After a 7.3 percent shortfall in planned investment in the year 2002, foreign investment in U.S. real estate rose by 59 percent in 2003 and is expected to increase by another 11.9 percent in 2004 as foreign investors earmark 56 percent of their cross-border allocations for U.S. real estate, according to the results of a survey released Wednesday by the Association of Foreign Investors in Real Estate.

The top five U.S. cities on foreign investors’ shopping lists are Washington, D.C., New York, Los Angeles, San Francisco and Chicago, the survey found.

Global real estate investing followed a similar trend, rising 21.3 percent over 2003 investment levels. The 12th annual survey was conducted by Kingsley Associates among AFIRE members who collectively have nearly $300 billion invested globally, with about half of that invested in the United States. “As an asset class producing very respectable returns in an extremely volatile equities market, real estate has become a serious competitor for investors’ dollars,” said Jim Fetgatter, chief executive officer of AFIRE.

According to the survey, the United States, garnering 60 percent of the vote, is regarded as the most stable and secure country for real estate investment; tied for second place with 9.4 percent of the vote, were Canada and France. With 54 percent of the vote, the United States also far-out-distanced Japan, in second place, as having the best opportunity for capital appreciation. Survey respondents indicate that on average, North American real estate comprises 50 percent of foreign investors’ global real estate portfolios.

Despite the fact that 94 percent of survey respondents said they found it “somewhat” or “very” difficult to find attractive U.S. opportunities in 2003, as compared to 78 percent in 2002, 73 percent of respondents said that their appetite for U.S. investments was “somewhat” or “much” stronger than it was for opportunities in other countries, up from 66 percent in 2002. In response, investor’s commonly cite “altering their investment criteria” and using local joint-venture partners to successfully place capital in the United States.

“The United States real estate market always has attracted offshore investors” said Erwin F. Stouthamer, newly elected chairman of AFIRE, “and there’s no question that because of the current competition, deals are much harder to come by. This is true especially for yield-driven investors looking for fully leased trophy buildings.

“However,” he added, “there are pockets in the market where an investor prepared to take some risk will get a better reward for the investment. In addition to the diversification benefits that an allocation to U.S. real estate brings, U.S. real estate returns that bear some degree of risk may still weigh-up to expected risk-adjusted returns elsewhere.”

For the second year in a row, investors selected Washington, D.C., as the best city globally for their investment dollars. In 2002 Washington rose from the fourth-ranked spot to displace London as the best global city and this year had nearly twice as many votes as London. The remaining slots were filled respectively by Paris, New York, and for the first time, Los Angeles in fifth place, displacing Milan.

High on investors’ shopping lists are retail properties. Just one year ago, retail ranked fourth among investors’ preferences. Multifamily, which ranked as the most attractive investment in 2002, fell into second position. Hotels, which had consistently ranked in last place since the mid-90s, moved into third position. “After several years of having very low investor interest, hotels showed the biggest move in investor perception moving from fifth place to third,” added Fetgatter. In addition, while nearly half of the average foreign investor’s global real estate portfolio is allocated to office properties, its attractiveness for new investment has declined steadily since 2001 to the last position of the five property types assessed in 2003.

Survey respondents expressed an overwhelming preference for equity ownership of properties at the expense of REITs. Respondents said 58 percent their current U.S. real estate portfolio asset allocations were in private equity with another 16.5 percent in private mortgages and only 16 percent of their assets in REITs. Respondents said that 36.9 percent of their allocations were in core investments; 17.5 percent in opportunistic funds, and 15.1 percent in value-added strategies. Respondents further said that they expected the rate of return on REITs to fall dramatically in 2004, from an average of 29 percent to 8.5 percent.

Founded in 1988, Washington, D.C.-based AFIRE currently has157 members representing 17 countries.


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