Opportunities for foreign investors are tempered by global uncertainty.

Domestic turmoil in both REITs and real estate capital markets has created a new wave of opportunity for foreign investors in U.S. real estate, according to a survey released recently by the Association of Foreign Investors in Real Estate (AFIRE). However, foreign investors' plans for investment in U.S. real estate in 1999 are somewhat more cautious than they were last year.

Although 27 percent of respondents (more than double last year's 12 percent) rated the opportunities for real estate investment in the U.S. as being better than they were last year and 30 percent said opportunities were equivalent to last year, only 42 percent of respondents said they would increase their investment in 1999. In 1997, while only 12 percent said opportunities were better than they had been in 1996 and 23 percent said they were the same, 67 percent of respondents said they would increase their investment in the forthcoming year.

With over $22 billion invested in U.S. real estate, AFIRE's member investments represent nearly two thirds of all direct foreign investment in U.S. real estate.

"Last year at this time our members faced fewer opportunities due to very strong competition from REITs that reduced inventory and sent prices skyrocketing," said David Golden, the newly elected chairman of AFIRE. "This year, the product is more accessible. By and large our member companies are heavily capitalized, so they are not as dependent on the capital markets which have stalled investment among U.S. investors. But there is no question that the optimism of foreign investors has been tempered by continuing concerns about a global recession."

Golden is president of CGR Advisors, a division of Rodamco, a Netherlands-based, internationally operating property company, with $3.5 billion of foreign capital invested in U.S. real estate.

Office Buildings Ride High; Hotels, Industrial Properties Fall

At no time in the seven-year history of the survey have office buildings been so high on foreign investors' "buy list." Office buildings were ranked as the #1 investment opportunity in the U.S. today, and 37 percent of respondents said they would add office buildings to their portfolio in 1999.

Of significance is foreign investors' declining interest in industrial and hotel properties. This year only 3 percent of respondents had industrial properties on their buy list, and only 3 percent had hotels on their list. Last year, both property types were preferred by 11 percent of respondents.

The leading indicators show that multifamily properties may have another resurgence among foreign investors in the next few years, according to James Fetgatter, chief executive of AFIRE. "Survey respondents picked multi-family properties as the second most attractive real estate product in the U.S. today," he said. "Since 1995, it has been in the third, fourth or fifth position, although it had been held in high regard in the early Nineties."

Foreign Investors Seeking REIT Opportunities

While the popularity of REITs wavers in the U.S., it is gaining among foreign investors. This year, 49 percent of investors indicated they had invested in a REIT compared with 32 percent in 1997. Interest in REITs among foreign investors has grown every year since 1993, when only 16 percent of respondents said they would invest in a REIT in the future. Investors also projected that their investments in REITs as a percentage of their portfolio would climb by five percentage points, to 30 percent, in the next three years.

In a Tale of Five Cities, Four Emerge as Leaders

When asked to rank the top five cities for foreign investment, respondents could agree overwhelmingly on only four: Washington, New York, San Francisco and Boston. "The fifth ranked cities, Chicago and Atlanta, were so far down the line in terms of preference as to be non-contenders," said Fetgatter.

Surprises include the dramatic rise of New York from fifth position in 1997 to second place in 1998, and Boston's plunge from first to fourth. Washington, DC, which had been the perennial bridesmaid for the last four years, finally recouped the first place position it held in 1992 and 1993. Atlanta, which had held the number one or two position for the four years between 1992 and 1996, fell from fourth place in 1997 to a virtual no-show fifth spot this year. San Francisco hung on to the number three slot.

"Washington is the Federal capital of the world's largest economy, said George V. Wertz, a founding member of German-based TMW Immobilien AG (Munich). "It has strong employment growth from both the private and public sector, and a strong, highly educated workforce. It is also a city open to foreign investors, easily reached from Europe, and offers a high quality of life to which European investors related."

In describing New York's resurgence, Albert Behler, president of Paramount Group, Inc., a German-owned investment firm with substantial real estate holdings in the U.S, said "A combination of factors is driving New York's increased popularity among foreign investors. On the economic front, Wall Street continues to prosper, despite recent hiccups. But more important than that is the growth of other industry segments such as tourism, entertainment and telecommunications. This growth has made the City a more diversified economy not solely reliant on Wall Street cycles."

In order for New York City to become the number one city for foreign investments in the future, Behler said "a continuing trend toward economic diversification and maintaining a desirable quality of life" would be required. "The city needs to further address transportation and infrastructure issues in order to further improve New York's standing as 'the world class city'!"

The Association of Foreign Investors in U.S. Real Estate (AFIRE) was established in 1988 for non-U.S, investors in the U.S. real estate market and has been the official voice of the foreign institutional real estate industry in the United States. AFIRE members have a common interest in preserving and promoting investment in U.S. real estate. Currently, AFIRE has 145 members representing 17 countries. Because the association no longer limits its focus to foreign investments in the U.S., but has expanded it to include real estate investments by foreigners around the world, it has undergone a name change to The Association of Foreign Investors in Real Estate.

"The name change is symbolic of the broadening of the investor base within AFIRE," said Fetgatter. "Recently, the Association has opened its doors to international investors with no U.S. investments, and to institutional quality investment firms with overseas investments.