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Searching for the Best Deal
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Written by Marta Kazmierczak   
Wednesday, 05 December 2007

A melting pot of immigrants from various countries around the world, Chicago is attracting a diverse clientele base, perhaps offering a "home away from home." Many Europeans, including Poles, are parking their investments capital in this popular city. 


  Investing in real estate once meant a quaint vacation home in the Florida Keys or owning rental property downtown. Today, real estate investing is an international proposition - one that offers many options in various countries around the world. Last year in the U.S., foreigners made direct real estate investments of $4.6 billion. Of those investors, 25% were European (U.S. Bureau of Economic Analysis). Clearly, factors such as the currency exchange rate and supply and demand characteristics of national and local real estate markets have encouraged foreign investment in the U.S. Furthermore, land availability, zoning and planning regulations, relative availability of financing, and the country's economic state has increased demand, especially in cities such as New York, Washington D.C. and Chicago. Diversification is perhaps the most prominent rationale for foreign investment. Ibbotson Associates, a Chicago investment research firm, recently studied international real estate and concluded that foreign real estate should equal about 8 to 9 percent of an investor's portfolio. This may increase returns while reducing overall risk. Also, due to increasing demand for all properties (prompted by rising rents and occupancies) as well as low capitalization rates, cities such as Chicago and New York offer opportunities in every property type while still maintaining liquid real estate markets.

Chicago, specifically, has experienced an influx of foreign investment in both commercial and residential real estate. With increasing demand for commercial space as well as emerging trends in residential real estate such as condo-hotels, there are many opportunities for unique investment options.

Still, it seems as if Poles are reluctant to venture into real estate deals in the U.S., including Chicago. The general perception in Poland is that the exchange rate is currently fantastic for investment as is the overall U.S. economy, but apprehension still arises when faced with the decision of where to invest.

"Investing in the US is very ambitious for most Poles. They tend to go to the eastern [European], less developed countries for investment," says Jakub Benke of Starcom MediaVest Group, a major marketing firm based in Warsaw.

As the strong real estate development trend continues in Poland driving prices up and profits down, Poles may consider diversification into the U.S. market a lucrative, rather than intimidating, investment opportunity. Despite emerging European markets, the U.S. real estate market is diverse and relatively liquid - a historically safe investment.

Although Poles may not comprise the largest foreign investor group in the U.S., they are avidly pursuing real estate deals in Poland and other eastern European countries. In Poland, cities such as Gdansk, Gdynia, and Sopot are commanding more accommodations as local citizens move from outer areas into the cities and suburbs. Prompted by increasing employment opportunities, more and more cities are seeing this trend. As a result, rental stock is in demand and yields substantial returns, in turn encouraging investment.

Other eastern European countries, such as the Ukraine, Bulgaria, Croatia, and the Czech Republic, are also experiencing more development and attracting yield-hungry investors. Many of these countries are new to the EU and as a result, are on their way to stabilize and modernize their economies. For this reason, Polish investors are looking at the less developed countries in pursuit of lucrative projects. The dominant trend is to purchase vulnerable properties, especially office space, and rehabilitate them to current standards. The ultimate goal is to then lease out these properties as the rental market continues to grow and eventually produce 15-30% annualized profits by selling the properties for higher prices.

Poland is currently one of the most successful nations at attracting and retaining foreign direct investment. The majority of that investment activity is centered in the residential property market, primarily in Krakow and Warsaw (Ezine Articles).  Last year, foreign investment in Polish property doubled from 2004 to $3.5 billion (Cushman & Wakefield Inc.). New property investors are settling for annual returns below 7%, far below the double-digits collected in the 90s. Still, this is better than the ever-thin returns in the U.S. and other Western countries.

A wave of capital from both the American and European pension and investment funds is currently flowing into eastern European countries including Poland. However, as prices in this market rise, investors have begun to look to even riskier markets, such as Bosnia, driving up prices and in turn, pushing down profits there as well (WSJ). Although real estate experts predict a correction within the next five years, real estate development is at its peak with no sign of a slowdown. Furthermore, despite the risks associated with some of these more unstable countries, there often is not enough property in these markets to meet foreign demand.

Still, the U.S. is considered the "strongest and most stable country for real estate investments by a wide margin," (TIAA-CREF Asset Management). U.S. real estate was also ranked as having the highest potential for capital appreciation. Foreign investors may rely on various benefits depending on their respective country of residence along with market conditions at the time of investment. Factors such as exchange rates, tax differences, and general holding periods are important to consider when engaging in investment decisions. Moreover, the U.S. has obtained and more importantly, maintained, a solid reputation as a safe place to invest in despite economic and political changes within its boundaries.

The relationship between the U.S. and Poland is one of mutual interest. As more American and European companies establish a presence in Poland and acquire real estate, in turn creating jobs and aiding the Polish economy, the investment portfolios of many Poles will continue to expand and diversify. Furthermore, as more foreign investors choose the American real estate market to diversify in, the U.S. will continue to lead in investment potential and consistently encourage new ventures. Having similar economic expansion goals, albeit in different stages of development, these two countries will undoubtedly continue to support each other in real estate investment.

 
 
 
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