US (CoStar) – February 13, 2020 –Foreign investment in U.S. real estate dropped significantly last year, falling to its lowest level in five years.
Foreign investors participated in $37.8 billion in deals in the U.S. last year, down 42% from 2018, according to CoStar data. Foreign investor purchases accounted for just 5.4% of last year’s total volume — that is off from highs of 11.4% in 2014 and 2015.
The drop-off comes as foreign investors sat on the sideline for almost half the year due to the prospects of rising costs for capital and properties in the U.S. In addition, the flow of money from Asia shifted from major buyers in Singapore and China to emerging buyers from South Korea, Japan and Hong Kong.
Investors from Singapore, which had acquired more than $5 billion of U.S. properties in 2017 and again in 2018, completed only $1.87 billion in buys last year. Moreover, Singapore-based Global Logistics Properties sold off its U.S. industrial portfolio to U.S.-based Blackstone Group for $18.2 billion, making Singapore the largest net seller of U.S. properties last year.
Investments from U.K.-based buyers shrank both here and across the pond in their home market, while U.S. investors stepped up both here and in the U.K. In addition, capital from Germany continued to flow to both markets, with investors from Germany being the largest net buyer of U.S. properties.
Richard Barkham, global chief economist and head of Americas research for CBRE, said in an interview with CoStar that there were three reasons for the drop in U.S. activity by global investors.
The first has to do with what happened in 2018. The previous year included a couple blockbuster deals involving giant retail-oriented real estate investment trusts. Unibail-Rodamco SE, Europe’s largest commercial property owner, bought Westfield Corp. for about $15.8 billion in the biggest property acquisition since 2013. Westfield was the 12th largest U.S. retail property owner at the time. In addition, Toronto-based Brookfield Asset Management paid $15 billion to acquire another retail giant GGP.
Big deals like that didn’t happen in 2019.
Also, 2019 kicked off with the markets expecting additional interest rate boosts from the Federal Reserve. The prospects of higher interest rates coincided with the value of the U.S. dollar rising. The combination would have driven up acquisition costs for foreign investors, which kept them on the sidelines for the first half of last year, Barkham said.
However, by mid-year 2019, the Federal Reserve reversed course and started lowering interest rates. That prompted a return of foreign capital in the second half of the year with volume in the second half 24% higher than in the first half.
Thirdly, Barkham said China’s decision to place restrictions on commercial real estate investments in the U.S. and other markets meant one of the largest players in the past had largely left the field.
In late 2017, China’s government announced efforts to restrict outbound investments in foreign real estate and redirected investors to different world destinations in Europe and Asia.
With no signs on the horizon that the Federal Reserve could start raising interest rates again, “we expect to see Asian capital return to the U.S. this year,” Barkham said, particularly from investors in such markets as Singapore, Hong Kong and South Korea.
By dollar volume, Canadian firms were both the largest buyers and sellers of U.S. properties among foreign investors. But overall, their volume of activity was relatively flat as there was a lot of profit taking occurring last year, according to Amy Erixon, principal of and managing director for Investments of Canada-based Avison Young.
“Some of the big plans like [Public Sector Pension Investment Board] were harvesting some gains because they went early into New York and tripled their money. So they sold and rotated into other property types,” Erixon said.