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Jan. 3, 2012

Economy Watch: U.S. Still Number One Among Foreign CRE Investors

By Dees Stribling, Contributing Editor

The United States remains the number-one choice for cross-boarder (i.e. foreign) investors in commercial real estate, but its popularity has slipped somewhat, according to the 20th annual survey of members of the Association of Foreign Investors in Real Estate (AFIRE), which was conducted by the James A. Graaskamp Center for Real Estate of the Wisconsin School of Business and released as the New Year rung in. In the opinion of AFIRE members, the U.S. still offers the most secure option for real estate investment, but they also say that “improved property fundamentals” and the “repeal of FIRPTA”–the Foreign Investment in Real Property Tax Act of 1980–would spur further investments in U.S. real estate.

A clear majority of survey respondents, 60 percent, say they plan to increase their investment in U.S. real estate in 2012, but that number is down from a stronger majority of 72 percent who said the same thing at the beginning of 2011. Although the U.S. is still regarded as providing the best opportunity for capital appreciation, only 42.2 percent of the respondents placed the U.S. first for 2012, down from 64.7 percent last year. The runner-up country in capital appreciation potential was Brazil, with 18.6 percent of the respondents picking it as the best nation for capital appreciation.

Indeed, Brazil is a hotspot these days among CRE investors, along with its largest metro area, Sao Paulo. Only last year, Brazil was fourth place in capital appreciation, but now it has pushed China into third position. On the other hand, the euro-zone crisis has investors spooked about that part of the world. According to the AFIRE survey, with all European countries except Switzerland–and even Germany–falling in the estimation of CRE investors.

Markets calm for now

Wall Street took the day off on Monday for the legal New Year’s holiday, but there was trading elsewhere in the world. No extreme gyrations, however. For example, the Stoxx Europe 600 was up 1.1 percent on Monday on news that German manufacturing was stronger than expected, while in Asia the likes of the MSCI Asia Pacific Excluding Japan Index gained 0.6 percent, and markets in Australia and South Korea were up as well.

Besides inspiring precipitous drops in the broader equities markets in late July 2011, there were other strong indications that the almost-default by the federal government over the summer was understood by investors as the near train wreck that it almost was. The Chicago Board Options Exchange Volatility Index (VIX), evocatively nicknamed the “fear gauge” by investors in options, had a roller-coaster of a year as well, with a particularly fearful moment at exactly the time of the debt-ceiling crisis.

Specifically, the VIX rose like a bottle rocket in mid-summer to the 30s, which represents quite a bit of fear, since there seemed to be some chance that Congress might really let the United States default. Extra nervousness came after the crisis was (putatively) solved, when despite the last-minute deal in Congress, the country’s rating was downgraded anyway. Since last summer, things have calmed down for the VIX, which is currently in the low 20s, which is roughly the same level as before the default crisis. Calm for now, that is. VIX futures seem to indicate that investors think 2012 might also be a roller coaster, depending especially on what happens in Europe.

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