Capital Flows, Off-shoring Top Global Trends

The staggering amount of capital that has targeted real estate in the last few years will grow larger this year, making it the number one trend to watch, according to a new report by Ernst & Young L.L.P.

"The magnitude of the capital flows is really phenomenal," said Dale Anne Reiss, global director of Ernst & Young's real estate, hospitality & construction practice. "Whether its debt or equity or direct investment, foreign or domestic, retail or institutional, it's all flowing into real estate and the question is how is it going to be employed?"

The funds are increasingly flowing across borders, Reiss said, pointing to data that showed foreign investment in U.S. real estate jumped 59 percent from 2002 and 2003. Foreign investment could rise more than 12 percent in 2004. Meanwhile, the firm estimated that U.S. opportunity funds have amassed $100 billion in buying power, of which $60 billion is earmarked for foreign investment.

"Clearly it's having an impact on pricing and there's been a growing spread between fundamentals and pricing," Reiss said.

While capital flows are the top trend, Ernst & Young also identified nine other trends -- several that are just beginning to develop -- that will shape real estate in 2004. Corporate off-shoring, for example, is a real and growing trend, though it is difficult to point to specific examples. But Reiss asserts that the business that already has moved from the United States could fill Tampa, Fla's. entire office market -- about 57 million square feet.

The report also predicts the REIT structure will continue to spread to nations across the world. The European Union, for example, recently proposed creation of an EuroREIT structure that would be applicable anywhere in the Euro Zone.

Other trends include increased investment in non-performing loans on real estate throughout the world; corporations and government entities worldwide taking advantage of sale-leasebacks; continued use of adaptive re-use and the spreading of tax treaties around the world to facilitate more cross-border investment.