+Wall Street Journal put out an article on Sunday, April 12^th with some recent news on New York area real estate. In the article, I gave some insight on investor sentiment, how exchange rates affect United Realty’s holdings, and observations on the wider real estate market. The Wall Street Journal also released the results of the United Realty/Zogby Real Estate Confidence Index, which is a survey of 113 institutional real-estate professionals on the nature of the current investment landscape as well as expectations for future opportunities and risks. You can find the original article here: http://www.wsj.com/articles/whats-the-deal-1428887802

American Investors are Adapting to Reduced Returns

Today, the confluence of the economic environment in Europe and the uncertainty about China is causing foreign investors to acquire assets in the US and compelling American investors to adapt. The slowdown in China’s GDP growth and the stagnation in Europe are leading investors to look for secure and stable investments. Consequently, they are increasingly looking to invest in the United States, resulting in rising real estate prices in cities like New York and San Francisco. Investors are as a result seeking returns in secondary markets.

Investors from across the globe are bidding up prices in the US as they look for places to put their money. They are less likely to acquire assets in Europe, as its economies are experiencing sluggish GDP growth. There are signs that the Eurozone may be on the verge of recession.  Investors understand that there are structural issues with the Eurozone economies. They are loath to invest in the area given its economic environment, as well as Eastern Europe’s social instability. Investors are instead looking to acquire assets in the US. 

Additionally, the apprehension about the course of the Chinese economy is convincing investors to transfer their wealth to the US. There is speculation that the Chinese economy will not experience the rapid rates of GDP growth that it experienced in the 1990s and 2000s. Public policy, as well as other issues, may prevent its economy from expanding as it becomes less dependent on exports.  As a result, investors are acquiring assets in the US, in particular New York and San Francisco.

These investors are interested in acquiring assets that they perceive to be secure and stable. The assets of choice have been prize properties, such as the Waldorf Astoria that was acquired for a record amount this month.  Investors from East Asia, the Middle East, and Scandinavia are investing in these prized properties in city centers in cities like Boston and New York. As a result, the values of offices in these areas have risen to 10% over the previous price peak in 2007.

U.S. investors are consequently investing in assets in other markets with the potential for greater returns. U.S. investors are finding that they getting a better bang for their buck in cities that are considered secondary to cities, such as New York and Boston. Additionally, investors have been investing their capital increasingly in developments and redevelopments. 

Going forward, investors should consider the pressure on real property prices caused by the influx of foreign capital, and the impact that it’s having on returns. The intelligent investor will seek out returns in markets outside of those considered to be the homes of prized properties, as well as in development and redevelopment projects.