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US remains top bet for real estate investment in 2012 but Brazil gains ground

While the United States offers the most stable and secure option in commercial real estate, investors said improvement in rent and occupancy growth and the repeal of a 1980 foreign investment tax would have the strongest impact on their investment decisions, it says.

For about the past year or so, investors in US commercial real estate have focused on gateway cities such as New York, Washington, Boston, San Francisco and Los Angeles, driving prices up and yields down.

Meanwhile commercial property in Brazil, with its bubbling economy and safer investment environment, has become a hot spot for global investors. Sao Paulo, Brazil's largest city, jumped to the fourth best city for real estate investment dollars in 2012, up from 26th place last year.

The United States is still very desirable and was second behind the UK in attracting cross border investment in 2011, according to Real Capital Analytics preliminary figures.

‘The negative is it doesn't promise a whole lot of capital appreciation because the prime markets are already fully priced,’ said James Fetgatter, AFIRE chief executive officer.
‘By no means will Brazil replace the US, at least not in the foreseeable future. Brazil is considered now a much safer place to invest and a place where you can get capital appreciation and good yield,’ he added.
AFIRE'S survey respondents hold more than $874 billion of real estate globally, including $338 billion in the United States.

Some 60% of respondents said they plan to increase their investment in US real estate in 2012, down from a record 72% last year, while some 42.2% said they believed the United States in 2012 would offer the best opportunity for the price of their commercial real estate investments to increase, down from 64.7% in last year's survey.

The United States lost ground to Brazil, with 18.6% saying Brazil's property market offered the best growth opportunity for their investment dollars. That's up 14.2%, moving Brazil up to second place from fourth, and pushing China down into third place.

Some 70% of respondents picked one of the top  three countries as their favourite, while the remaining 30% had top choices from 13 other countries on five continents.

Respondents said they would invest more in U.S. commercial property if the fundamentals of rent and occupancy growth were stronger.

Another US barrier respondents cited was the Foreign Investment in Real Property Tax Act (FIRPTA). The 1980 act, originally designed to protect farm property from foreign ownership, subjects foreign buyers to both their domestic and US taxes when they sell their investment, unless their home country has a taxation treaty with the United States.

FIRPTA opponents have argued that the act unfairly penalizes foreign investors of real estate. Such double taxation does not apply if they buy US stocks or bonds.

New York remained the top city for foreign investment, London moved up to second place, swapping places with Washington. Sao Paulo was fourth, and San Francisco moved up to fifth from tenth place last year.

Europe's sovereign debt problems and looming recession pushed most of the countries there, except for a few such as Switzerland and Poland, off the map for real estate investors. Germany lost about half its support among respondents in terms of stability and price appreciation.

Emerging markets also seem to be getting more popular among potential investors. Respondents identified 25 countries they would consider for investment, up from 18 last year. Brazil topped the list, with China in second place, as each did last year. Turkey moved up to third place from seventh last year and India and Vietnam each dropped down one spot third and fourth place respectively. Appearing for the first time were Colombia in tenth place, Hungary in twelfth and Qatar in seventeenth place.

As for US commercial real estate, respondents said that this year they would most likely invest in apartment buildings, the fourth consecutive year multifamily topped the list. Of all the types of US commercial real estate, the multifamily sector has not only recovered from the post 2007 real estate slump but rents and occupancy are even stronger than before.

Warehouse and distribution centres ranked second, up from fifth last year. Office properties were third, up from fourth and retail properties, that is shopping centres and malls, slipped to fourth from second. Hotels were fifth, down from third last year.

The survey was conducted in the fourth quarter of 2011 by the James A. Graaskamp Center for Real Estate, Wisconsin School of Business.