A growing number of U.S.-based real estate investors plan to increase their offshore holdings over the next 12 months based on a new survey. But the accelerated movement of capital abroad may also signal that domestic real estate assets are trading at peak levels.
These among other findings were unveiled last week in the 2007 Bryan Cave Real Estate Executives’ Forecast Survey. The annual survey polled 347 U.S.-based real estate professionals, more than a third of whom work for private real estate firms. Bryan Cave is a Chicago-based law firm that has conducted this survey for each of the past four years.
More than half (55%) of respondents plan to buy commercial real estate outside the U.S. over the next year. Another 38% are “highly likely” to launch similar campaigns. This sizeable interest in offshore real estate may also reflect an over-valued domestic market. In fact, one of the survey questions asked executives if they felt that U.S. real estate was “over valued” or “fairly valued.” The vast majority, or 58%, felt it was over-valued. Only 37% of respondents labeled U.S. real estate as fairly valued. These two percentages are also virtually identical to the 2006 survey.
But a perception that values are unrealistically inflated may not dull transaction volume. While roughly one-third of respondents expect transaction activity to weaken, a full 48% believe it will gain momentum over the next 12 months. One Bryan Cave real attorney believes that undiminished capital flows are driving deal flow despite growing concerns that assets are commanding exorbitant prices.
“The deals just keep getting bigger and we have seen no lag in activity,” says Bryan Cave attorney Victoria Goldson, a partner in the law firm’s St. Louis office. “We also aren’t hearing about many people who are concerned that the market is going to slow down, either.”
Goldson believes that REIT privatizations and portfolio sales will likely continue through the next 12 months. She also sees fresh buyers unloading many assets immediately after closing a deal — a tactic that The Blackstone Group is exploiting after buying Equity Office Properties Trust for $38 billion.
Other significant findings:
*North America and Europe are viewed favorably by most of the respondents. Among the 191 real estate executives who expressed an interest in offshore real estate, three countries drew the most interest: Mexico, Canada and England drew 8% of their votes, followed by China which garnered 5% of the votes. The country that sustained the biggest drop in investment appeal during the past 12 months was China.
*The threat of terrorism isn’t having an outsized effect on investor sentiment. Only 6% of respondents cited terrorism as having a significant impact on their real estate investing behavior over the next 12 months. Nearly half of respondents (47%) cited interest rate movements as likely to affect their investing strategy, however.
*Downtown office buildings and multifamily towers are tops. Of the respondents, 21% plan to buy metro office properties this year. That’s up from 17% in 2006. The next favorite property class was high-rise apartment buildings in metro markets. Respondents (13%) plan to invest in these assets, the same level as in 2006.