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Current Trends and Historical Perspective
Prepared by the
Research Division of THE NATIONAL ASSOCIATION OF REALTORS®
November 2007 Preface
The
U.S. real estate market is the envy of most nations in the world. The
homeownership rate in the United States was 68 percent in 2007 – a near
record level; more than 75 million households in the country own their
own homes. Housing activity posted record numbers in the first half of
this decade. And even though home prices began to slip in 2007, home
prices rose almost 50 percent from 2000 to 2006, enabling home-owning
households to build wealth through the equity in their property.
Commercial
real estate, after under-performing in the years after the 2001
recession, has also returned to health. Vacancy rates are declining,
helping to push up asking rents in most of the commercial sectors. This
has attracted more investment in commercial properties, and returns
from investment in commercial properties have also been in positive
territory. Underlying the robust health of both residential and
commercial real estate are solid economic fundamentals.
One
factor that has helped to support the U.S. real estate market and
industry is foreign investment. The “globalization” of the economy
extends to real estate. Foreign governments, international financial
institutions, foreign companies, foreign pension and equity funds, and
foreign individuals have all observed the performance of U.S. real
estate, and have seen opportunities to take advantage of healthy
returns on their investments. U.S. real estate provides safe haven for
many foreign investors.
There
are few barriers to foreign individuals or entities investing in U.S.
real estate markets, and U.S. markets welcome them. Foreign investment
in U.S. real estate companies— either directly or through ownership of
company stock -- allows those companies to expand, creating new jobs
and expanding services for real estate consumers. In addition, foreign
capital flows into U.S. securities contribute to the health of our
nation’s economy by putting downward pressure on long-term interest
rates.
This
report examines the trends in and impact of foreign investment in the
U.S. economy with particular attention to U.S. residential and
commercial real estate markets. It looks at the level of foreign
investment in real estate companies through 2006 along with a breakdown
of the major countries with significant holdings in the U.S. In 2007,
foreigners made significant investments.
Executive
Summary
The
U.S. real estate market continues to attract investors from outside the
United States. Foreign investors are attracted to the U.S. market for
various reasons, not the least of which is that foreign participation
in U.S. real estate is relatively free and open. Investment from other
countries helps to stabilize U.S. interest rates and, thus, helps to
keep mortgage interest rates low, spurring business investment in
commercial properties and enabling consumers to become homeowners.
Foreign Investment in
the U.S.
Foreign
direct investment holdings in U.S. real estate totaled $43.3 billion or
2.1 percent of total foreign direct investment holdings in U.S.
markets. In 2006, Germany, Australia, Japan, and Latin America
accounted for the major share – 54 percent -- of foreign direct
investment in
U.S.
real estate. Foreign investment in all U.S. asset holdings increased 18
percent from 2005 to 2006. In 2006 the level of foreign direct
investment (10% or more stake) rose to a record $2.1 trillion. The
amount of private foreign market ownership of stocks and bonds in U.S.
real estate related companies also rose -- to over $5.2 trillion in
2006, a 20 percent increase from 2005.
Impact of Foreign Funds
on U.S. Real Estate Market
The
flow of foreign funds into the U.S. securities market helps put
significant downward pressure on long-term interest rates. NAR
estimates that in the absence of foreign capital, long-term interest
rates would be four percentage points higher than current levels. Such
an increase would result in a four-percentage point rise in the 30-year
mortgage rate, thus depressing home sales activity and, therefore, real
estate industry revenue.
Impact on the U.S.
Economy
Foreign
investment helps create jobs through either direct investment in a
business by providing funding for domestic businesses to reinvest or
spend money on expansion. Those reinvestments and expansion spur job
creation, which in turn fuels demand for commercial real estate.
In
2006, over $715 billion of foreign investment funds flowed into the
U.S. economy. By the end of the year, total foreign entity (government
and private) owned assets in the U.S. had increased by $2.480 trillion
to a total of almost $16.3 trillion. Holdings of U.S. securities and
bank liabilities by foreign governments totaled almost $2.8 trillion
and foreign private holdings of all types of U.S. investments were
$12.3 trillion.
As
a comparison, total U.S. entity (government and private) holdings of
foreign assets totaled almost $13.8 trillion. U.S. government owned
assets abroad totaled only about $72.2 billion, while foreign assets
(direct investments, stocks and bonds, etc.) owned by American private
entities totaled over $12.2 trillion.
Looking Ahead
Prospects
for continued increases in foreign direct investment in U.S. real
estate are bright. The strong foreign currencies in relation to the
U.S. dollar will permit greater investment in the U.S. Though U.S.
economic growth has slowed to 2 percent in 2007, it will improve to
about 3 percent growth rate in 2008. Consumer spending is showing some
signs of diminishing, but
it is still not substantial enough to push the economy into
recessionary levels. Such a stable environment augurs well for the U.S.
as a growth opportunity for foreign investors.
Demand
for office and industrial commercial space looks positive as jobs in
the service and financial services sector are expected to increase and
from the rising demand for warehousing needs associated with sharp
increases in imports and exports. The demand for retail and multifamily
properties should continue to be solid into 2008.
Foreign Direct
Investment in the U.S. and Real Estate
The
expanding globalization of the world economy has spurred greater
investment across international borders. Real estate - though a
physically immovable investment - is no exception. This report measures
the impacts of foreign investment in U.S. assets and real estate and
analyzes the resulting effects on the overall U.S. economy.
In
2006, the U.S. housing market entered a period of slower activity with
an 8.5% decline in existing unit home sales. New home sales dropped
more than 18% from their peak level in 2005. Nevertheless, median
existing home prices still managed to increase 1% over their previous
high posted in 2005 and new home prices rose 2% above 2005 levels. But
it is important to note that these real estate sales and appreciation
rate declines followed a sequence of four record years of sales and the
highest increases in inflation-adjusted home price appreciation in over
40 years. In 2007, home sales have fallen further and the national
median home price is projected to have decline 1 to 2 percent.
A
precursor of the change in the market was the gradual rise in interest
rates begun by the Federal Reserve over the past two years and their
effects on the high-risk adjustable-rate mortgages taken out by many
buyers. The rising interest rates and rising national default rates put
pressure on market prices and lowered mortgage security values. In
turn, investor demand for high-risk mortgage securities dropped
precipitously causing a ‘crunch’ in credit availability to many
higher-risk mortgage borrowers.
During
the recent real estate boom period, foreign investment in the United
States helped maintain lower domestic interest rates as well as
increased the demand for foreign ownership of
U.S.
properties. One way to determine the extent of international engagement
in U.S. real estate is to examine trends in foreign direct investment
in the U.S. Figures from the U.S. Department of Commerce show a
continuing rise in investment by foreigners from 2005 to 2006. By the
end of 2006, the level of foreign direct investment (FDI) in the U.S.
reached an all-time high of almost $2.1 trillion, an astonishing 12%
increase over the level in 2005. (For a relative perspective of these
magnitudes, the U.S. budget deficit is currently running at a $239.4
billion rate – slightly over 11% of the 2006 FDI figure.)
Foreign
Direct investment in the United States
$2,200
$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
2005 2006
The
amount of foreign investment specifically in the U.S. real estate
sector (including rental and leasing) sector rose to $43.3 billion in
2006. That represents a third consecutive year of increase, an
encouraging sign after foreign investment in real estate fell
successively for four years from a peak of about $50 billion in 2000 to
$36.7 billion in 2003.1
These
figures on foreign direct investment in American real estate companies,
as measured by the Commerce Department, include only the purchases of
stock in U.S. real estate (and related) companies. They do not
reflect,
for example, a vacation home purchase by foreigners.2
However, they do include transactions related to commercial real
estate. as well as supporting stock prices of residential
1
There was a significant revision to the past years' data in the 2005
report. For example, FDI in real estate was $41 billion in 2000 prior
reports, but was now revised to much higher $50 billion.
2
This home sale would, however, show up in the existing-home sales
figures produced by the National Association of REALTORS®, or the new
home sales statistics released by the U.S. Census Bureau.
real
estate companies like Reology (previously known as Cendant) which
provides those companies with greater opportunities tap investors’
funds for expansion.
Foreign
investment in U.S. real estate comes from many different countries, but
several dominate. The primary players, in order of their level of U.S.
investment in 2006 were:
-
Germany
-
Australia
-
Japan
-
Latin
America
-
United
Kingdom
-
Canada
-
the
Netherlands
Japan,
which until 2004 had consistently accounted for the highest investment
share, dropped to third place in 2006. In the past seven years Japanese
investment in U.S. real estate plummeted from $11.7 billion in 2000 to
$5.4 billion in 2006. Meanwhile, investment shares from Germany and
Australia steadily rose over this same period – more than sufficient to
offset the declines in investment by the Japanese. In 2006, Germany and
Australia accounted for 16.2% and 13.4% percent, respectively, of real
estate and rental/leasing investment. Japan and countries in Latin
America accounted for 12.5% and 12% , respectively.
Real
estate investment from Latin America, after being relatively flat from
1998 to 2001, began a steady ascent from 2002. Investment from the
United Kingdom rebounded nicely in the past year to surpass its
previous peak investment level set in 2000. The U.K. accounted for
nearly $4.9 billion dollars in U.S. real estate markets in 2006.
Foreign investment from Canada has been steadily declining from a high
of about $6.7 billion in 2000. In 2006 Canadian investment in U.S. real
estate totaled only $3 billion. Investment from Australia took the
opposite path,
rising from $1.3 billion in 2000 to $5.8 billion in 2006. Investment by
Germans has also been steadily rising since 2000 to exceed $7 billion
in 2006.
In
addition to purchasing stock in U.S. real estate companies, foreign
companies may choose to buy U.S. real properties. The reasons include
the desire to expand operations in the
U.S.
and thereby avoid tariff restrictions, lower transport costs or take
advantage of America’s skilled workforce. Whatever the reason, direct
purchases of U.S. properties can result in new construction, new real
estate purchases, and more jobs at home.
The
best measure of foreign purchases of U.S. commercial properties is the
change in holdings of U.S. properties by U.S. affiliates of foreign
companies. Unfortunately, this data has a two-year lag time.
Consequently, the most current information is for 2004. Foreign
holdings through U.S. affiliates of U.S. commercial properties rose
strongly in 2004 - following another strong gain in 2003. Direct
holdings of U.S. commercial properties rose to nearly $190 billion in
2004, an increase of $15.7 billion from 2002 to 2004. That trend is
certainly encouraging given the declines in the three prior years. Over
a longer time frame, total holdings of U.S. commercial properties more
than doubled from 1987.3
3
According to the BEA, this data is calculated by combining BEA's annual
surveys of Foreign Direct Investment and BEA estimates for firms not in
the sample. A U.S. affiliate is defined as any firm in “which there is
foreign direct investment – that is, in which a single foreign person
owns or controls, directly or indirectly, 10 percent or more of the
voting securities or an equivalent interest. The financial and
operating data of
U.S.
affiliates
cover the entire operations of the U.S. affiliate, irrespective of the
percentage of foreign ownership.”
Under
BEA’s definition, “commercial property comprises all commercial
buildings and associated land owned by the affiliate that are either
used or operated by the affiliate or leased or rented to others.
Commercial buildings include apartment buildings, office buildings,
hotels, motels, and buildings used for wholesale, retail, and services
trades, such as shopping centers, recreational facilities, department
stores, bank buildings, restaurants, public garages, and automobile
service stations.” The BEA produces this data a year behind the foreign
investment data. Consequently, 2003 is the most recently year of
reported data.
International Capital
Flows and the Impact on the U.S. Real Estate Market
In
addition to direct foreign investment and the number of foreign
visitors to the country, there is another area of international
importance that impacts U.S. real estate. The flow of foreign funds
into the U.S. securities market has helped put significant downward
pressure on long-term interest rates. Residential real estate is one of
the largest sectors of the U.S. economy. Nearly two trillion dollars
are exchanged each year in the sale of both new and existing homes.
These transactions provide millions of Americans with jobs and result
in hundreds of billions of dollars of economic activity each year. In
total, the housing sector directly accounts for about 15 percent of
U.S. annual gross domestic product (GDP). Some analysts suggest that if
one includes the housing wealth contribution to consumer spending, the
housing sector could account for up to 30 percent of GDP. The
significant contribution of housing to the economy means that stable
and low interest rates are ever more critical in keeping the housing
market intact. And the strong inflow of foreign capital has played a
vital role in helping to stabilize interest rates.
According
to a Federal Reserve research paper,4
it is estimated that a one-percentage point increase in the federal
deficit-to-GDP ratio raises long-term interest rates by roughly 25
basis points. Money is fungible – and upward interest rate pressure
from excessive borrowing by the federal government can be alleviated by
an increase in the foreign capital supply. The NAR economic research
staff estimates that in the absence of foreign capital, long-term
interest rates would be four percentage points higher than recent
levels. Specifically, a four- percentage point rise in the 30-year
mortgage rate would have resulted in existing home sales of 6.1 million
in 2005 rather than the record 7.1 million sales actually posted.
Regarding impacts on the commercial real estate market, low mortgage
rates force cap rates used to value commercial properties lower. This
raises the overall value of commercial property.
Thanks
in part to the significant inflow of foreign capital into the U.S.
markets, mortgage rates in the U.S. have remained near 45-year lows,
averaging around 6.0 percent in 2006 and rising into the low 6% range
in 2007. During the same time period, the Federal Reserve raised its
key short-term rate by about 450 basis points in 18 increments of a
quarter of a point each. Because of stable long-term rates, home sales
and home prices set new records in 2005 for a fifth consecutive year.
However,
in 2006 the new and resales markets began to slip from the 2005 highs;
by early 2007 the higher interest rates and the ‘crunch’ on less
affordable financing caused housing affordability conditions in many
housing markets to deteriorate. Moreover, increases in defaults and
foreclosures -- as well as buyers and investors pulling out of
contracts and “dumping” properties onto the market -- had shifted what
once was a tight housing inventory to a housing oversupply situation by
the spring of 2006. This situation continues and will likely be with us
through at least part of 2008.
As
of November 2007, existing-home sales are on-track to decline nearly
18% in 2007 from their record 2005 figure. Home prices began to decline
in the latter half of 2006; and, the annual average home price
appreciation is expected to be about one percent in 2007. The more
cyclical new home sales market is projected to experience an even a
larger swing in 2007. Sales
4
Laubach, Thomas, “New Evidence on the Interest Rate Effects of Budget
Deficits and Debt,” Finance and Economics Discussion Series 2003
12.
Washington: Board of Governors of the Federal Reserve System, 2003.
of
newly constructed homes are on track to decline by 24% in 2007, with a
two percent decline in prices. Without foreign capital, these
adjustments in the current housing market would have resulted in far
greater declines. Moreover, analysts are still concerned about the
possibility that the housing collapse may push the overall economy into
a recession.
Reasons
for Foreign Financial Investments
There
are two major reasons underlying the significant growth of foreign
capital inflow into the United States. The first is a natural outcome
of domestic consumption preferences and foreign demand for safe U.S.
investments. Because of the U.S. demand for foreign goods and services,
the U.S. is supplying the ‘currency’ that is then “loaned back” to us
in the form of foreign financial investment capital spending. Foreign
investors have always had a strong appetite for the ownership of U.S.
assets, primarily because we are a safe place to invest and our assets
help diversify their investment portfolios. That helps keep U.S.
interest rates low, which in turn supports spending by American
consumers and companies.
A
second reason, put forth by current Federal Reserve Chairman Ben
Bernanke, is that there is a global savings glut, particularly in China
and Japan, and the U.S. is the only logical place to park the money.
Similarly, the strong run-up in oil prices in 2005 that continues to
the present has fattened the coffers of oil-exporting countries. Those
nations have used much of this money to invest in America. The net
result of these economic effects is a seeming paradox that the U.S. has
been running a huge international deficit on commodity and services
trade while at the same time attracting a huge offsetting inflow of
foreign financial capital. The high foreign demand for U.S. government
securities has also kept those interest rates lower than they would be
otherwise, as well as the cost of government borrowing.
Trends
in International Flow of Goods and Services and Financial Investments
Over
the past several years, the U.S. has been running record goods and
services trade deficits -- called “the current account” -- but also a
record investment account surplus -- called “the financial account.” To
better understand how these trends work themselves out, we need to
explain the U.S. Balance of Payments accounts. The current account and
financial account provide measures of the annual net international
flows to and from the U.S. The current account values the amount of
goods and services the U.S. is exporting relative to (minus) its
imports of these same goods and services. The financial account
indicates how much foreigners are investing in the U.S. economy versus
(minus) the outflow of U.S. financial investments abroad. For several
years now, the U.S. has had huge net current account trade deficits
(the value of imports exceeds exports) but offsetting net positive
capital inflows from abroad. However, the overall net still has
remained negative. Usually, when one hears reports on the U.S. trade
“deficit,” they usually mean the current account export/import trade
difference. However, the financial account investment for years has
been a net positive for the U.S. and only slightly less than the trade
deficit.
The
Current Account Trade Deficit
The
2006 current account balance set a new deficit record at nearly $811.5.5
For the second quarter of 2007, the U.S. current account deficit was
$190.8 billion, or negative $763.2 at an annualized rate. If that level
were to continue for the remaining two quarters of the year, the 2007
current account balance would register a deficit of about $769.5
billion; an improvement over the balance of the past. Over the past few
years, high oil prices have contributed to the widening of the deficit
and recent futures spot market prices have hit all-time highs over
$90/bbl. Indeed, during early November 2007, oil prices were flirting
with $100/bbl. Clearly, the worsening of America’s trade deficit has
been primarily due to the demand for foreign goods and services, but
that is partly a function of the fact that we have the world’s
strongest economy with consumer free choice.
It
is also the case that the accumulated effect of a strengthening dollar
from 1995 to 2001 made U.S. products more expensive and foreign
products more affordable to Americans. In addition, weak foreign
economies in relation to the U.S. economy hampered U.S. exports.
Recently, this situation has begun to turn around and the current
account trade deficit has started to narrow. The declining dollar has
been raising the prices of imports and making U.S. exports more
affordable to foreign economies.
The
dollar is now much weaker compared to five years ago, particularly
against the euro. This is a fortunate development from the perspective
of the trade balance: it makes U.S.-made products more competitively
priced. So the weaker dollar has helped stabilize the U.S. current
account trade position in mid-2007. However, recent tensions in the
Middle East and global forecasts for increasing energy demands have
continued to place upward pressure on oil prices and that could still
maintain the U.S. trade gap. Of course, there is a downside of the
weaker dollar: import prices rise allowing domestic prices to increase
as well. That creates inflation and it puts upward pressure on interest
rates. A feedback effect is that higher U.S. interest rates may slow
the domestic economy but also attract a greater inflow of financial
investment from abroad. A declining dollar makes it more difficult for
government policy makers to lower interest rates when the domestic
economy is weakening.
The
Financial Account Surplus
The
U.S. financial accounts of the Balance of Payments have worked in the
opposite direction of the current account. A high U.S. trade deficit
naturally means a large amount of U.S. currency is flowing to foreign
countries. These countries have to invest these dollars somewhere in
the world and the U.S. is a good place to park the money. The upshot is
that this increase in foreign flows of U.S. dollars tends to show up in
the financial accounts and is the result of the current account trade
deficit. The U.S. financial account, therefore, has been running a
large surplus in recent years. That is, foreign financial investment in
the U.S. has significantly outpaced U.S. investment abroad.
5
All trade numbers are on a current-cost basis unless otherwise
specified. Source: Bureau of Economic Analysis.
Balance of
Payments Accounting
The
international trade position of the U.S. is summarized by the balance
of payments. The balance of payments is an accounting standard that is
equal to the sum of the current and capital accounts. The current
account is the sum of goods and services exported by the U.S. minus
those goods and services that are imported from abroad (the current
account also includes net investment receipts and net unilateral
transfers, but these make up a small portion of the account). The
capital account measures the flow of capital between the U.S. and
abroad and is the sum of all foreign investment in the U.S. minus total
investment abroad by the U.S. government and individuals. In theory,
these two accounts should directly offset one another (i.e., balance),
but this is not the case in practice. The rationale for this assumption
is that to increase purchases, one must borrow to do so and an increase
in capital accounts reflects borrowing from abroad.
In
fact, in 2006 there was a $715 billion total investment inflow of
foreign funds into the
-
U.S.
-
In the 2006 balance of payments financial accounts, the value of
foreign-owned assets in the
-
U.S.
-
exceeded the value of U.S. assets owned abroad by $804.4 billion. So,
while purchasing a Mercedes in the U.S. may cost more because of the
trade deficit, the reverse financial flow into
-
U.S.
-
investments will help provide the car buyer with the lower interest
rates to be able to finance it. Obviously, if the U.S. were not a good
place to invest and did not have very efficient and sophisticated
financial markets, U.S. consumers would find themselves paying much
higher prices for foreign goods and struggling to provide low-cost
finance and jobs for consumers. The feedback loop is fairly virtuous
for U.S. consumers because of America's economic strength and efficient
markets.
One
noteworthy event in recent years has been the variability of direct
investment by foreign investors in the U.S. and direct investment by
U.S. investors abroad. For both groups these categories had trended
solidly upwards in the 1980s and 1990s, reflecting steadily increasing
movements of financial capital across borders from liberalized capital
markets. However, direct investment by both parties fell in 2001 and
2002. The onset of global recession in 2001 and subsequent sluggish
recovery in 2002 retarded international capital movement. By 2003,
however, gross investment – both inflow and outflow - returned to
positive growth, and in 2006 both figures surged to record highs.
The
ever-increasing annual influx of funds from abroad has also resulted in
steadily increasing holdings of U.S. financial assets by foreigners. By
the end of 2006, the U.S. net international investment holding position
(foreign holdings of U.S. assets minus U.S. holdings of foreign assets)
was a (negative) $2.54 trillion -- a 13.5% increase from 2005, and
reflected the fact that the value of foreign investments in the U.S.
continues to exceed the value of U.S. investments abroad. Most of this
increase was due to the strong net foreign purchases of U.S.
securities.
Trends in
Foreign Investment in the U.S.
In
terms of gross foreign investment holdings of U.S. assets (not
adjusting for U.S. holdings abroad), nearly $13.8 trillion were held by
foreigners in 2005 and rising to $16.3 trillion in 2006. Each of these
figures roughly equals one year of U.S. current dollar gross domestic
product.
Dividing
the gross foreign holdings into government and private sources also
reveals an important trend. Private foreign investment has sharply
outpaced official foreign government investment in recent years. The
stock of foreign investment in the U.S. by private individuals reached
over $12.3 trillion in 2006, accounting for 82 percent of the total
foreign investment position. Because private capital is not subject to
negotiations and agreements between governments, a sudden pullout of
funds could potentially wreak havoc on U.S. financial markets and the
U.S. economy.
In
the U.S. economy, official (i.e., government) foreign investment plays
a relatively small role; this report focuses primarily on private
foreign investment. Private investment in U.S. real estate companies
can come in two forms: direct investment in real estate and other
private investment in real estate. An example of direct investment
would be a German company purchasing a 10% or greater share of direct
ownership in a U.S. real estate company. However, the category “other
private investment” covers standard financial market purchases of
stocks, bonds, or cash that are held by portfolio investors who want a
market return on their securities rather than a controlling ownership.
The lion’s share of foreign private investment in the late 1990s came
in the form of other private investment. Total direct investment
holdings (position) in U.S. real estate (and rental and leasing) peaked
in 2000 at $50 billion. Since then it has declined to a level of about
$43.3 billion in 2006, valued on an historical cost basis.
Other
private investment, however, has been surging and posted record levels
in 2006. This private investment is annual financial flows into assets
such as stocks, bonds, U.S. currency, and other paper assets such as
CDs and money market accounts. As discussed above, an increase in the
flow of funds from abroad can help reduce domestic interest rates. In
turn, lower interest rates stimulate investment and consumption of
larger purchases such as homes and automobiles. While investment in
currency has been relatively stable over the last ten years, annual
private foreign purchases of U.S. Treasury securities (bills and bonds)
have surged in recent years. They fell to as low as $375 billion in
2001, but have since then risen to a level of almost $644 billion in
2005, and then slipped to a little over $594 billion in 2006. Although
the demand shows some cyclicality, it has had a generally increasing
trend as global instability continues to generate high demand for safe
assets like Treasuries, bank assets, and cash.
As
of the end of 2006, the total U.S. investment (position) holdings of
foreign government and private entities totaled almost $16.3 trillion.
Foreign governments owned about $2.77 billion (mostly in U.S. stocks
and bonds) while private holdings totaled over $12.3 trillion. Of that
figure, holdings of U.S. Treasury securities totaled over $594.2
billion; private direct investments (10% or greater company ownership)
totaled about $2.1 trillion; general ownership of private sector stocks
and bonds were almost $5.23 trillion; U.S. dollar currency deposits
held were $364 billion; and U.S. bank assets owned were over $3.3
trillion.
Projections for
International Growth
Much
of foreign investment comes from investors searching for assets with
superior, but safe performance. The continuation of this trend will
depend on whether foreign economies are performing well, thereby
creating new capital for investment, and if they are doing well,
whether they are outperforming the U.S. economy and, in so doing,
providing an alternative place for investment.
GDP
growth is a strong indicator of return on investment. The U.S. looks to
perform better in 2007 based on forecasts of GDP growth. The Euro zone
as a whole will improve, but the US faces its strongest competition
from Eastern Europe, India, China, and South America. However, these
areas are not likely to absorb a large part of investment in the U.S.
as each of them face serious questions about market stability and the
security of the investment.
APPENDIX
There
are many reasons why foreign firms, individuals and other non-U.S.
entities invest in U.S. real estate markets. Many of them are
elaborated earlier in this report. In addition, there are several
qualitative reasons underlying foreign direct investment in U.S. real
estate.
Establishment of Market
Presence
The
United States is the world’s largest and most open commercial real
estate market. Undoubtedly, foreign firms want to establish presence in
the U.S. They do this in a variety of ways. They make direct investment
in properties. In addition, they may choose to build businesses or
establish joint ventures with U.S. companies in real estate
development, design, construction, property management or brokerage.
Safe Asset
Certain
U.S. investments are viewed as safe alternatives compared to what, at
times, are more risky foreign assets. During periods of economic
uncertainty in foreign markets, funds are often redirected into U.S.
assets that have low default rates such as U.S. Treasury bonds,
high-grade corporate bonds, U.S. backed mortgage securities, and U.S.
real estate. This trend was particularly apparent during the Asian
economic meltdown of 1997-1998 and the Russian ruble collapse of 1998.
Similar market instability have led to panic among investors and
resulted in foreign investors shifting their monies into U.S. dollars
and U.S. markets. The Argentinean debt crisis of 2001-2002 did not have
as great an impact because many investors had learned their lessons
from the previous experiences and had adjusted their portfolios
accordingly.
Institutional and
Technical Factors
Institutional
and technical factors also explain the increased foreign involvement in
the
U.S.
economy. These factors include worldwide liberalization of financial
markets and technological change.
Liberalization
of Financial Markets
As
the U.S. economy has become increasingly international in recent years,
so has the
U.S.
real estate market. Since the early 1970s, the industrialized nations
of the world have been steadily removing restrictions on international
capital flows. In 1971, the Bretton Woods system of fixed exchange
rates was abandoned in favor of floating exchange rates. By allowing
currencies to float, nations permitted the market to determine the
relative value of goods and services traded across borders.
In
addition to allowing exchange rates to float, many of the world’s
industrialized nations have removed most controls on capital and
restrictions on foreign participation in domestic financial markets. In
the early 1970s, the United States eased administrative guidelines that
inhibited foreign access to U.S. financial markets, and in 1984
abolished the withholding tax on non-resident holders of bonds issued
by U.S. residents. The United Kingdom lifted exchange controls in 1979,
liberalizing cross-border transactions using pounds sterling. In the
1970s, Germany removed authorization requirements for non-resident
purchases of domestic bonds, and also lifted a withholding tax imposed
on foreign holders of domestic bonds. In the 1980s, Japan opened up
participation by foreign firms in Japanese securities markets and
liberalized approval procedures for firms seeking to make direct
investments abroad.
This
pattern of liberalization continued into the late 1990s with many
Asian, Latin American, and former Soviet countries opening their doors
to foreign capital. However, the downturn caused by the implosion of
the Southeast Asian economies in 1997 sparked a spate of new controls
on capital flows in many of these countries. Although the International
Monetary Fund (IMF) has conditioned its bailouts on continued expansion
of liberalized trade policies, the going has been slow. This
liberalization is crucial to maintaining the flow of foreign capital
into
U.S.
real estate markets, and it enables foreign investors to transfer
capital abroad in order to diversify their portfolios, including
investment in U.S. real estate. In the face of these controls on
foreign investments, the U.S. economy offers an advantage for investors
who want to be certain that they can get their money back after
investing.
Technological
Change
At
the same time that governments have been liberalizing their trade and
foreign investment policies, technology has been revolutionizing the
world. In the U.S. alone, private sector spending on information
processing equipment and software increased from $218.9 billion in 1996
to over $600 billion in 2006 after adjusting for inflation.
Telecommunications, computing, and information technology now permit
almost instantaneous transmission and processing of information around
the globe. This capability lowers financial transaction costs and
fosters a financial environment in which capital flows rapidly from one
country to another seeking the highest yield. As a result, foreign
investors can respond quickly to opportunities to invest in the U.S.
real estate market.
The
residential real estate market has also benefited from technological
change. From anywhere around the globe, prospective home buyers can
browse online listings with pictures and even 360-degree virtual tours.
Web sites like Realtor.com and Worldproperties.com allow housing
shoppers to search at minimal cost and to start the home buying
process. The benefits of these capabilities are being realized.
According to the
National Association of REALTORS® 2006 Profile of Home buyers and
Sellers,
24% of home buyers first learned about the property that they
eventually purchased through the Internet -- up from 15% in 2004. In
1995, this figure was less than one percent. Furthermore, 73% of survey
respondents listed the Internet as a “very useful” source of
information for their housing search. Further technological advancement
will undoubtedly lead to even lower transaction costs and higher
international transactions.
Foreign
investment in U.S. markets plays a significant role in stimulating the
U.S. economy. The total flow of financial investment helps expand the
pool of funds available to grow U.S. businesses, boosts the stock
market, and lowers interest rates. Furthermore, lower interest rates
bid up home and stock prices, which can boost consumer confidence and
thereby stimulate spending.
Foreign
companies may buy stock in a U.S. company for several reasons: as a
simple investment, to satisfy the need for international
diversification in a portfolio, or to gain strategic positioning within
an industry. In addition, the U.S. economy is seen by many foreign
investors as a “safe haven” – by and large not prone to big shifts.
(Even U.S. economic recessions are relatively mild compared to those of
other national economies.) A weaker U.S. dollar against foreign
currencies attracts those European foreign investments to American
markets. Political stability in the U.S. can also be a factor in
deciding to invest in U.S. markets. For whatever the reasons,
foreign direct investment in the U.S. has more than tripled in the past
15 years, rising from $533 billion in 1991 to nearly $2.1 trillion in
2006.
The
reasons for foreign direct investment in U.S. real estate are the same.
In addition, because the U.S. real estate market has a proven track
record of healthy returns, investing in the
U.S.
real estate industry often makes more sense than investing in foreign
real estate markets or in other domestic industries. U.S. interest
rates are low, which is an attractive incentive for investors from
abroad. Demographics are playing their part as well. Other countries –
especially those in Europe – are experiencing the same “aging” of their
population as is the United States. Foreign baby-boomers – like their
American counterparts – are looking for ways to maximize their return
on investments as they approach retirement.
