While many foreign investors prefer acquiring office towers in cities such as New York and Washington, Baita International — a German operator of real estate funds — recently paid $12 million for Paradise Crossing, a 67,470 sq. ft. community shopping center in the Atlanta suburb of Douglasville, Ga. The retail property may not be glamorous, but it offers an initial yield of 8%. The center is anchored by a Publix grocery store, which signed a 20-year lease.
“This is a very secure long-term investment, and that is what Germans like,” says Reto Schneider, president of Atlanta-based Baita.
Baita is hardly alone in its preference for retail real estate. In 2003, foreigners bought $2.1 billion in retail product, up a whopping 182% from $746 million in 2002 and $247 million in 2001, according to Real Capital Analytics, a real estate research firm in New York that tracks sales of retail properties valued at $5 million or more. Office product remains the largest sector for foreign buyers with purchases totaling $5.9 billion in 2003, down from $6.8 billion in 2002. Foreign purchases in all sectors totaled $8.4 billion in 2003, about the same as in 2002.
Industry analysts say that Europeans and Australians pulled back on real estate acquisitions early in 2003 because of nervousness over the Iraq war, but the buyers have since returned. And now conditions seem ripe to produce another strong year. In recent months, the dollar has declined against the Euro, making purchases cheaper for most foreigners. As of mid-January, one Euro was worth $1.23.
| 2001 | 2002 | 2003 | |
|---|---|---|---|
| Office | $2.3 billion | $6.8 billion | $5.9 billion |
| Retail | $247.7 million | $745.5 million | $2.1 billion |
| Apartment | $307.3 million | $611 million | $269 million |
| Industrial | $180.1 million | $262 million | $170.8 million |
| Source: Real Capital Analytics | |||
At the same time, the U.S. economy is rebounding, suggesting that real estate values will hold firm. Cap rates in the U.S. are approximately 8% for investment-grade properties, while rates in Germany are about 6% or lower.
“There is a lot of demand from foreigners in all sectors, including retail, and Europeans seem eager to do deals,” says Noble Carpenter, managing director of real estate services firm Jones Lang LaSalle.
While the Germans remain the biggest foreign investors, much of the increased appetite for retail properties is coming from Australians, including Macquarie Bank, which ranked as the largest foreign purchaser of retail properties. In a joint venture, the Australian bank and Developers Diversified Realty, a U.S. real estate investment trust, formed Macquarie DDR Trust. The new trust trades on the Australian Stock Exchange and recently purchased a stake in U.S. shopping centers worth $550 million. Total Australian purchases in all sectors jumped to $1.5 billion in 2003 from $485 in 2002.
Retirement plans are dominating the Australian charge. With the government encouraging increased saving, pension funds have been expanding, and many have been buying Australian real estate. But now most quality properties in the country are owned by institutions. To increase real estate positions, the funds are heading abroad. While the Australians are exploring Asia, many prefer the U.S. “Australians feel comfortable in a country where they speak the language and the market seems stable,” says Carpenter.
Along with their interest in retail properties, Australians have been competing against Germans and other foreign bidders to acquire top office buildings. One of the most active players has been ING, the Dutch multinational, which has assembled funds in Australia. ING Office Fund, a vehicle for Australian investors, recently bought 900 Third Avenue in New York for $107 million. The high-quality office building has 585,000 sq. ft. Such investment-grade properties provide the kind of secure cash flow that pension funds seek. For more on international development, see page 18.