NEW YORK, NY -- (Marketwired) -- 10/21/14 -- Institutional investors are pouring capital into commercial real estate, causing an uptick in property trades around the globe this year. JLL's (NYSE: JLL) global Capital Markets experts attending the Urban Land Institute's (ULI) fall conference in New York this week are raising their predictions on 2014 foreign investment into the United States this year, forecasting nearly $50 billion, well exceeding 2013's record $38.7 billion. This comes after JLL raised its earlier prediction of total global direct investment transaction volumes from $650 billion to $700 billion by the end of 2014. The abundant amount of equity, coupled with steadily improving debt markets, will cause transactional volumes to return to 2006 levels.
"Commercial real estate is undergoing a seismic change given the massive shift in global capital allocations into this asset class," said Steve Collins, JLL Americas Capital Markets President. "As the real estate asset class matures, sophisticated investors are increasingly focused on varying their level of investment across global markets to achieve their objectives. We expect the competition for global funds to continue."
U.S. property captures lion share of foreign capital
Foreign investors have already invested $38 billion into U.S. commercial property investments year-to-date. The United States is capturing more than its share of global property investments with an increase of 25 percent, compared with a 15 percent uptick in EMEA and 10 percent in Asia Pacific trades.
"Foreign capital will move the needle more than any other investment source in the United States property markets this year," said David Green-Morgan, Director of Global Capital Markets Research for JLL. "The power buyers are changing. Over the last 18 months, more than 70 percent of all trophy assets traded in U.S. gateway markets were purchased with some element of foreign capital." Major U.S. markets are benefiting from more foreign capital seeking economic and political stability in one of the world's most transparent markets.
This year, more than 685 U.S. assets have traded to foreign buyers with 21.3 percent of the investment landing in the hyper-competitive Manhattan market in New York City.
"We expect foreign investment to remain above the last cycle's range of 10 to 15 percent of total investment," said Scott Latham, Vice Chairman of JLL's Capital Markets. "There were 51 transaction examples so far this year totalling $9.9 billion of trades from investors across all product types. We are near the peak of 2006-2007 investment sales volumes and foreign investors account for 31 percent of all transactions. Improving fundamentals will deliver increasing returns as the economy continues to strengthen."
Investor mix
The hungriest investment groups for domestic properties include a broad diversity of institutional and private investors, including Canadian, Chinese, European and South American. Institutional investors overall are increasing allocations for real estate as an asset class.
Property preferences
Foreign investors are largely placing their capital into core trophy and Class A office properties, but some are diverging into other property types including hotel, industrial and development assets.
- Canadian pension funds and REITs, Norwegian Sovereign Wealth Funds (SWFs) and Japanese operators all face a need for portfolio diversification and thus have shifted their acquisition appetite to hotel and industrial product
- Foreign investment into hotel product has increased more than 50 percent year-over-year, led by Asian investors, including Chinese and Japanese funds that funneled $2.25 billion into the market
- Appetite for industrial product remains strong, comprising of 12 percent of total investment, led by the United Arab Emirates
- Residential activity has increased substantially as Asian investors focus on the strength of this sector
Landfall of liquidity
With strong transaction forecasts for 2014 comes a very bullish outlook at the commercial real estate lending markets. JLL expects liquidity to continue to flow easily into commercial property this year, but that continues to put pressure on capital values and yields. Across the 25 prime office markets JLL tracks, average yields are now below 5.5 percent and this has provided an almost nine percent boost to capital values this quarter, the biggest quarterly increase since the first quarter of 2012.
"The end of the Federal Reserve's quantitative easing program is on the horizon; however, investors' minds have been put at ease as the debt markets remain highly liquid with low interest rates. Spreads have moderated since the start of the year, driving the overall cost of capital down to levels seen last May," said Peter Nicoletti, International Director with JLL's Capital Markets. "CMBS is tracking up 14 percent ahead of last year, and unsecured debt raising by REITs and balance sheet lenders remains competitive."
According to Preqin, the amount of capital raised but yet to be called is at an all-time high of US$206 billion, with 83 percent of that focused on investments in Europe and North America.
"With this momentum, commercial real estate could be a $1 trillion investment market by 2030 or even earlier," concluded Green-Morgan.
About JLL
JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual fee revenue of $4.0 billion and gross revenue of $4.5 billion, JLL has more than 200 corporate offices, operates in 75 countries and has a global workforce of approximately 53,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.0 billion square feet, or 280.0 million square meters, and completed $99.0 billion in sales, acquisitions and finance transactions in 2013. Its investment management business, LaSalle Investment Management, has $50.0 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.
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