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Jones Lang LaSalle's latest international real estate capital report records global real estate investment of US$682 billion in 2006, a surge of 38% over 2005, and nearly double 2003 volumes.
Globalization of the asset class continued relentlessly as 42% of investment value now involves a cross-border transaction (up from 34% in 2005), and 29% were inter-regional (up from 23% in 2005). Already a new annual record for the asset class, investors posted an additional $218 billion to the total transaction volume with residential and entity-level deals accounted, bringing the total aggregate global real estate investment volume to $900 billion -- the strongest ever performance by global real estate markets.
Tony Horrell, CEO of Jones Lang LaSalle's International Capital Group, commented: "There is currently a large overhang of investment targeting the sector with $4 of money chasing every $1 of product. Global real estate markets performed very strongly throughout 2006, and it was the first year that all major developed and emerging market returns were both aligned and positive.
Investment was driven by increased allocations to the asset class, growth in investible for investment and by the increased attention of opportunistic private equity players who identified relative value in the sector. These increased flows into real estate gave rise to two notable phenomena in 2006 -- an increasing number of 'mega-deals' and continued globalization of the asset class."
The United States accounted for 40% of global transactions by value and the UK accounted for 15%. The German and Japanese markets have almost doubled their share of global volumes to 9% and 8% respectively, and the German market now attracts the same share of global cross-border investment as the U.K. United States: A Domestic View
Total transactions in the United States were US$271 billion, up 32% on 2005 levels. Manhattan, by far the largest market in the United States (14% of national market), experienced strong transaction growth with investment increasing by 61%.
The volume of cross-border border transactions in the United States more than doubled to $65 billion, and accounted for 24% of total U.S. transaction volume (up from 14% in 2005). However, a significant portion of this activity was sell-side transactions completed principally by German and Global funds (defined as funds originating from multi-regions) as the Germans freed up liquidity by selling significant U.S. holdings. Manhattan captured a disproportionate share of cross-border investment -- accounting for 21% of total cross-border investment into the United States -- spurred by the sub-six percent vacancy rate in Midtown, tightening conditions in downtown and additional demand for space extending into New Jersey as tenants compete for a finite amount of availability.
The United States remained the largest investment destination of cross- border transactions with 23 percent of the total global real estate transactions by value, followed by the United Kingdom (18%), Germany (18%) and France (8%). In the United States, global sources of capital easily accounted for the most cross-border purchases in 2006, with $17.2 billion (43% of cross- border purchases), followed by Canada with $4.6 billion (11.7%), the U.A.E at $4.3 billion (10.8%), Germany at $2.8 billion (7.0%) and Australia with $2.7 billion (6.8%). On the cross-border sell-side, German investors and global sources of capital tied for most active in 2006, each selling $11.1 billion (31% each of cross-border sales) of U.S. properties. Following were Canada with $3.1 billion (8.7%), Japan at $2.4 billion (6.8%) and Australia at $1.4 billion (4.1%).
On a net-investment basis, global sources led by buying $6.1 billion more in U.S. properties than they sold in 2006, followed by the U.A.E. with net investment of $3.8 billion, Hong Kong investors at $2.2 billion, Canada investors at $1.5 billion and Australian investors at $1.3 billion. Total cross-border purchases in the United States rose 86% to US$39.6 billion, up from $21.3 billion in 2005.
"Given the liquid and transparent real estate market in the United States, we continue to see record-setting capital inflows from overseas investors into high-quality product in high performing markets such as New York," said Steve Collins, Managing Director of Jones Lang LaSalle's International Capital Group. "With the favorable exchange rates for foreign investors, we expect U.S. properties throughout the major markets, and specifically in Manhattan, D.C., Boston, Los Angeles and Chicago, to attract strong international investor interest in 2007 with little end in sight."
U.S. Market Highlights
Cross-border investment increased in nine of the nation's top 10 markets by volume in 2006, except in Los Angeles where economic recovery concerns linger. Manhattan experienced the largest yearly gains with total investment of $37.3 billion and, of that, cross-border investments more than tripled to $14.8 billion. Total investment was also up strongly in Boston (81%) with cross-border surging more than five-fold to $4.9 billion; in Atlanta (31%) with cross-border transactions nearly tripling to $1.9 billion; in Chicago total volume increased (30%) to $16.2 billion while cross-border activity doubled to reach $3.8 billion; and in Dallas (20%) with cross-border transactions more than doubling to $1.8 billion.
Report highlights:
-- North and South America: Direct commercial real estate investment in
the Americas reached US$283 billion in 2006, up 31 percent on 2005.
Cross-border investment represented 25 percent of total investment (up
from 16% in 2005) and inter-regional investment reached 22 percent of
total investment (15% in 2005). Investment markets in the Americas
region are overwhelmingly located in the United States (96% of the
region's transactions by value). Other investment markets include
Canada and the rapidly growing cross-border markets of Latin America -
dominated by Mexico and Brazil.
-- Private Equity Fueling the Market: private equity investors have
rapidly accumulated portfolios by pursuing entity-level deals. This
phenomenon, particularly prevalent in the United States, saw the
privatization of REITs and other listed real estate owners valued at
over US$48 billion in 2006. In February 2007, Blackstone purchased
Equity Office Properties Trust, the world's largest REIT, for US$39
billion highlighting both a potential arbitrage between public and
private markets and opportunistic investors' enormous appetite for
real estate assets.
-- Cross-Border Investor Mix: The mix of cross border investors in the
Americas changed significantly in 2006, with Australian, German and
Hong Kong investors dramatically reducing their purchasing activity.
Major cross-border purchasers in 2006 included Global funds (US$18
billion), Canadian funds (US$5 billion), and Middle Eastern funds
(US$5 billion). German funds sold real estate valued at US$11
billion, principally located in New York, Boston and Chicago and
purchased assets valued at US$3 billion (Chicago and Philadelphia).
Australian funds, having dominated the United States cross-border
market in 2005, reduced their purchase activity to US$3 billion
(predominantly retail) and shifted their attention to Europe.
Looking ahead, Steve Collins concluded: "Total transaction and cross- border volumes continue to rise globally, and real estate continues to produce a stable return that is paying off for investors across the globe. We expect 2007 to be at or near the record volumes of 2006. With the weakened dollar, we also expect an increased level of cross-border investment into the United States, and the probable return of German buy-side investing."
Collins also noted that investment vehicles have opened up in the United States that should impact growth in global transaction volumes. "The emergence of the Collateralized Debt Offerings (CDO) market provides investors -- specifically highly leveraged Opportunity Funds -- the opportunity to place additional, cheaper, non-taxable debt on an investment without encumbering the other financing positions. This will allow buyers to increase returns because they can now push underwriting values to higher levels due to this inexpensive new debt in the marketplace."
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