Declines in Cross-Border Capital Reshape Global Investment

MBA (4/3/2008 ) Murray, Michael
More than $85 billion of significant property sales, reported through February this year, represented a 50 percent drop from the first two months of 2007, based on the Global Capital Trends report from Real Capital Analytics, New York.

The report showed North American property sales plummeted nearly 80 percent in the first two months this year compared to January-February of 2007, while commercial real estate sales in South America and Asia soared by 106 percent and 104 percent, respectively. It also appeared that Europe or Asia would lead in global property sales by the end of the quarter, RCA said.

“The credit markets will continue to weigh on the property markets for at least another quarter and quite possibly longer,” the report said. “In the past week, some improvement in CMBS [commercial mortgage-backed securities] prices was noted, but with volatility so high, it is far from clear that the recovery process has started. The consensus is that recovery of the credit markets and CMBS will be slow.”

Many industry analysts do not forecast the CMBS market returning to normal capacity until the middle of 2009, but equity capital remains abundant. The report said some investors are pursuing distressed mortgages as others see opportunities in mezzanine loan originations.

“Still others are looking for cross-border opportunities, which may be contributing to the surge in investment in the ‘BRIC [Brazil, Russia, India, China] ’ countries,” the report said.

Cross-border investors—defined as a buyers or major capital partners not headquartered in the same country as the property’s location—accounted for 32 percent, or $339 billion of property acquisition capital last year.

Nearly $177 billion went to a property’s location on the same continent as the cross-border’s headquarters and $162 billion was global, property in a different country from a cross-border’s headquarters, RCA said.

“Office properties captured the most cross-border capital with $147 billion of international deals in 2007, but retail and developable land was also popular with cross-border buyers,” the report said.

Morgan Stanley—institutional U.S. capital—accounted for $16.2 billion in cross-border capital, including more than $10.3 billion for office property; France’s publc Unibail fund invested $13.5 billion in cross-border capital, including more than $12.4 billion into retail. Most of Australia’s Centro Properties Group cross-border capital—$6.4 billion—went into retail property; and Spain’s Metrovacesa fund invested nearly $5.7 billion into office property. Dubai World, a United Arab Emirates public fund, invested all of its cross-border capital—nearly $5.5 billion—into apartment properties.

Meanwhile, GE Capital; Prudential Real Estate Investors; LaSalle Investment Management; Deutsche Bank and Citigroup accounted for more than $22.9 billion of U.S. cross-border, institutional capital, while U.S. equity capital from ING Group; Goldman Sachs; Paramount Group; Beacon Capital Partners and Lehman Brothers accounted for $19.6 billion, RCA reported.

“In addition to the U.S., major exporters of property capital include quite an eclectic group of countries: Ireland, the UAE and other Arab nations, Canada, Israel, Australia, Singapore and several European countries,” the report said. “Hong Kong is also included although much of this is flowing to China.”

The report added that capital flow in only one direction between countries is not unusual.

“Commercial property capital has flowed almost exclusively out of the Arab nations and Israel,” the report said. “Ireland is another country that has made major purchases internationally but it has few cross-border buyers for its own properties.”

Nearly $51 billion of cross-border capital targeted the United States last year, RCA said. The United Kingdom received nearly $49.3 billion and Germany had more than $46.4 billion in cross-border capital. China ranked fourth after receiving more than $29.5 billion—55 percent domestic, 38 percent continental and 7 percent global capital flows.

“Cross-border investors dominated property acquisitions in a number of cities last year,” the report said. “Foreign buyers accounted for over 80 percent of all property sales in Prague, Warsaw, Munich and Chongqing, and more than half of sales in London, Paris, Sydney, Berlin, Stockholm, Moscow and Chengdu, among others. Cities where cross-border investment represented 20 percent or less of overall sales were New York, Tokyo, Los Angeles and Hong Kong.”