Investors take bullish attitude to US real estate market
May 2016 | FEATURE | FINANCE & INVESTMENT
Financier Worldwide Magazine
2015 was a strong year for US real estate investment. Commercial real estate in particular enjoyed high demand and few vacancies, driving commercial rents higher. Though the market could turn quickly, optimism is widespread. Indeed, many real estate investors and executives have adopted a bullish attitude, expecting the sector to continue to perform admirably despite the instability and volatility permeating other areas of the global economy.
According to a new report from KPMG, 91 percent of investors expect US real estate fundamentals such as vacancy, rates and deal velocity to improve on last year throughout 2016. With considerable amounts of capital entering the country and the US economy on an upward trajectory, investors are viewing the US real estate space as a viable and attractive proposition. Recent interest rate rises and tax changes will likely provide a further boost for investors looking to enter the market.
Port in a storm
In comparison to other global markets, the US is currently a model of stability. Volatility in the eurozone, considerable economic decline in China and other emerging markets, and a general sense of geopolitical uncertainty has positioned the US favourably in a global context. Already seen as a safe haven for investors, the US is attracting more capital from Canada, the Middle East and Asia as investors pull away from high risk real estate opportunities in more volatile locations. This process of ‘de-risking’ has been driven by companies cautious about the longevity of the current expansion cycle. Accordingly, companies are becoming much less aggressive in their pursuit of risk.
Foreign investors in real estate completed $87.3bn worth of deals in the US last year, whereas in 2009 they completed just $5bn worth of deals, according to Real Capital Analytics Inc. Office towers, warehouses, apartment buildings, shopping malls and hotels were the main targets acquired by overseas investors in search of higher yields. Manhattan proved popular in 2015, seeing $23.5bn worth of deals, or around 27 percent of last year’s total. New York is often seen as a gateway destination for investors seeking opportunities elsewhere in the US.
The influx of capital into the real estate space is likely to continue throughout 2016. For foreign investors there is a burgeoning confidence in the stability and security offered by the US economy. With inflation well in check, interest rate increases likely already factored into company forecasts and with US GDP likely to see continued modest improvements, the US is a welcoming destination for foreign real estate investors. Seventy-four percent of survey respondents expect foreign investment in US real estate to increase over the next 12 months, according to KPMG. “Strong economic fundamentals, a reliable legal system and other structural advantages in the US have continued to fuel foreign interest in the US real estate market,” notes Greg Williams, KPMG’s national sector leader, building, construction & real estate. “The continued inflow of foreign capital has led to a significant increase in competition for the best investments, leaving many investors with a major challenge in their hunt for yield across a variety of assets and markets.”
As more and more investors look to the US for investments, the level of available capital is likely to outweigh the number of viable opportunities. This influx of capital has already begun to have an influence on prices, driving them up considerably. Regardless, foreign capital should continue to flow, which will only serve to exacerbate the situation. The signing into law of the Foreign Investment in Real Property Tax Act in late 2015 may open the door to more activity from overseas investors, putting foreign pension funds on an even footing with domestic funds.
But some investors are reserving their bets as the economic real estate cycle winds down. “Investors are becoming more cautious in their decision-making as we near the end of the economic cycle, leading to changes in operations, portfolio management decisions and the timing of their investments,” says Mr Williams. “They need to be prepared for the coming change in momentum.” Though 91 percent of those surveyed by KPMG expected to see an improvement during 2016, it was a slight dip from 93 percent in last year’s survey.
Cyber security concerns, too, are giving some in the real estate industry reason to pause. Many in the real estate space believe they are ill prepared for the challenges posed by cyber crime and cyber criminals. “The nature and sophistication of cyber threats are rapidly evolving and the size and severity of cyber security breaches and incidents are rapidly growing,” says Kevin Goldstein, advisory director at KPMG. “Thus, unfortunately, the risks of reputational and financial damage are greater than ever. Being able to reasonably prevent, better detect, and properly respond to a cyber security incident is no longer optional, but a requirement of real estate industry firms of every size.”
For investors, the US real estate space is an attractive proposition. Though there will be headwinds to navigate, cautious optimism is the order of the day.
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