Global Hot Spots
A look at multifamily trends in the global community.
By Keith Loria, Contributing Editor
In a recent Akerman Real Estate Industry Outlook Survey, which surveyed 200 real estate executives, more than half believed the multifamily sector will be the most active market for foreign investment in the U.S., in 2014, with the majority of capital coming from Europe. Money from Latin America and Asia were also high on the list.
In fact, nearly 51 percent of respondents predicted that the greatest increase in Latin American real estate investment in the U.S. will come from Brazil.
Investors looking at multifamily markets outside of the U.S. are finding some opportunities, but nothing to the growth extent of our country.
Jubeen Vaghefi, the leader of JLL’s Multifamily Capital Markets, says the strongest plays in multifamily globally are the U.S. multifamily markets and not elsewhere.
“This is from a standpoint of size of markets and professionally managed as for-rent housing. You also have the most stock globally,” he says. “The rest of the world doesn’t operate the same way the U.S. does. Europe, Asia, a lot of places, they just don’t build and rent apartments the same way we do in the U.S., and it’s not a tried-and-true institutional investment.”
Vaghefi says that historically, a large amount of capital flow has not trickled to the multifamily sector, but that has changed of late. Today, a big supply of capital from many countries is finding its way to the U.S. for multifamily investment.
“Capital from Germany is increasing in a meaningful way; Canadians are deploying more both privately and institutionally; and we are seeing investments from Asia and the Middle East,” he says. “What these countries are showing us is that the hottest trend for multifamily globally is right here in our backyard.”
Brian McAuliffe, senior managing director of CBRE’s Multi-Housing Group, says the smartest global opportunities for multifamily are in the value-add space, especially by investors from Asia and Israel.
“We are seeing foreign capital flow in all regions and in all different types of investment strategies,” he says. “The majority is in value-add space as investors are looking to take a little more risk and achieve higher yields than core space has to offer.”
Lewis Feldman, a real estate attorney with Goodwin Procter LLP, recently led a group of industry experts at the Milken Institute Global Conference discussing the world’s most ripe investment markets. Among those on the panel were William Kahane, CEO of RCS Capital; William McMorrow, chairman and CEO of Kennedy Wilson; Jonathan Pollack, global head of commercial real estate and head of risk for structured finance at Deutsche Bank; Henry Silverman, global head of real estate and infrastructure at Guggenheim Partners; and Sam Zell, chairman, Equity Group Investments.
“The first big principal that came out of this is it seems like there’s a belief that there’s now a permanent renters market in the U.S., where it once was just a pathway to homeownership, but that’s not the case anymore,” Feldman says. “There has been much interest in multifamily real estate, particularly in urban areas.”
Not that there aren’t choice global opportunities for multifamily investors outside of the U.S.
A look at Europe
As we hit summer 2014, most major markets in Europe have seen an economic recovery or are well into recovery, and apartment growth is a direct correlation to where there is job market activity. Major European cities adding jobs are most likely the places where investors are considering getting into some sort of multifamily housing.
Multifamily investments in Europe, while still small, are beginning to find some increased interest.
“London is seeing a fair amount of activity for multifamily housing,” Vaghefi says. “It’s not coincidence that it’s by some measures the money center part of the world, especially Europe’s money center. We have seen expanded growth in that sector, and a lot of people continue to move there. It’s one of the most expensive housing markets in the world.”
As for new developments, Vaghefi says that other major cities in Europe, such as Paris, Madrid, Barcelona and major cities in Germany, are seeing a little action on the multifamily side, but not to the extent of rental housing that you would see in New York, Los Angeles, Miami, Boston or San Francisco.
“It’s not something commonly done over there. It takes a lot longer to develop because of regulatory or land challenges,” he says. “Capital for development in most markets outside the U.S. is more fluid in the for-sale market. Outside the U.S., it’s more common for people to buy condos as the urban vertical living lifestyle is very common in most cities around the world.”
In Europe, McAuliffe says the London market is the most desirable among investors on the multifamily side, though it’s much more limited in new developments compared to the U.S., and that relates to a lack of maturity in the multi sector compared to other sectors.
“If you look at London and compare it to New York, San Francisco or Seattle—the three hottest spots in the U.S.—development activity is just a small fragment of those markets,” he says. “It’s not a function of investment returns, and there’s not as much acceptance of multi space as there is in the U.S.”
Looking at Latin America
Latin America is seeing a fair amount of development, especially in Columbia, but Vaghefi says not necessarily on the rental side of things. For example, Brazil continues to be a growth market but most of what’s being built is in the condo market. Panama is seeing a fair amount of new development as well, but the majority is in the for-sale market.
“There is development taking place in Mexico and some institutional investors are looking to increase their exposure down there,” Vaghefi says. “In the U.S., the luxury sector is the big focus now, but in Mexico, it’s more about middle-class developments and creating newer affordable product.”
Industry experts say there’s a direct correlation between Latin America and Miami, and Latinos are more likely to invest in hard assets rather than put money in the bank. That’s why Latin American investors are flocking to the Miami multifamily market—they are comfortable with the market.
Feldman says Zell is very hot on Colombia and believes South America is where people should be putting their money. Mexico also is ripe for multifamily opportunities, as people are looking for apartments in major cities.
“Latin America has been hot and Brazil was hot, but it’s tapering off,” he says. “Where there are emerging middle classes in the world—places such as Brazil, India, Israel—there are always folks like Zell who will go and see the opportunity for renters. Brazil may be stalling out but Colombia has a more progressive environment. Uruguay and Ecuador still suffer from some corruption but your money is still worth more in areas that you know.”
With peace and security issues in the Asia Pacific, it is not a market that many U.S. investors are talking about, at least publicly. Just read through the latest issue of Forbes or Fortune and you can see there is a lot of development being done in China, but most of it consists of condominiums, and Asia itself is not a big multifamily market.
According to the 2014 2Q report by JLL, limited high-end residential sales activity was seen in most Asian markets, with policy restrictions remaining in place in various countries, such as Home Purchase Restrictions in China, extra stamp duties in Singapore and Hong Kong, and tighter regulations on bank credit in Singapore.
“Both Singapore and Hong Kong witnessed a marginal decline in prices in the first three months of the year, while Shanghai saw capital value growth (4.5 percent),” the report states. “For the remainder of 2014, sales in the high-end residential segment are likely to remain similar to or slightly below levels of the last 12 months. We expect flat prices in most markets this year, except for small falls in Hong Kong, Singapore and Jakarta.”
In Dubai, the residential market is experiencing a broad-based recovery, with prices and rents picking up in most locations. The report shows that average residential prices have increased by more than 30 percent in the year to April 2014, which has led to fears of another bubble developing.
“JLL’s view is that the current levels of price increases are unsustainable and that the market will see prices and rents rise at more modest levels in 2014,” the report states. “There is some anecdotal evidence that the residential market is already cooling down, with lower levels of transactions reported in recent weeks.”
Also in play
Feldman feels the Middle East other than Israel is tough right now. And while investors have made some serious money in Egypt and Morocco in the past, no one trusts the stability there now.
Canada is very hot with investors, but the country as a whole is considered too small for any big multifamily moves by the major players. According to Feldman, Canadian money is coming into the U.S. at a greater rate than ever before.
Improving economic conditions and subsequent job growth are fueling a strong multifamily market in the U.S. with occupancy at 95.9 percent and rents at a 10-year high of an average of $1,083 per month.
The recent JLL report shows U.S. occupancy has risen 10 basis points quarter-on-quarter and 40 basis points on a year-on-year basis, while effective rents have climbed 3.2 percent in the past year. It’s no wonder that foreign investors are eager to be a part of this.
In the U.S. last year, the Texas market saw a lot of multifamily investors come from Canada. McAuliffe says foreign investors and companies are attracted to Houston because of the energy industry and the strong economy, and thanks to job growth in other Texas cities, it continues to grow.
In fact, Canada trumps the international community in investing in U.S. units.
“Canada dropped about $3.5 billion on American apartments in 2013,” McAuliffe says. “The next top investors were Bahrain, Israel and Switzerland, all coming in at roughly $500 million each. The buyers are reflecting the current state of the multifamily cycle in their investment strategy.”
Feldman cites lots of foreign investors going into places like Miami, Texas, New York and the Bay Area with goals of buying quickly and as much as they can. He sees Asian markets such as China and South Korea particularly increasing their multifamily presence in the U.S.