Overseas investors are accelerating commercial real estate property price gains and increasing foreign investment dollars may continue driving the trend.
While global real estate investors continue to increase their flow of funds into commercial U.S. properties, the trend appears to be causing property values to increase at a much faster pace than if the same or similar properties were bought by local investors.
According to a recent survey, CBRE found that investor demand for commercial property continues to increase as 53% of surveyed global investors indicated they plan to increase their purchases throughout 2015. New York, Dallas and Seattle all made the top 10 list of markets where that money will be targeted.
“The appetite for global real estate investment is increasing as more investors intend to deploy capital outside of their own region this year. Competition for assets is intensifying and many investors plan to move out the risk curve in search of higher yields, a trend that will result in a stronger focus on value-add and opportunistic investments,” said Chris Ludeman, global president of CBRE Capital Markets. He cited the current low interest rate environment, economic expansion across an increasing number of markets, and improving real estate fundamentals as the main reasons investors are continuing to favor commercial real estate.
Foreign investment in U.S. commercial real estate has been growing consistently over last six years, according to Deutsche Bank analyst Ashley Hooper. The volume of deals last year topped $49 billion, surpassing the 2007 peak investment level of $47 billion.
“This positive trend appears to be continuing; so far this year we are up 140% over last year,” Hooper wrote.
A big portion of the growth this year came in February when Singapore-based Global Logistic Properties Ltd. completed its acquisition of the former IndCor Properties for $8.1 billion. Assembled and sold by Blackstone, the portfolio was one of the largest logistics platforms in the U.S., with 117 million square feet of industrial properties spread across 29 different U.S. cities.
Canada was the leading global buyer of U.S. real estate last year with $9.7 billion of direct foreign investment, according to research from CBRE. And before January 2015 was even over, Canadian investors transacted a significant $2.75 billion in U.S. real estate deals.
The continued flow of overseas investment is helping to drive up property prices, according to a new jointly authored paper from three university researchers.
Yu Liu, a professor in the Department of Real Estate, J. Mack Robinson College of Business, Georgia State University; Paul Gallimore, a professor at the School of Real Estate and Planning, Henley Business School, The University of Reading in the United Kingdom; and Jonathan A. Wiley an associate professor also at Georgia State published the research.
Their study examines the capital value performance for commercial property sales made by nonlocal investors, both when they purchase a property and when they sell it. The research found that non-local, out of market investors overpay when buying commercial property by an estimated 13.8%, and sell at an estimated 7% discount.
They also found the under-performance in buying and selling property increases as the geographic distance separating investor and asset expands. Out of market investors fundamentally overvalue similar assets sold to each other relative to assets transacted between locals, and they are also less patient as sellers.
Using CoStar Group data, the authors analyzed 10,971 office purchases and 11,444 sales in 138 U.S. markets. Their analysis controlled for investor clienteles, timing, location and sale conditions. The three hypothesized several reasons why out of market investors may overpay for CRE.
- They might have an information disadvantage relative to local participants
- They may be disproportionately represented by tax-exempt and institutional investors who have superior access to reduced cost of capital, giving them more of an ability to outbid other investors
- They may be represented by less sophisticated investor clienteles
- The investors may be coming from cities with more expensive rental markets, which could be skewing decisions.
“Their thesis quantifies what many CRE professionals have suspected for years: that foreign buyers are liable to pay more than their domestic peers for U.S. real estate assets,” said Eric Hawthorn, director of research and communications at Llenrock Group, a Philadelphia-based capital markets firm providing real estate debt, equity, joint venture partnerships and advisory services.
“Since several gateway U.S. markets are among the top destinations in the world for international CRE capital, foreign investors pursue opportunities here extremely aggressively,” Hawthorn said. “Whether deployed for stability or returns, foreign capital is flooding into U.S. gateways in such quantities that it is skewing the valuations of upper-tier properties across asset types.”
According to Hawthorn, foreign investors appear to be competing with each other, rather than with their domestic counterparts, which may create a disconnect between properties’ operating income and the sums that foreign investors will spend in order to outbid their peers.