Aussies strengthen push into US prop­erty

The Weekend Australian - Review - - Prime Space - In­vest­ment

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.

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