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Expert Q&A James A. Fetgatter, CEO of the Association of Foreign Investors in Real Estate (AFIRE)

This month, the Global Real Estate Monitor connected with James Fetgatter, CEO of the Association of Foreign Investors in Real Estate (AFIRE), to discuss foreign investment activity in the U.S. commercial real estate sector.

AFIRE is the only not-for-profit association for the foreign real estate investment community, providing the opportunity for foreign investors in the United States to become as knowledgeable as domestic investors. The association has an exclusive membership of international investors from 17 countries.


GREM: How is the ongoing credit crisis impacting foreign investment in the U.S.?

JAMES FETGATTER: The credit crisis in the U.S. can be positive and negative for foreign investors. On the negative side, foreign investors rely on debt sometimes as much as domestic investors. Seldom do foreign investors use 100 percent equity for their acquisitions. In fact, using local currency debt is a classic means of hedging against currency fluctuations. A more severe problem is when foreign investors want to develop a property. In that case, they are faced with the same constraints on construction lending that U.S. developers face. Construction loans above a certain amount are difficult to fund in today's market.

On the positive side, foreign investors tend to use less leverage than domestic investors. Their average leverage ratio is around 60 percent so the tightened underwriting standards have less effect on them. Additionally, the high-leverage buyers have been forced out of the market, considerably lessening the competition for the better real estate deals. Those foreign banks not encumbered with sub-prime investments have benefited from the withdrawal of U.S. banks from real estate lending. As one German banker put it, "my phone calls now get answered".

GREM: For AFIRE members, what are their thoughts on the current economic downturn the U.S. is experiencing?

FETGATTER: Foreign investors are for the most part taking a "wait and see" attitude about the U.S. economic downturn. Whether the U.S. is in a recession has been a question for some time now and foreign investors sometimes have less of a "feel" for the economy than those who reside in the U.S. In fact, it is often difficult for investors living in other countries to distinguish between the troubles in the residential markets with the state of the commercial market. This is especially true for upper management and Boards who may be reading major media reports.

Although foreign investors may be slightly cautious about the U.S. economy, they still consider the U.S. to be the most stable and secure real estate market in the world. The resilience of the U.S. economy is well known and can be relied upon to protect asset values for the long-term investor.

GREM: How do AFIRE members view the upcoming presidential election? Do they feel that it adds another layer of uncertainty to the U.S.?

FETGATTER: While foreign investors may have personal and individual views on the U.S. presidential elections, this seldom affects their investment and business decisions. Politics is considered politics and business is business. Over the 18 years I have served as CEO, I have not heard of an investment decision that was made or postponed based upon who was President of the U.S. Actual tax regulations passed by Congress or promulgated by the Treasury may have some bearing on investment decision but seldom the person sitting in the White House.

GREM: Over the past several years, Australian investors have led foreign investment in U.S. real estate. Where do the most active foreign investors come from today?

FETGATTER: In 2007, the countries or regions supplying the largest volume of foreign real estate investment into the U.S. were Australia, Germany, and the Middle East. These results, however, can often be influenced by mega-deals and can easily change from year to year. The Australians and Germans have consistently been the major investors for several years.

The Australians have a tremendous amount of capital invested in the super-annuation funds, their equivalent to our 401(k) plans, and they are constantly seeking to maximize their yields. In a country of only 20 million people, there are limited options for them and thus they are forced to look beyond their own borders for investment opportunities.

Middle Eastern investors are, of course, investing oil revenues and profits from the booming economies of Dubai, Abu Dhabi, etc. Their motivations are yield and diversification out of the Middle East. They have been major investors in London and other capitals of Europe as well as the emerging markets in Asia.

The Germans love real estate and use real estate funds much like Americans use mutual funds. The bulk of German capital in U.S. real estate is either high-net worth families or middle-class Germans saving for retirement.

GREM: In general, do foreign investors have more or less money to invest in U.S. real estate?

FETGATTER: Foreign investors have significant capital available for investment but this is a global phenomenon often called a "wall of capital". Most real estate professionals believe there is a wealth of capital sitting on the sidelines waiting for the right opportunities. The acceptance of real estate as a respected asset class has increased allocations to real estate for foreign pension funds much as it has for U.S. domestic funds.

GREM: Which sectors are most attractive to foreign investors and why?

FETGATTER: Foreign investors traditionally favor office buildings. Fifty percent of AFIRE members' global portfolios are in office. Office buildings are easier to manage from afar and investors can invest large amounts of capital in a single transaction. According to the latest AFIRE Foreign Investment Survey, multi-family housing is the second most favored product type in the U.S., and although retail comprises 25 percent of AFIRE members' global portfolio, it is the least desirable product type currently in the U.S.

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