The U.S. real estate market remains a magnet for offshore investors with figures for the first half of 2017 showing the country continues to be the world’s leading recipient of cross-border capital, attracting US$19.8 billion of foreign investment.
As JLL’s H1 2017 U.S. Investment Outlook observes, this is slightly below the pace of 2016, which saw US$55.1 billion of activity by year-end. Nevertheless, offshore deployments remain steady and significant, with investors demonstrating a focused approach to acquisitions.
Why? For offshore investors, U.S. real estate offers manifold attractions. Market sentiment and liquidity remain elevated, an extensive range of assets exists, and there is an active, engaged and diverse investor pool.
“For some investors, this is combined with limited investment options in their domestic markets,” says Sean Coghlan, Director, Americas Research, JLL. “Uncertainty over the economic climate and prospects in the European Union, especially as Brexit plays out, is another factor. At the same time, foreign pension and sovereign wealth funds continue to increase their allocations to real estate, while the relaxation of restrictions on outbound investment by some countries has helped stimulate foreign capital flows.”
Asia gains ground
Overall foreign investment flows into the U.S. may have remained relatively steady, but the sources of that capital continue to shift. “Historically, Canadians have been the most active foreign investors in U.S. real estate, but now investors from Germany and Asia Pacific have started to make strides,” says Coghlan.
While Canadian capital remains the single largest source, accounting for 30 percent of year-to-date foreign investor activity, almost half the offshore acquisitions in 2017 originated in Asian countries, reflecting their ongoing appetite for U.S. real estate. In addition, seven of the top 10 foreign buyers were based in Asia. The office sector, and in particular coastal gateway markets, continue to be their main targets.
Office still reigns
This focus on primary office markets and high-quality assets extends to cross-border investors more broadly. Roughly half of the foreign capital inflows went into the office sector over the first six months of 2017, totaling investments of US$10.6 billion. Primary markets accounted for three-quarters of those office acquisitions.
In part this reflects the fact that almost 80 percent of that foreign office investment came from just five countries, three of which are in Asia: China, Singapore, Canada, Germany and Japan. This level of concentration marks a major change from recent years, as together these countries haven’t accounted for more than 60 percent of foreign activity since 2003.
Multifamily on the rise
Multifamily saw the next biggest inflow of overseas capital, with a broader subset of foreign sovereign wealth and pension funds increasing their exposures to the space.
“While some overseas investors are focused on suburban investment strategies due to current urban development levels and pricing, others are seeking to align U.S. multifamily with office exposure from a market and sub-market perspective,” says Coghlan. “We will see more transactions from these groups, likely at scale, in non-conventional structures and with strong domestic sponsors. However, selectivity will remain the norm.”
With pricing elevated in primary markets, and targeted opportunities remaining limited, foreign investors will continue to expand the scope of their U.S. real estate investment strategies by both asset type and location, including moves into selected non-primary markets.
In 2014, 71 percent of foreign capital was deployed in primary markets. That figure now sits at 58 percent. And approximately 22 percent of foreign investment in the first half of 2017 went to tertiary markets, the largest share these markets have seen since 2007. This migration has largely been spurred by portfolio opportunities across the industrial and alternatives sectors, notably within student housing and medical office.
For many foreign investors though, part of the diversification problem to date has been their limited familiarity with non-coastal markets. “Foreign investors often don’t have people on the ground in the U.S. to seek, acquire and operate the properties,” notes Coghlan.
Hence the growing attraction of M&A deals, such as Greystar’s US$3 billion acquisition of Monogram Residential Trust, with equity for the transaction provided by a newly created open-end fund boasting Dutch pension group APG, Singapore’s sovereign wealth fund GIC, and Canadian pension fund subsidiary Ivanhoe Cambridge as cornerstone investors.
“M&A may provide opportunities to acquire a platform, and a team, that has experience and a presence in those asset sectors and markets that investors are targeting,” says Kevin Stahl, JLL’s Head of M&A and Strategic Advisory for the Americas (offered by Jones Lang LaSalle Securities, LLC – Member FINRA/SIPC). “In addition, it offers an opportunity to gain access to an ongoing pipeline of assets to acquire or develop in the future. We are also seeing a number of foreign investors pursuing or considering potential entity-level investments in private real estate operators and developers. Programmatic joint ventures and ‘club’ JVs are gaining popularity as well.”
Given the relative liquidity of U.S. real estate and ongoing geopolitical uncertainty elsewhere in the world, the U.S. office sector and primary markets will continue to see the bulk of foreign investment activity. Looking forward though, we expect foreign capital to further explore selective investments in other U.S. real estate sectors, as well as more secondary and tertiary markets.
For more insight into the latest investment trends, download JLL’s H1 2017 U.S. Investment Outlook.
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