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Joseph Dobrian is a contributor to Real Estate Forum , from which this article was excerpted.

International Real Estate investors are likely to diversify their global interests more this year and next, but will still focus much of their capital on US assets, according to the experts. While domestic investors have driven prices up in many markets, thereby diminishing returns, US properties are not only considered among the safest investments in the world, but are also viewed as more attractively priced than comparable assets in many European and Asian cities.

According to a survey conducted this spring by the Association of Foreign Investors in Real Estate, 75% of the Washington, DC-based organization’s members rate the US as the safest place to invest in real estate, up from 55% last year. The five most popular US cities among such players are, in order, Washington, DC, New York City, San Francisco, Los Angeles and San Diego. Office is the favorite product type, hotels are surprisingly strong and multifamily came in last place.

Foreign players’ 2006 acquisition plans call for an aggregate $45-billion global expenditure, with 47% of that figure earmarked for US assets–the first time in the history of the survey that the US allocation has dropped below 50%. (AFIRE members currently have $475 billion invested all over the world.) Respondents spent some $20 billion in the US last year, which is slightly less than in 2004. The reduced allocation may be attributed to the fact that foreign investors are now selling as well as buying in the US, the association reports.

“In many overseas markets, there’s more capital than there is real estate,” explains Noble Carpenter, international director of Jones Lang LaSalle in Chicago. “Thus, there’s tremendous interest from foreigners in all US property types. Typically, these investors are getting more active about managing their portfolios, which is why we’ve seen dispositions as well as acquisitions.”

Carpenter says it’s hard to generalize about the goals and strategies of overseas investors. Some are driven more by current returns, some by overall returns, while others look for a balance. Some are stable, core investors; others are opportunistic and tend to bet on more risky, yet higher-yielding plays. Oftentimes, they’ll partner with a domestic player whose objectives complement their own strategy, rather than resemble it.

“Generally, Germans are current return investors and want to ensure that they’ll pay their dividends,” he continues. “Australians are, too, but they like tertiary markets and portfolio deals, while Germans buy a property or two at a time. Some of the Middle Eastern investors focus on the jewels–the collector’s items–while others, such as the Sharia-compliant investors, might stick entirely to industrial properties, which are less likely to violate Islamic laws,” he says.

Overseas players also have different tastes when it comes to participating in the US debt markets. William C. Green, managing director of Charlotte, NC based Wachovia, notes that among European investors, demand is almost exclusively for high-grade, floating-rate debt. Asian entities also like high-grade securities, but recently he’s seen a proliferation of Asian funds that are very risk tolerant and high yield.

In either case, he says, “Asian investors give tremendous liquidity to the floating-rate market in the US. Short term rate adjustments are much more popular with European and Asian investors than long-term, fixed-rate depositories, since they themselves are financed that way.”

Though returns are diminishing, foreign players seeking attractively priced, sound investments continue to funnel capital into the US property markets.

Australians Love the US, And the Feeling Is MutualFor the past two years, according to Afire’s statistics, Australian players have accounted for the greatest percentage of foreign investment in US real estate. Further, about 40% of those polled by the association believe Australians will be the most active buyers in the US property markets this year as well.

London-based Mark W. Baillie, Macquarie Real Estate’s head of real estate for Europe and North America, notes that the Australian property fund manager has set up joint ventures with several major US companies, including ProLogis in industrial, Developers Diversified Realty Corp. in community center retail and Equity Office Properties Trust and Brandywine Realty Trust in the office sector.

“What drove our involvement in American real estate was the growing availability of capital in the Australian market due to our compulsory pension scheme,” he explains. “Nine percent of everyone’s salary is paid into superannuation funds–otherwise known as pension funds. The overall pool just spilled over the A$1-trillion mark [about US$750 billion], and it’s expected to exceed A$2 trillion in six or seven years. Of that, 12% to 13% gets allocated to real estate, which is high compared to the 7% or 8% that’s typical of US pension funds.

“Until the late ’90s, we could invest in Australian real estate, but there just wasn’t enough development to provide supply on a continuing basis,” he continues. “Listed property trusts–LPTs, which are equivalent to US REITs–constitute 11% of the Australian stock market compared to 1% or 2% in the US, and they own about half of all investment-grade real estate in Australia.”

The US, with its low debt rates, high-leveraged return rates, cultural compatibility and relatively light taxation, became the first port of call for Australian LPTs when they ran out of product at home, explains Baillie.

Australian LPTs are popular investments for superannuation funds and mom-and-pop investors alike. They offer different returns from US REITs, Baillie points out: high cash yield and low growth, perhaps 7% and 2.5% respectively, compared to an average 4% yield and 5% to 6% growth for US trusts. LPTs distribute all their cash flow, so if they want to expand, they have to go back to investors to raise capital. This, he says, imposes discipline on the segment.

Hungry Irish Investors Look West for PlaysIreland’s vigorous commitment to growth industries such as biochemistry and computer technology, along with its aggressive economic policies, have turned one of the most economically beleaguered countries in Western Europe into one of the wealthiest and most advanced in a single generation. Along with this growth, there has been a proliferation of private capital eager to be placed in real estate. Tony Campbell, president and CEO of Anglo Irish Bank in North America, reports that Irish investors are particularly interested in trophy properties in New York and Boston–two cities to which they feel a cultural affinity–as well as in other major metropolitan locations.

Anglo Irish Bank’s primary mission in the US is to lend at the $30-million-plus level to American real estate companies. Recently, however, they’ve branched out into property acquisitions, announcing the purchase of their 21-story, 349,969-sf headquarters building at 265 Franklin St. in Boston from Boston Properties and the New York Common Retirement Fund for $170 million on behalf of a group of private investors from Ireland.

Anglo Irish Bank’s Irish clients, Campbell relates, prefer to build international portfolios, focusing mainly on Ireland and the United Kingdom but also dabbling in Eastern Europe and Asia.

“They understand return on equity,” he says, “but typically, they invest with a view to an explosive capital appreciation, rather than a running return. For them, in terms of capital cost per sf, the US still offers good value compared to Dublin and London.”

Private Wealth Flowing In From Middle Eastern GiantsGerman investors may be patient and conservative, says JLL’s Noble Carpenter, but even more so are petro-dollar-driven Middle Eastern investors. These typically are groups led by super-wealthy individuals, such as Sheikh Mohammed bin Rashid Al Maktoum, prime minister and ruler of Dubai.

“Sometimes those investors will surprise you,” says Carpenter. “For instance, the Dubai Investment Group bought the Milestone Group’s multifamily portfolio early last year, then flipped it to Invesco in about 18 months. But in general, Middle Eastern money is patient.

“Another factor to keep in mind is that some Middle Eastern investors need to invest in a Sharia-compliant manner–but there are degrees of interpretation as to what is compliant,” he says, referring to the Islamic law against lending with or paying interest. “As with any religion, you’ll find some Muslims more observant than others. The Koranic injunction against borrowing or lending at interest can be an issue, but there are ways to structure the transaction around it. It’s not an obstacle; it just requires some creativity,” Carpenter relates.

Foreign Buyers Still Face Tough Competition in the StatesThey may be willing and able to acquire assets in the US, but foreign investors should brace themselves for heated competition. Three-quarters of the participants in Afire’s survey indicated that their main competitors for US properties are domestic pension funds and their advisers. Almost a decade ago, international investors’ biggest rivals stateside were domestic REITs and private individuals. Today, they come in at second and third, with 41.5% and 33.9% of the vote, respectively. Other foreign investors ranked fourth, at 32.3%.

Given the competition, international buyers have started to tweak their investment strategies. Afire found that 14.3% intend to look at more development plays over the next five years, while 11.4% plan to engage in joint ventures with local partners. Another 18.6% plan to diversify geographically or by property type. Given these trends, the association states, “the next five years of activity by foreign investors in the US should prove to be exciting indeed.”

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