Overseas Investors Still Find U.S. Property Hot

Foreign investors buy billions of dollars of prime commercial property in the U.S. every year. Where are they from?

by Maya Roney

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Foreign countries continued their American commercial property shopping spree in 2006, providing more than 5% of the record $336 billion spent on U.S. office towers, apartment complexes, retail centers, and industrial buildings.

Half of the biggest U.S. single-asset real estate deals in history were announced or closed last year. In the same period, overseas investors spent a grand total of $19.96 billion on U.S commercial real estate—about flat from the year before, but five times as much as they spent in 2001, according to New York City-based research firm Real Capital Analytics.

"This whole globalization movement we've all been talking about so long? It's actually happening right now," says Dan Fasulo, director of market analysis at RCA.

The real story, however, may not be "how much," but "who," as in who bought the most U.S. commercial property last year. Though the players in the lineup of biggest foreign buyers remain largely the same as in recent years, the order is constantly shifting.

Leading the Pack

The Middle East topped the list for 2006. Last year, the wealthy region provided the biggest U.S. commercial real estate investors by sales volume, at $5.29 billion, according to RCA.

Some of the other top shoppers may be more surprising—Australians spent $3.78 billion on U.S. commercial real estate last year, the second-highest sales volume on the list. Germany took fifth place, with $1.97 billion in commercial real estate purchases.

The Pacific Rim region—Japan, South Korea, China, Hong Kong, Singapore, and Taiwan—was the third-biggest investor at $3.29 billion, marking an 891% increase from the year before. (RCA doesn't break out its data by individual country.)

Canada ranked fourth on RCA's list, with U.S. commercial real estate purchases totaling $2.57 billion, no doubt helped along by Edmonton-based Triple Five Group's $1.8 billion purchase of the Mall of America in Bloomington, Minn. Other massive U.S.-to-foreign deals in 2006 included Hong Kong-based Hudson Waterfront's $1.25 billion purchase of AXA Financial Center in New York, and Dubai-based Istithmar's $1.2 billion purchase of 280 Park Avenue in Manhattan.

Diverse Incentives

"2006 was the year of the Middle East," says Fasulo. "They're looking for all sorts of hard assets to invest in." Investors from Middle Eastern countries such as Dubai, Bahrain, and Kuwait tend to be high-net worth individuals and families flush with petrodollars from the runup in oil prices in 2005, Fasulo explains.

Giant deals like Istithmar's Park Ave. buy helped the Middle East displace Australia, the biggest foreign buyer of U.S. real estate in 2005, with purchases totaling $7.7 billion that year. But the land down under retained a solid second place on the 2006 list, as investors and institutions continued to load up their portfolios with U.S. real estate.

With limited opportunity in their own country, which has only about 20 million people vs. 300 million in the U.S., Australians have naturally taken to investing in real estate overseas, explains Jim Fetgatter, chief executive of the Washington (D.C.)-based Assn. of Foreign Investors in Real Estate (AFIRE). Much of the capital is coming from the country's pension-fund pool, which has grown sharply since the mid-1990s, when a law was passed mandating that employers put 9% of their workers' gross salaries into retirement accounts similar to 401(k) plans.

Another Aussie Year?

Unlike the U.S., Australia doesn't have an established bond market, so investors look to U.S. real estate for stability, Fetgatter notes. Among the biggest Australian investors in U.S. commercial property are Macquarie Real Estate, Centro Properties Group, and Galileo America Shopping Trust.