.

Last year, most foreign buyers were investing in core real estate in gateway cities such as New York and Washington, Mr. Collins said.

This year many of the buyers are looking in Boston, Los Angeles, San Francisco and Chicago. By the end of the year, he thinks they will be shopping for real estate in Seattle, San Diego, Atlanta and Houston.

The current surge of foreign investors attracted to U.S. real estate is not like other investment waves into real estate, said TIAA-CREF's Mr. McAndrews. In the past, it was investors from individual countries like Japan and Germany that came separately, he said.

Now, “there's more diversified interest. A level of diversity (of investors) brings out the best in any asset class.”

Source: www.pionline.com

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