A very American homecoming

US investors have stepped up their investment in the UK market, a new study shows, thus confirming the anecdotal evidence of a recent spate of deals. DTZ Debenham Thorpe, in its annual report on overseas investment in UK property, concludes that more than £780 million sterling worth of US money flowed into UK property last year, up from £80 million in 1996. Indeed, US investors are quickly catching up with the most active foreign investors in UK property, the Germans, providing 19 per cent of non domestic money compared with the Germans' 25 per cent."There has been a real step change in American investment," says Peter Evans, director of research at DTZ. "They have been here kicking the tyres for years but 1997 was the first year we have seen them come in comprehensively."The collapse of Randsworth Trust in 1991, a UK fund backed by US pension schemes, had long been viewed as an almost permanent deterrent to serious US involvement in UK property.The US activity occurs against a backdrop of rising foreign property investment overall, with one quarter of all investment coming from non-domestic buyers. In 1997, director overseas investment in UK commercial property totalled £4.1 billion, nearly double the previous year, and higher than that in any other year on record.Moreover, investors are showing an increasing propensity to seek bargains outside the traditional "trophy" areas in the City and West End of London. Roughly a third foreign investment was placed outside London, against an average of 19 per cent in the years 1988 to 1996.The study raises two questions; first, what accounts for the surge in foreign - particularly US - investment in the UK and second, what effect is this investment likely to have on the way the local markets operate?The first question is easier to answer. US institutions, pension funds and insurance companies, have been very slow to diversify investments outside their own borders, even for more liquid and transparent products such as bonds and equities. But the fall of the dollar in 1985 encouraged these institutions to seek higher returns in foreign currency bonds, and by the mid-1990s that had expanded to equities.While the average US pension funds held no more than 5 per cent of total assets in foreign equities just a few years ago, the average is now closer to 10 per cent, with some of the largest funds holding close to 20 per cent in foreign shares.Roger Orf, managing director of Pelham Partners, UK offshoot of Apollo, the US opportunity fund, says US investors, having become accustomed to portfolio diversification for stocks and bonds, now find it easier psychologically to consider property.But there is another issue. "The reason they are coming over here is that opportunities are drying up at home," Mr Orf explains. The US property crash in the early 1990s allowed the most opportunistic investors to purchase assets at rock bottom prices, with even average returns totalling 20 to 25 per cent.Now, with the recovery of the US market, returns are between 15 to 20 per cent. According to Lehman Brothers, the average US Real Estate Investment Trust turned in a 21 per cent return in 1997, underperforming the broader market. With returns no longer spectacular at home, canny investors want to go abroad.But predicting the effect that this rising tide of foreign money will have on UK property is far more difficult. For one thing, there is no guarantee that it will remain here. Money may one day flow out as quickly as it flowed in, causing property values to whipsaw. "Does increased cross-border activity inherently increase volatility?," Mr Evans asks. "We don't know."Moreover, there are questions about whether the "weight of money" might distort property values over time, leading to a general acceptance of lower yields.And, perhaps most important, will foreign money, particularly from the US, cause structural changes in market operation?The effect of US investment in European equities has hastened the export of US type corporate governance movement, forcing structural changes in the way boards behave. Will US investors begin demanding the levels of transparency they find in their home markets? Will they begin using US type measurements of value to analyse a property's worth?It is clear that no market can remain immutable in the face of changing demands of its participants. But undoubtedly, UK investors will also have to adapt to new ways of doing business.