Global property investors still favor U.S. commercial real estate by a wide margin, but second-place China is rapidly closing in, according to an annual report tracking institutional investor interest.
New York and Washington headed the list of preferred cities for commercial real estate investors, the first time two U.S. cities were on top in 16 years of the survey, sponsored by the Association of Foreign Investors in Real Estate (AFIRE).
Respondents said they found investing in U.S. commercial real estate easier than it has been in years, as the credit crisis has driven out investors who relied heavily on cheap debt to finance purchases. Most respondents were institutional real estate investors who tend to rely less on borrowing.
London tied Washington in second among most attractive cities for commercial real estate. Paris was next, and Shanghai zoomed up from the ninth spot to fill out the top five cities in the survey.
Five of the respondents’ top 10 global cities are in Asia. “One of the significant findings that cannot be overlooked is the jump in investors’ confidence in China,” AFIRE Chief Executive James Fetgatter said in an interview.
More respondents said the United States offered the best opportunity for capital appreciation, ahead of China. But the U.S. lead over China as favorite among respondents narrowed to less than 5 percentage points in 2007 from 27 points in 2005.
India fell to third from second place and Russia moved from fifth to fourth — tied with Mexico, which had been seventh.
About 200 members were surveyed for the report by the association, whose members hold $700 billion of cross-border real estate, including $230 billion in the United States.
OUT OF OFFICE, INTO STORES
Within the U.S. property market, the most dramatic change was a reversal of investors’ preference for retail property over office space.
Despite the credit problems Australia’s Centro Properties Group is battling to secure new debt for its U.S. shopping center holdings, retail property moved from fifth out of five categories to the number-one spot. In contrast, office fell from its long-time top spot to the bottom.
Hotel property was the second-most-preferred U.S. property type, up from third. Industrial property came third, up from fourth, and apartments came in fourth, down from second.
After New York and Washington, the most popular U.S. cities for commercial property investment were Los Angeles, San Francisco and Seattle. Las Vegas saw a marked improvement as an investment location, moving to number eight from 16th.
Conducted in the final quarter of 2007, the survey reflects the credit crunch that was under way. Stingier lenders and pricier loans drove out private investors who dominated U.S. commercial real estate acquisitions in the past few years.
And respondents said it was the diminished competition for deals, and not the weak dollar, that made U.S. properties more attractive. The percentage saying it was “very difficult” to find attractive U.S. real estate fell to 22.8 percent — the lowest since 2003 — from 37.5 percent last year.
“Most (respondents) are larger institutions. Most hedge their investment currency plus they borrow in U.S. dollars,” Fetgatter said. “They try to separate currency risk from real estate risk.”
Global investors also tend to focus their investment strategy according to regions, not currency.
The 200 survey respondents said they planned to spend an average $1.69 billion globally on real estate in 2008, a 20 percent rise from $1.39 billion in 2007. Respondents said they plan to increase U.S. investment by about 16 percent.