Foreign Investors are Piling into the US Commercial Real Estate

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Foreign investors are piling into the US commercial property market as they see the sector as one of the few that will escape a property bubble bursting. London’s skyline is dominated by skyscrapers that have been snapped up by foreign investors from China, India, and the Middle East. 

In New York, China’s largest life insurance company has been acquiring property for its commercial investment arm, while a Malaysian developer last year bought a stake in a Manhattan tower for £650 million.

Capital from overseas has always flowed into US real estate, but never on this scale. The buyer of the 15 Broad Street office building was Singaporean sovereign wealth fund GIC, with an estimated $161 billion under management. 

Behind them were two secretive companies from Qatar, Al Rayyan, and Qatari Diar, who bought a portfolio of six commercial buildings for £272 million.

The world is on a veritable shopping spree – riding a wave of cheap money from floods of cash created by the Federal Reserve’s policy of stimulating the US economy through quantitative easing – propelled by an insatiable demand for prime office buildings in central business districts. 

The market is flooded with money chasing yield, making the commercial property one of the safest investments.

The US economy is recovering, but the pace has been gradual. Job growth continues at a measured rate and while consumer spending increased in January, it failed to meet expectations despite falling unemployment and low petrol prices. 

With the Federal Reserve planning at least one more hike in interest rates this year, the real estate market is expected to cool a bit in 2016.

Chris Ludeman, chief executive of capital markets for North America at agency CBRE, said: “With another rate increase on top of already-low bond yields, we could see an even greater flight to quality and a steeper yield curve. 

This may cause some foreign investors who have been deploying capital at a rapid rate recently to pull back, as their motivation of getting higher returns could diminish.” However, interest from foreign investors is expected to remain strong because of the price differential between prime US property and other global markets.

Growth in the US real estate market is not expected to slow down anytime soon, but the low-interest rates that have helped fuel foreign investment are likely to rise. This will cut into demand for commercial property in future years.

Ludeman said: “Lower interest rates have meant that equity invested in US office buildings has outperformed all other asset classes by far since 2008. Rising rates will make it more expensive to acquire assets and could potentially make the market less attractive.” 

Foreign investors are following their domestic counterparts’ lead – private Chinese investment in US commercial property has risen four-fold over the past three years, according to CBRE, while Russian investment doubled during 2015 compared with 2014.

Alongside capital from China and Russia, money from Japan and Singapore is particularly strong in the US. Japanese investors spent $9.1 billion in 2014 and although this dropped to $5.3 billion in 2015, 2016 is expected to mark a recovery.

The commercial property market in Hong Kong has grown larger than that of Manhattan – the average price of a square foot of commercial space is £1,567 compared with $1,832. 

Although this looks like good news for investors and American property owners, the issue is that Chinese capital flows into US real estate may be stalling as the yuan continues to devalue against the dollar.

The US office sector has shrunk from a peak of about 900 million sq ft in 1990 to 740 million sq ft currently. Vacancy rates remain relatively low at 11% on average, compared with 20% during the global financial crisis.

The Fed’s policy of quantitative easing has kept interest rates near zero and quadrupled its balance sheet to £3.4 trillion since 2008 – most of this is held in US Treasury bonds.

Foreign investors come to the US for a number of reasons – a strong economic track record and transparent legal system, political stability and security, relatively low taxes on foreign income, and ease of visa applications for skilled workers.

“It’s really hard to find any major risks with this market,” said Ludeman. “As long as the US economy continues to grow at a moderate pace, there’s enough life left in this expansion for occupiers to continue expanding their office space portfolios.

However, with 28% of all office space leased by technology-related tenants, some are concerned that companies may cut back on leasing if growth in the sector begins to slow.

The US commercial property market is not just benefiting from foreign investment, but also domestic players selling out of an overheated residential development market – particularly in London and Hong Kong. 

This has contributed approximately 10% of annual transaction volumes in recent years, with most sales coming from private equity funds.

However, a large proportion of recent US office building sales have been for vacant or partially occupied buildings, as well as those that do not generate any rental income.

This is because foreign investors are able to purchase commercial property using offshore funds that need not be fully invested – this means they can buy properties with very low levels of occupancy and value them according to the potential future rent roll, rather than current earnings.

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