LOS ANGELES – According to new research from CBRE, U.S. net rental assets are attracting a growing number of overseas investors.
Foreign investment in net rental assets – comprised of office, industrial and retail real estate – was $ 1.9 billion in the first quarter of 2019, up 6.6% from the total for the first quarter of 2018. International investors accounted for an even larger share of net rental investments in the first quarter of 2019 (15.1%) than in the same period of the previous year (12.9%). Global investment in net rentals averaged more than $ 8 billion per year over the past four years, compared to approximately $ 3 billion per year between 2011 and 2014.
Higher than other wealth groups
According to Will Pike, CBRE vice chairman for Net Lease Properties for Capital Markets, foreign investors' appetites for US net lease real estate have grown more than any other investor group, with their holdings growing by nearly $ 21 billion since 2014 increased.
"This is further evidence that global capital flows are prioritizing the risk-adjusted returns of the net leasing sector and will continue to invest in the asset class," he said in prepared remarks.
Top foreign buyers
International buyers increased investment in US net rentals by $ 8.8 billion in 2018 – a 30.1% year-over-year increase and the second highest figure on record, according to statistics from CBRE. New York City, San Francisco, Boston, Dallas / Ft. Worth, Columbus and Los Angeles received the most foreign capital.
The top countries of origin for foreign investment in US net rental properties from 2016 to 2018 were Canada (USD 5.55 billion), South Korea (USD 3.28 billion) and China (USD 3.22 billion). These three countries accounted for more than half of all foreign investment in the US net rental market during this period.
Canadian and Chinese investors mostly targeted industrial real estate, while South Korean investors mostly preferred office products.
The U.S. net lease transaction volume is expected to continue growing in 2019, with investor demand for net lease office and industrial equipment increasing. The increasing demand for US net lease real estate led to an investment volume of USD 68.3 billion in 2018 – the highest annual sum since CBRE began tracking the market in 2002. The share of net lease acquisitions in the total commercial real estate volume was at 11% -wide-12% since 2012, indicating continued strong investor demand in this sector.
Total capitalization rates for leases are expected to remain stable for the remainder of 2019. Government bond spreads have gradually narrowed since 2012 and fell to 321 basis points over the past year as interest rates rose. Recent cuts in the 10-year interest rate caused the spread to rise to 386 basis points in the first quarter of 2019.
Appeal to secondary markets
Risk aversion is driving demand for this asset class, which is characterized by the longevity of the leases and the tenants' underlying loans, Pike said.
Pike also noted that investors are increasingly focusing on net rental opportunities in high-growth secondary and tertiary markets. "While Gateway markets like New York City, Washington, DC and Chicago saw the largest increases in investment over the past year, markets like Phoenix, Seattle, Baltimore, Columbus and Atlanta saw significant growth," he said.