Real Estate Forum - December 2011

NEWS FRONT
From Russian Property, With Love

MOSCOW—Despite being marginally affected by the global downturn and a lack of government transparency, Russia is still popular for new development and leasing. The country is experiencing growth from exposure with various world stage events, including economic meetings and the 2018 FIFA World Cup.

In Cushman & Wakefield’s recent European Cities Monitor, Moscow was ranked the most desirable city to open new offices, beating 35 other European markets for the second consecutive year. Fifty-seven European firms plan to expand there within the next five years, up from 47 in 2010, according to the survey. The city has seen strong expansion in consumer spending along with growth in business-to-business sales and the potential of secondary cities, says Tom Millard, managing director of C&W here.

Class A office rents in Moscow and St.
Petersburg showed the best growth in the
Europe, Middle East and Africa region dur-
ing the first half of 2011, according to a new
study by Colliers International. Rents in
Moscow rose 11% in the first half to about
$54.32 per square meter, and St. Petersburg
saw rates rise by 10% to $31.86 per meter.

Foreign Investors in US Move Up Risk Spectrum

Foreign investors’ appetite for US properties is diversifying, broadening from core assets in coastal US cities to secondary markets, value-add and distressed properties. These options are reigniting interest by European and Asian buyers. The year ahead should also show a marked change in the appetite for development as longtime players consider projects in high barrier-to-entry markets.

Previously, a large number of investors competed for the preeminent assets in the top core markets—mostly those in New York City, San Francisco and Washington, DC. Now, the US is experiencing a notable thinning of the peloton as those same investors move slightly further out the risk continuum into solid, well-located properties in secondary cities. Alternately, they may stay within core markets but broaden their search to include value-add or even distressed assets.

In August, Allianz, along with joint venture partner CCP Investment Board of Canada, purchased two multifamily properties in Boston: the Archstone North Point for approximately $186 million and the Archstone Woodland Park for about $84 million. The North American Development Group of Ontario, Canada acquired the Edgewood Retail District in Atlanta for $81.7 million in September, while a partnership of Chinese and Korean investors bought Three First National Plaza in Chicago in August for approximately $348 million.

For the majority, JVs remain the foreign investment vehicle of choice for US-based office investments, particularly those from

By Steve Collins

Germany and France, while Middle Eastern and Asian investors have their eyes on multifamily. In Germany, institutional investors are shying away from open-ended funds and increasingly amassing capital in Spezialfonds, as real estate remains a target asset class. German open-ended funds are also re-analyzing their US real estate volumes and may consider concentrated domestic selloffs to feed cash redemptions.

Development also appears poised for a tentative comeback as longtime international players begin investigating opportunities for office developments in those same barrier-to-entry markets of New York and Washington, DC. Little to no office construction over the past two years has resulted in falling vacancies and higher rents in these core markets. Some foreign investors who have gone through three to five cycles throughout the years are now beginning to feel more comfortable with future development plans. Aggressive foreign buyers with higher risk appetites could be the first to break ground.

Foreign lenders have also become more aggressive in 2011, with overseas banks and funds quoting interest rates around 3.25% with interest-only components for as long as five years, though underwriting remains extremely tight. A number of US borrowers are now choosing foreign lenders due to their ability to take down a larger loan, with longer terms and shorter execution. While large-scale transaction activity is muted, foreign investors could be in a position to break away from the pack in 2012.

Steve Collins is the Washington, DC-based international director for Jones Lang LaSalle. He may be contacted at stephen.collins@alm.jll.com. The views expressed here are the author’s own.