U.S. retail continues to attract foreign investors, but the pace of investment ebbs and flows with the economic tide.

The foreign buyers of U.S. retail real estate these days come mostly from Germany, with a few from the Middle East and Switzerland. Their product of choice is typically the tried-and-true grocery-anchored neighborhood shopping center. And their appetite for retail ebbs and flows with the cycles of the stateside real estate investment marketplace and the fluctuating value of Euros, deutsche marks, guilders, francs and riyals versus the U.S. dollar.

The lure of the American shopping center to the foreign investor rests on a number of factors, according to Jim Fetgatter, chief executive of the Washington, D.C.-based Association of Foreign Investors in Real Estate (AFIRE), a trade association for the foreign real estate investment community.

Thanks largely to restrictive land-use policies and a general preference for inner city retailing, "American-style shopping center product is not very available in European countries," Fetgatter notes. Meanwhile, "there are some opportunities in Asia, but Asian investments are typically much more risky."

"There is a real dearth of retail product available in the middle European states," agrees Michael Federle, senior vice president, Grubb & Ellis, San Francisco. "And at the same time, conservative investors such as the Germans and Dutch are wary of the governments in countries along the Russian border."

"The U.S., meanwhile, personifies the most stable government in the world, as well as the most stable currency," Federle continues.

Since the mid-1990s, Fetgatter adds, retail product has consistently been the second most popular real estate product type for the foreign investor, running behind office buildings. "Retail was probably the No. 1 choice in the early 1990s," he notes. "But what happened was that fear grew over the prospect of oversupply, mall obsolescence and a number of other factors, as well as the fact that office properties offered great value at that time."

More talk than action Despite the allure of the U.S. and its retail product, however, these days there is more talk of foreign buying of U.S. shopping centers than there is action, according to CB Richard Ellis managing director Todd Goodman, Newport Beach, Calif. "The flow of foreign money into the country for purchasing shopping centers is inconsistent," Goodman reports.

Ken Shulman, director and senior vice president of investment sales for The Staubach Co. of Dallas, agrees. "As far as a lot of foreign money beating down the doors looking for neighborhood shopping centers to buy - I can't say we are seeing a lot of activity," Shulman notes. "It seems like the competition for higher-end properties is more among the stateside pension fund advisors. But there is a lot of foreign money hovering around Washington, D.C."

Who's buying what? Foreign buyers, for stateside shopping centers, tend to come from a couple of places. "The bulk of the foreign money we are seeing is German," according to Robert Fahey, senior director of Cushman & Wakefield Inc., Philadelphia. "And with the steep run-up in the price of crude oil over the past 12 months, we've seen a pretty significant increase in the amount of Middle Eastern money coming into the states."

BVT, a German investment firm, runs an acquisitions/syndication program known as the Retail Income Fund (RIF) for an investor base comprised primarily of Germans, along with a few Swiss, says David Ballew, president and CEO of the company's Atlanta-based acquisitions arm.

"We only acquire investment-grade, grocery-anchored neighborhood shopping centers - dominant centers anchored by the dominant grocery chain in a given market," explains Ballew.

By loading up on centers with 20-year credit tenant (e.g., grocery store) leases and limited space for small shops, continues Ballew, "We are providing handsome, bond-type, stable and secure returns to our investors that start at 7.5% and scale upwards to 10%."

Additionally, BVT offers higher risk/higher return U.S. shopping center investments for high-net-worth individuals, notes Ballew. "We are partners with The Sembler Co. and Steiner + Associates in a number of projects," he reports. For example, BVT is an equity partner with Steiner and Sembler on Tampa's Centro Ybor lifestyle/entertainment center, a $40 million, 210,000-sq.-ft. project.

In a similar vein, Atlanta-based Jamestown is a real estate investment and management company that buys U.S. properties on behalf of large groups of German investors, according to partner Stephen Zoukis. This firm has focused on acquiring office properties, according to Zoukis. "Until recently, we have had a $100 million single-property investment minimum, which has pushed us into bigger and bigger, primarily office, projects located almost entirely in New York City, Boston and San Francisco," he explains.

But currency fluctuations have caused Jamestown to adjust its strategy. "The rising strength of the dollar has made it harder for us to raise money in Germany," Zoukis notes. "One response has been to reduce our minimum to $60 million per property - which drops us back into the range where we can effectively buy U.S. retail properties again."

While German currency may be losing purchasing power vis-a-vis the dollar, the negative effects of this are partially offset by the provisions of the U.S.-German Tax Treaty. The German income tax rate is as high as 60%. But under the terms of this treaty, "German investors who own U.S. real estate have the income and distributions taxed at U.S. rates, and are not taxed again in Germany," says Ballew. "Since there is such a disparity in tax rates, this favorable tax treatment is a very attractive inducement for Germans to invest in U.S. real estate."

As if they needed any more inducements, the U.S. is the place for retail investment for investors from countries around the world, notes AFIRE's Fetgatter. "There is no retail like U.S. retail - we lead the world when it comes to shopping centers and retailing concepts. Combine this fact with our stable economy and stable government, and the U.S. is obviously the natural place for retail investors to come."

One "foreign" investor with a long track record of investment in U.S. retail properties has work underway on a new center in Macon, Ga.

The Montreal-based Sofran Group, in partnership with Dallas-based The Trammell Crow Co., is developing a $50 million, 515,000-sq.-ft. power center in this middle Georgia city 70 miles south of Atlanta. Anchored by a 125,000-sq.-ft. Target, the center will also include retailers such as Old Navy, Bed Bath & Beyond and Goody's.

Sofran began developing in the U.S. in the late 1970s, according to company principal Norman Zazalkoff. "We had the capital, felt we had the know-how, and came down to develop shopping centers," he recounts. "It took us time to find out who to work with and to establish relationships with tenants - and it has worked out very well for us."

A privately owned developer whose product includes enclosed malls and office buildings in Canada, Sofran limits itself to grocery- or big-box-anchored strips in the U.S., says Zazalkoff. The firm has built around 50 centers in the states.

Other than having to deal with Canadian tax laws, which Zazalkoff describes as "more onerous" than those in the U.S., developing in the states presents no special problems for Sofran, which currently has a 1 million-sq.-ft. portfolio of centers and offices in Atlanta, Jacksonville, Fla., Altamonte Springs, Fla., and Boston. "There are not any major differences in shopping center development and operations in the U.S. versus Canada," notes Zazalkoff, "at least no more than you find when you work with different regions of the country."