Lend Lease Real Estate Investments in Boston has formed a publicly traded trust in Australia that focuses exclusively on U.S. office buildings. That fund’s acquisition of the Hub’s One Liberty Square (above) last year is just one example of Australia’s recent interest in the U.S. commercial property market.
As a recognized international city, Boston has certainly seen capital flying into its commercial real estate sector from all directions of the globe in recent years, but the next fresh source might be heading straight from Down Under.
Australian funds “are going to become a big player in the United States property market,” acknowledged Charles Burd, a principal with Lend Lease Real Estate Investments in Boston.
Burd noted that the United States has had a significant presence of Australian capital buying properties for some time, underscored by the ubiquitous presence of Lend Lease itself. But that stream is expected to become decidedly more aggressive in the near term, with an Australian love of real estate and need for increased returns sending pioneering funds off the Pacific continent and into foreign markets, part of a global explosion of cross-border capital flow.
“We are seeing that first major wave of Australian money coming in,” acknowledged James Fetgatter, chief executive officer of the Association of Foreign Investors in Real Estate. Fetgatter’s Washington, D.C.-based organization does already have several well-heeled Australian members, including Lend Lease, Westfield and MacQuarrie Bank, but Fetgatter said the group anticipates several new players to land on U.S. shores in the near term, partly due to an aging Australian population and the need to raise retirement income.
“Certainly when people begin to go overseas, the U.S. is the first target,” Fetgatter said. “We’re so big and so reliable, people can get comfortable with [investing] here.” According to the latest AFIRE survey, its members alone have more than $272 billion invested in U.S. real estate, with leading countries including Germany, the United Kingdom and the Netherlands.
Sense of Stability
The Australian movement is partly due to a requirement of companies to contribute increased amounts to employee pension plans, Burd explained, pumping up the amount of capital available to invest. Seeking increased yield, that capital is forging into real estate, but the domestic market cannot grow enough to satisfy their needs, said Burd, prompting the capital to head overseas.
The United States is preferred, Burd said, partly due to a sense of stability, as well as easier tax and currency issues. Lend Lease itself has formed a publicly traded trust in Australia that focuses exclusively on U.S. office buildings, with that fund having acquired One Liberty Square in Boston last year and, more recently, an office building in Miami that the fund joint-ventured with German capital.
One of the more promising additions to the new arrivals in the United States is Challenger International Ltd., a massive Australian life insurer that is in the process of buying its first Boston asset, the 21-story 50 Milk St. in the Hub’s Financial District. The firm previously acquired a pair of stable office buildings in Austin, Texas, for $115 million and aims to spend an average of $500 million to $700 million in the United States annually going forward, said Jeffrey J. Miller, a senior director with CB Richard Ellis Investors.
A veteran investment advisor who has been in Boston since the late 1980s, Miller is getting especially familiar with Challenger after having assisted the firm in its pending purchase of 50 Milk St., which is expected to close next week for a hefty $400 per square foot, or about $103 million for the 280,000-square-foot asset. Not only did Miller help Challenger underwrite the building, he has now been retained by the company to open its first U.S. office, and to form a new subsidiary, Challenger America Inc.
“I’m their first U.S. employee,” Miller said last week, explaining he will be moving to New York City to establish Challenger’s U.S. beachhead. After 17 years as a pension fund advisor, first in New York and then in Boston since 1988, Miller said he sees his new role as principal and acquisitions manager being “a nice change” from his previous focus.
As in the case of its first two acquisitions, Challenger America will focus on stable, core assets featuring good credit tenants in prime markets. Although a solid credit deal might enable Challenger to enter other regions, Miller said the main focus will be on the top 15 metropolitan markets. The Texas deal made sense despite that high-tech market’s recent troubles because the two buildings purchased by Challenger are 100 percent leased to Dell Computer, Miller said.
“The key is the strong credit tenant with long-term leases to get us through any troubled waters,” he said. Boston will join New York City and Washington, D.C., as the top three markets Challenger will concentrate on, Miller said. Despite its commitment, Miller added he has yet to see any firm evidence that Australian money will march en masse on the United States. “I’m not sure it’s a trend,” he said.
According to Burd and Fetgatter, however, the likelihood is there that there will be increased examples. In fact, AFIRE is so convinced of the potential that Fetgatter said he plans to suggest at next week’s board meeting that the group gather in Sydney sometime next year.
“I do think we will see more of it,” Fetgatter said, although he added that Germany continues to dominate as the leading cross-border investor in the United States. That group is also seeing changes in its country that will allow more money to flow into foreign real estate, added Miller. And while German funds have been unusually quiet in the Hub on investment deals in recent months, Miller said he anticipates they will remain focused on Boston as one of its top markets.
