Survey of foreign investors shows confidence

Real Estate Weekly, Nov 19, 1997

Sixty-seven percent of respondents said they intended to increase their investment in U.S. real estate in 1998. However, only 12 percent said they thought that opportunities in U.S. real estate were better than they were a year ago. This year to date, AFIRE members have invested over $7 billion in U.S. real estate.

"While the numbers reflect an excellent position for U.S. property owners, they are bittersweet from any investor's perspective," said Johannes C. van Poppel, the newly elected chairman of AFIRE, and president of Argus Realty Services, Inc., a major Dutch institutional investor. "Prime real estate has truly recovered from the dark days of the early 90's, when investors' interest was tempered by a poor economy. However, the current capital market situation in the U.S. has greatly increased competition. And, this competition is largely coming from REITs, a fact further confirmed in the survey."

In response to a question regarding competitive influences on investors' ability to purchase property, 64 percent of respondents said that REITs represented the chief competition to their investment dollars. However, respondents also said that by the year 2000, they expected 25 percent of their investments in U.S. real estate to be made through REITs.

For the third year in a row, approximately one-third of respondents selected office buildings as being the most attractive investment opportunity. Retail, which had ranked first from 1992 to 1995 but dove to fourth place in 1996, took the number two spot this year.

One-third of respondents also said they were most likely to add office buildings to their portfolios in 1998. As a comparison, in the first years of the survey, 1992 to 1994, less than 10 percent of respondents, who vastly preferred retail at the time, said they would add office buildings to their portfolios. This year, 19 percent said they would add retail, while 11 percent said they would add industrial, 11 percent said they would add multi-family properties, and 8 percent said they would add hotels.

In the years 1992 through 1994, no investors said they would add hotels to their portfolio.

"Even more significant," according to James Fetgatter, CEO of AFIRE, "is respondents' perception of hotel properties as a sound investment opportunity. This year, hotels were rated in third place, just behind office and retail, in terms of viable investment opportunities. In previous years hotels had been distant fourth and fifth choices in terms of investor confidence."

Boston Wins Investors' Hearts

For the first time ever, foreign investors selected Boston as best U.S. city for foreign investment. Boston replaced Atlanta, which held the number one spot for the last three years. In 1995 and 1996, Boston was third-ranked, following Atlanta and Washington, D.C.

"We've seen a dramatic change in Boston over the last year," said Buddy Haunss, managing director of U.B.S. Asset Management, a subsidiary of Union Bank of Switzerland. "Boston's high concentration of growth industries - banking, financial management, medicine, and high technology have greatly contributed to the strength of this city as an investment opportunity." According to Haunss, "Vacancy rates of less than 4 percent and strong absorption have led to a dramatic increase in rental rates over the last year. Some Class A space is now renting for over $40 a square-foot."

"Boston's fundamentals are solid," he added. "There is no speculative office construction; unemployment less than 4 percent; demographically, Boston has a highly-skilled, highly-paid workforce; and it offers a great quality of life. It's a nice place to live."

Washington, D. C. retained the number two position it has held for the last three years, while Atlanta, which had been in first position for the last three years, slipped to fourth. "There's been a great deal of investment focused on Atlanta over the last several years, and this has temporarily led investors to believe assets here are over priced," said Stephen Zoukis, a partner in JAMESTOWN, an Atlanta and Cologne, Germany-based real estate investment finn. "Atlanta is in the middle of a 40-year boom that will rival the development Los Angeles experienced in the years following the Second World War, and what we're seeing now is typical of the smaller variations within a long, upward cycle."

"Atlanta's general upward trend will continue as long as it remains an attractive place to live and work - so that entrepreneurs will choose to be here and larger companies can hire and retain the people they need," he added. "Atlanta probably shouldn't be the number one city at the moment, but it certainly should remain highly ranked."

Returning to the list after four years was San Francisco in third place. New York returned in fifth place after a one-year absence, replacing Chicago, which did not make this year's list. Also dropped from this year's list was Los Angeles.

The Association of Foreign Investors in U.S. Real Estate (AFIRE) is the official voice of the foreign institutional real estate industry in the United States. AFIRE members have a common interest in preserving and promoting investment in U.S. real estate. Currently AFIRE has 138 members, representing 15 countries including: the Netherlands, Germany, the United Kingdom, Canada, France, Singapore, and Taiwan. AFIRE is located at 700 Thirteenth St. NW, Suite 950, Washington, DC 20005 (202) 434-4510.