#us real estate
First Quarter 2000
Foreign Investment in U.S. Real Estate
By Kory Oscar Bockman, Economist
The U.S. economy has been responsible for the strength of the real estate market. Fueled by historically low rates, rising real income, and huge job gains which spurred consumer confidence, the housing industry has been able to reach record levels. Improving market conditions, coupled with more attractive pricing vis-a-vis foreign real estate, have made U.S. commercial real estate a more attractive long-term investment as it generates a higher return than many investments overseas. U.S. real estate markets, however, are not the sole purview of U.S. consumers and investors. The past year saw many countries engulfed in a financial whirlwind and others struggling to come to terms with a new united currency. Financial turmoil abroad has a significant impact on the U.S. real estate market because of capital flight to safety. The world sees U.S. markets as a safe haven for investments, and many foreign investors view real estate in particular as an opportunity to diversify their portfolios with those assets that generate strong returns.
Foreign Direct Investment in U.S. Real Estate
Foreign direct investment in U.S. real estate declined steadily in the early 1990s as the U.S. real estate market performed poorly as a result of the recession and an overbuilt market. However, this trend began to reverse in the mid-1990s. Market conditions improved in the U.S. while those overseas began to suffer. In fact, 1998 saw the third consecutive double-digit increase in foreign investment in U.S. real estate. *
The bulk of foreign investment in the U.S. comes from Asia. Japan is the largest single source of foreign investment as Japanese investors had been buying up America's landmarks. The economic miracle enjoyed by Japan in the 1980s and into the 1990s created significant wealth. In order to diversify portfolios and garner high profile investments, Japanese investors purchased high-priced hotels, golf courses, office buildings, and condominiums.
The next largest foreign investor in U.S. real estate is Canada. In fact, Canada has been aggressively increasing its level of investment in U.S. real estate, more than doubling its share of the real estate market from 9.9% in 1994 to 20.4% in 1998. The only other large investor increasing its share of the U.S. real estate market has been Germany, which saw an increase from 3.1% in 1994 to 8.0% in 1998. The Netherlands, which is now the third largest investor, maintained the same level of investment, but saw its share of the U.S. market fall from 20.0% in 1994 to 14.9% in 1998 as the overall level of investment increased.
Outlook for Foreign Investment in U.S. Real Estate
The Asian financial crisis did not hurt the U.S. real estate market but it did have an impact. As trouble began to grow back home, Japanese investors in particular were under significant pressure to sell off foreign investments and repatriate money in order to improve the books at home. In fact, the Japanese have been net sellers of U.S. property since 1993. This sell-off has proved to be a large boon for American investors as they have been able to purchase distressed assets at sharp discounts.
Americans are not the only ones benefiting from the Japanese fire-sales . As the Japanese flee the market, other Asians are picking up the slack. Chinese investors from Hong Kong and the mainland are finding a safe haven for their investments. Investors in Hong Kong were looking to move their money abroad due to its return to Chinese rule. Moreover, Taiwanese investors are doing the same as China increases the rhetoric of reuniting Taiwan into one China . All investors in the region were also anxious to leave behind the political and economic turmoil of Indonesia.
The situation in Europe is quite a different story. The advent of the single European currency, the Euro, has created a new dynamic in international investment. In fact, with the exception of the Netherlands and Germany, every European country decreased its level of investment in U.S. real estate. The Netherlands stayed flat while Germany had an increase of only just over one- percent. Meanwhile, Canada has been the most significant investor in U.S. real estate in terms of growth. The Canadian currency, the loon, weakened dramatically in 1997, prompting investors to look to place their money in investments that would hold their value. Canadian Pacific Hotels, for instance, expanded their reach in April 1999, by purchasing the luxury hotel properties under Fairmont Hotel Management LP of San Francisco. These properties include NY's Plaza Hotel and the Fairmont Hotel in San Francisco, as well as properties in Boston, Chicago, Dallas, New Orleans, and San Jose.
Just as the U.S. housing market is enjoying spectacular booms in certain areas of the country while others are merely keeping pace; the same is also true with foreign investment. While the U.S. as a whole is enjoying increased direct foreign investment in real estate, four cities in particular are receiving the bulk of the funds. According to the Association of Foreign Investors in Real Estate (AFIRE), the top four cities are Washington, NY, San Francisco, and Boston.
Not all foreign investment in U.S. real estate deals with hotels and office buildings, however. Miami draws a significant number of investors looking for homes and condominiums. In fact, foreign buyers including Latin Americans, Canadians, and Europeans snapped up about $250 million in luxury condominiums in the Miami/Dade area last year. ** While the financial troubles experienced in Brazil have kept many of that country's investors out of the market, Brazil's decreased participation has been more than offset by investors from Argentina, Colombia, and Venezuela.
Foreign investment in U.S. real estate has been on the rise over the last few years. There has also been a shift in the concentration of foreign investment from traditional to non-traditional investors. The investment level of Japan has declined dramatically, while the level of investment of Canada has increased even more dramatically. Overall, the outlook for the U.S. economy and the real estate market remains positive. While no one expects the U.S. real estate market to enjoy spectacular success as it has over the last couple of years, prospects for 2000 remain upbeat. As some international investors continue to liquidate their investments in U.S. real estate, the continued growth in investment from areas such as Singapore, Germany, and especially Canada will more than make up for disinvestment by those investors.
* Survey of Current Business, U.S. Department of Commerce, Bureau of Economic Analysis, September 1999.
** For more information, see the
South Florida Business Journal, Vol. 19.