German Investment in U.S. Real Estate Creates a Bidding War

German and other foreign funds have been investing in the U.S. real estate market for decades, and much of this is good news for the U.S. These foreign investors help to inflate the price of these real estate pieces, and often create jobs here in the U.S. These foreign investors also create much-needed capital and cash flow for buildings that need to remain competitive in order to retain their tenants. Additionally, most foreign investors are simply looking to put cash into a property while remaining the “silent partner” in its affairs, leaving the actual property management to another partner.

And just how much money are we talking about when we mention foreign investments in U.S. real estate? In 2004, foreign investors put over $13 billion into U.S. real estate, an increase of more than 60% over 2003, reports Real Capital Analytics. This amount has continued to increase each year with no signs of stopping.

In February of 2005, for example, Macquarie CountryWide Trust of Australia and Regency Centers, a Florida-based REIT, announced the $2.7 billion purchase of 101 grocery-anchored shopping centers from CalPERS/First Washington. The deal, which gives Macquarie in Australia a 65% ownership interest in those 101 properties, makes the joint venture partnership one of the largest owners of grocery-anchored shopping centers in the U.S.

Similar investment deals by foreign corporations and funds can be found in virtually every major city in the U.S., with foreign investors often owning a majority share of the real estate investment. German investors poured nearly $5 billion into U.S. commercial real estate in 2004, by far the largest source of foreign capital.

Most German investors have concentrated on fully leased, Class-A office properties, however, while these may still be the preferred choice among them, a large number of investors have expressed interest in retail properties as well.

Why are German investors so enamored of U.S. office buildings? Investment funds are willing to pour a lot of money into office properties because they are much less management-intensive than retail and residential properties.

As an example, in December of 2004, Jamestown, a German syndicator, recapitalized New York's General Motors building, valued at about $1.7 billion, in a preferred equity structure.

The one drawback to this type of aggressive foreign investment is the resulting bidding wars that often happen between them and the U.S. investors as well.

As another example, office buildings on the eastern coast or around Washington, D.C., and in the New England area are often very difficult to gain entry to, and are a favorite among German investors. However, American investors also have a tendency to bid very aggressively on those same assets. Fund managers are not looking for the initial return per se, which affects the price they are willing to pay for such an asset. And many simply need to get money out the door to meet targets, so they have no choice but to spend those funds as aggressively as possible.

This doesn’t scare off potential foreign investors, however, especially those with favorable tax structures in their home countries, such as Germany. Many German investors are attracted to the U.S. commercial property markets because if they invest in U.S. real estate, they pay taxes in the U.S., but not in Germany. This is a tremendous amount of leverage for them to continue to invest funds in the U.S. real estate market, and to invest aggressively.

Of course, currency value fluctuations are always a concern for foreign investments. When purchasing or investing in U.S. real estate, one must consider how the U.S. dollar will continually perform against the Euro. For many high-end foreign investors, however, they prefer to keep a large part of their portfolio as dollars and are not always buying with the Euro, so these fluctuations are not always their greatest concern.

And many are looking for long-term growth and market stability when investing, which is another reason that the American market is key. There is a tremendous amount of stability in the U.S. real estate market, especially when compared to that in other countries, even those in Europe. Investing for the long-term when considering that stability is a big factor for foreign dollars. There is a high degree of confidence in the U.S. market, and rightly so.

The structure of these investments is also an important factor. Many of these investments are not outright purchases, but work much like stock investments – you are buying a part of the property or an interest in it alone. In the example of the Jamestown investment in the GM building mentioned above, Jamestown is not buying the building outright, but rather a stake in the property. They have a local operating partner, in this case New York based real estate entrepreneur Harry Macklowe, and are themselves simply a passive investor.

So obviously there are many reasons why a foreign investor would look to the U.S. real estate market as a place to park their funds. The U.S. dollar may fluctuate against the Euro, but the U.S. offers long-term stability in its market and economic situation that is unlike virtually any other country. There is no need for day-to-day management of the property, as this can be handled by others.

And all of this makes U.S. real estate just as enticing to U.S. investors as it is to foreign investors. Hedge fund managers must also park their capital in something, and high-end commercial property is often seen as a Class-A asset. For all the reasons a German investor might look at U.S. office buildings, such as relative stability in the market, these are reasons that U.S. investors are drawn to them as well.

So it seems as if there is a drawback to the foreign dollars being poured into U.S. commercial real estate. It’s a welcome relief to the property owner that has a cash shortfall or that needs to use that cash for other business purposes, and of course it keeps the price of U.S. real estate competitive, but all of these are obstacles to the U.S. investor as well. More buyers mean a spike in prices, and soon enough the bidding war is on.

Contents

• How Much Mortgage Can You Afford?
• Buying a Good Vacation Home
• Buying a Home for Resale Purposes
• Claremont is the Top Earner – and Most Expensive
• Commercial Real Estate Still a Safe Bet
• Determining Your Offer Price
• Empty Homes for Sale
• Exercise Caution When Flipping
• Expensive and Alternative Homes
• Figuring Property Taxes for the High-End Real Estate
• Florida’s High-End Real Estate Goes Limp
• Foreign Investors and the Hamptons
• German Investment in U.S. Real Estate Creates a Bidding War
• Getting Wealthy From Real Estate Investing
• Going Green
• High-End Goes High-Tech
• High-End Investors – Why Immune to the Real Estate Crunch?
• High-End Real Estate Feels the Crunch?

• High End Property Site Map