Survey: Foreign investors show bigger risk appetite

In a quest for yield, more institutions are considering markets and property types that they may not have favored in the past, according to a new AFIRE survey.

While the US remains the top market among foreign investors in real estate, many of these institutions’ preferences otherwise have been shifting. Perennial favorites such as Washington, DC and the multifamily sector have been falling out of favor, while emerging opportunities in Spain and US secondary cities have been on the rise among investors seeking higher yields.

Spain, for example, now ranks second among countries that are viewed as providing the best opportunity for capital appreciation in the 22nd annual survey by the Association of Foreign Investors in Real Estate (AFIRE), although the country trailed first-place US by a 26 percent margin. In the previous year’s survey, the European nation ranked fifth, tying with Australia and Mexico.

“Spain was somewhat of a surprise to us,” said Jim Fetgatter, chief executive of AFIRE, of the country’s high ranking in the survey. “It has gone further down the road in terms of trying to resolve bad loans and get the market back into equilibrium.” Foreign investors therefore view the market as having favorable conditions for opportunistic investing and are willing to take on more risk for higher yields, he explained.

Meanwhile, Washington, DC, was not counted among the top five global cities for the first time since the launch of the survey in 2001, falling to number 9 from its fourth-place ranking last year. Fetgatter attributed the drop in the city’s popularity to spending cuts by the US government, the major driver of real estate demand for the market. The multifamily sector, another long-time favorite, also attracted less interest from institutions abroad, sliding to fourth place among US property types from its top rank in last year’s survey. “The bloom may be off the rose,” Fetgatter added.

By contrast, US secondary cities have been gaining traction among non-US institutions. “The gateway markets are now fully priced; they’re back at 2007 pricing,” said Fetgatter. “So, to get more yield, they’re interested in getting a bit higher on the risk curve and maybe even deeper into some secondary markets.” Sixty-six percent of survey participants said they were in favor of increasing investment beyond the US gateway markets.

The quest for higher yield is a bigger issue among foreign investors than domestic institutions because of the Foreign Investment in Real Property Tax Act (FIRPTA) of 1980, which requires non-US investors to pay a 10 percent withholding tax on the sale of US property investments. Such a tax has been viewed among foreign investors as not only putting them a disadvantage compared to their US counterparts but having a negative impact on their investment returns.

Foreign institutions said the repeal of the FIRPTA tax, as proposed by the White House last year, would have a major impact on their property investment activity in the US, according to the AFIRE survey.  Fetgatter was optimistic that the proposal would become law in the relatively near future. “The chances are better this year than they have ever been,” he said. “I’ve never heard so much chatter about FIRPTA as I’ve had in the past year. There’s a strong movement afoot.”