The U.S. real estate market saw a record infusion of $70 billion from foreign investors in 2015, but a decline in the pace of foreign capital fundraising may be the first sign of a slowdown in overall foreign investment in the U.S. real estate market, according to a news report from the CoStar Group.
The growth rate at which overseas investors are raising capital grew by only 3% in 2015 in comparison to 2014’s growth rate of 21%, CoStar reported, noting that the Americas and the Europe-Middle East-Africa (EMEA) regions experienced a foreign capital fundraising growth rate of under 2%.
On one hand, plummeting oil prices have shrunk the amount of investment capital in the Middle East, and government officials in China reportedly are more and more wary about the sum of investor capital leaving their country for foreign borders, industry experts told CoStar.
But on the other hand, the experts expect market dynamics such as quantitative easing and interest rates to overshadow international market insecurities, keeping foreign capital flowing and real estate appealing to investors, the news report said.
Both large and liquid markets in the U.S., China, the UK, Japan and Germany are likely to benefit from strategic deployment of the record $443 billion in capital raised for investment in commercial properties worldwide, CoStar’s new report said quoting industry experts. But look for foreign investors to reduce risk by opting to invest through join ventures and platform deals as opposed to direct investment, an expert told CoStar.
Last year’s record foreign investment in the U.S. real estate market, which contributed to the solid increase in property values and rate of transactions for the entire year, was strongest in the fourth quarter 2015, reaching its highest level since 2007, CoStar reported.
But in the first quarter of 2016, transaction activity fell precipitously as investors worldwide assessed market volatility, confirming expectations that 2015’s high level of foreign investment in the U.S. could not be maintained for very long, the report said.
Preliminary data from CoStar found that overall deal volume dropped about $40 billion in first quarter 2015, including a decline of $30 billion from domestic buyers and $10 billion from foreign investors. Still, the recent trend for overseas capital to favor U.S. assets is likely to continue, but at “uncertain levels,” according to the report.
One CoStar Portfolio Strategy executive noted that while “there are few economies that look as attractive as the U.S., relative pricing still impacts investor desire.”
“If assets seem too richly priced, then rational capital may look elsewhere,” according to the executive. “Cap rates have been driven lower and gateway cities are priced dearly relative to history. But relative to alternatives in Europe, they’re on the right side of the chart.”
The record $70 billion in foreign investment in the U.S. real estate market represented 11% of the more than $600 billion invested in all commercial real estate in the U.S. in 2015, CoStar said. However, foreign investment is likely much higher because foreign entities often co-invest with U.S. companies taking the role as the general partner, meaning the transaction is considered a domestic investment.
The biggest source of foreign investment in the U.S. real estate market comes from the United States’ neighbor to the north. Canadian investors — primarily pension funds and other institutional capital — have long favored U.S. office buildings and lately, apartment properties. Since 2014, Canada has represented 28% of direct foreign investment into the U.S., followed by Western Europe at 23%; China and Hong Kong at 14%; Southeast Asia, including Singapore, at 13%; the Middle East nations at 11%; South Korea at 4%; and Japan at 2%.
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