Aussies strengthen push into US property
AUSTRALIAN investors widened their lead as the biggest international buyers of US real estate, spurning skyscrapers in New York and San Francisco for warehouses in Mineral Wells, West Virginia, and malls in Sylvania, Ohio.
So far this year, Australians purchased $ US7.7 billion ($ 8.83 billion) of US real estate, or $ US2.2 billion more than they acquired during all of 2006, according to New York- based researcher Real Capital Analytics. Germans spent $ US2 billion in the same period and Middle East buyers $ US3.9 billion.
Record prices and falling yields from offices and trophy properties in New York, Chicago, Washington and San Francisco have sent Sydney- based Record Realty and Macquarie Bank’s property trusts to markets such as Pittsburgh and Mineral Wells where initial returns are about 45 per cent higher.
‘‘ There’s a tremendous amount of demand right now’’ from Australians, says Dan Fasulo, an analyst at Real Capital. ‘‘ They have been willing to venture anywhere for quality real estate.’’
Australians have spent twice as much as Middle Eastern investors on US property since 2005 and almost three times more than Germans, based on Real Capital data.
Investments in the US increased since 2002, when Australian companies had to pay the equivalent of 9 per cent of employee salaries into super accounts.
Timothy Rich, executive director of Record Realty, says he considered buying in Washington before his company acquired Government Properties Trust Inc in April for $ US223 million. The takeover gave Record Realty 22 properties spread across 14 states, including a warehouse in Mineral Wells — population 1860, and a 21/ hour drive from Columbus, Ohio, the nearest major city.
‘‘ None of the primary markets worked for us,’’ Rich says. ‘‘ We couldn’t achieve the level of return we were looking for.’’
Record Realty paid $ US275 a square foot for Government Properties, or about a third the going rate for office buildings in New York.
Rich expects Record Realty to make a 7.1 per cent return in the first year of owning Government Properties, with the buildings all leased to federal and local government agencies.
They include the US Environmental Protection Agency’s regional office in Denver and a 38,000 square foot Bureau of Public Debt storage building in Mineral Wells, an unincorporated Ohio Valley town about 10km south of Parkersburg, West Virginia, the Wood County seat.
The region is in the midst of a boom, with land values in the area increasing 12- fold since 2001 to about $ 130,000 an acre, says Steve Grimm, Wood County’s tax assessor. Kohl’s, Wal- Mart, Target and Coldwater Creek have all opened stores or distribution centers in the area, he says.
‘‘ It’s like that old saying: I drive by it every day and I didn’t think it was worth so much,’’ Grimm says.
Rising prices for commercial real estate in the biggest markets have discouraged German investors, says Matt Bronfman, managing director of Atlantabased Jamestown, which has invested more than $ US6 billion in the US since 1983, mostly on behalf of Germans.
US office prices soared 71 per cent since 2005 in the four markets where foreign investors buy most often: New York, Boston, Chicago and San Francisco.
Manhattan office properties have sold so far this year for an average of $ US752 a square foot, the firm says. That is more than twice their 2005 price. Average first- year yields, rental income after expenses, have fallen to 4.9 per cent this year, from almost 7 per cent two years ago, Real Capital says.
‘‘ We look at returns today in the 4- 5 per cent range, and we’re not buyers,’’ Bronfman says.
Australians ‘‘ go for yield and are more likely to use leverage than the Germans or the Japanese,’’ says Hans Nordby, director of US market forecasting for Property & Portfolio Research, a Bostonbased real estate research organisation.
‘‘ The Germans and the Japanese like gold- plated buildings. Until three years ago, the Germans would never take a connecting flight, so they wouldn’t go west of Chicago.’’
Australians are avoiding the strategy of Japanese investors, says Mark Baillie, executive director in charge of North American and European real estate investments at Macquarie Bank.
The Japanese lost an estimated 50 per cent to 80 per cent of their money after spending $ US78 billion on US properties between the late 1980s and 1995.
Many Japanese investments, including Mitsubishi Estate’s 1989 purchase of Manhattan’s Rockefeller Center for $ US895 million, came just before a US recession sent real estate values plummeting.
‘‘ We’ve asked ourselves: is Australian capital the Japanese capital of the new millennium?’’ says Baillie. ‘‘ But if you drew a map and overlay Japanese investments versus Australian, you’d find that they went into a few markets, a few sectors. We’re looking for stable long- term returns in many assets across the US’’
Macquarie has acquired more than $ US11 billion of US properties since 2001, mostly through joint ventures with US real estate investment trusts such as Equity Office Properties Trust, and ProLogis, the world’s largest warehouse owner.