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Global Entry Vehicles

Office is the most standardized product, but there are other ways to build an international portfolio

As global real estate investing has exploded-- trans-border deal volume (excluding multifamily investment property) rose by 33 percent in 2006, to a record $645 billion, according to Cushman & Wakefield Inc.—so have the challenges. It takes more than due diligence on local conditions and regional economies to decide which overseas markets have the most potential. Investors must also think about what property type makes the most sense.

Pros and Cons of Different Property Types

Property Type Pros Cons Office Standard structures Tenant familiarity Strong liquidity  Volatile supply/demand Competition for assets Retail less volatile than office growth opportunities global retail credit Local expertise needed Small assets Limited liquidity Industrial Standard structures Tenant familiarity Less competition for assets Lack of inventory Limited liquidity Residential (for-sale) Built-in exit strategy Growing demand in emerging markets Local expertise needed Residential (rental) Growing demand for housing in established and emerging markets Local regulations regarding tenant rights/rent control

 

Traditionally, the easy answer has been to stick with office properties. “Office is the most standard product type across the world," notes Lee Menifee, a senior director in CBRE Investors Los Angeles office. "An office building in Shanghai is not too different from one in L.A. because the structure and property management is similar."

Investors often put industrial properties in the same category, says Menifee. That’s because of a growing global logistics industry, which is based on container shipping, says Youguo Liang, managing director and head of global research for Prudential Real Estate Investors. That system requires standardization. "Industrial is not the first sector that investors would think about, but for the more sophisticated investors, industrial often provides better yields because the sector is ignored," he says. 

Retail and residential tend to be more localized—a shopping center in Bucharest is not like a strip mall in Burbank. "With retail and residential, you have to think about how much local expertise you're going to need," Menifee cautions. “You can't just buy a retail asset overseas and assume it will perform. For an investor without a major presence on the ground, it's almost impossible to make it work.”

On the other hand, in the 15th annual AFIRE Foreign Investment Survey (see “Investment Notes”) top international investors say that their second most popular property type in their portfolios is retail. On average, office accounts for 50 percent of the respondents' portfolios.

According to PricewaterhouseCoopers, in 2006 office properties accounted for nearly half of all cross-border investment and hotel investments represented the second largest sector at 20%, edging out retail and industrial. But a few years back office investments represented as much as 70% of cross-border deals.

Kraig Kast, CEO of Atherton Trust, a Redwood Shores, Calif.-based wealth-management company, clearly favors office property for global investing. "We feel more comfortable in office because of the similarity of assets and the types of tenants we work with in those properties," he says. Atherton manages commercial real estate funds totaling more than $200 million with assets in Asia, Europe and Latin America.

By contrast, Kast says, cultural factors enter the equation when you consider retail in other lands. "The things that attract people to a certain type of retail in foreign countries are different than what attracts people in the U.S.," he notes. "We really don't understand the tenant mix and what makes them work, and we haven't been able to hire anyone who can bring that expertise to us."

So, Atherton Trust continues its hunt for office investment opportunities in India through its Asian fund, Kast says. He finds Bangalore, home to many multinationals in India, particularly promising. These are the kind of clients his analysts understand and the kind of properties they know well. "Our plan is to find an American or European company that wants to expand, and we'll go in with long-term lease agreements with credit-worthy tenants," he notes. 

"Buying assets where the tenants are the local subsidiaries of a multi-national company is always an easy way to go," says William Benjamin, managing director of Apollo Real Estate Investors. "Unfortunately, those opportunities aren't always available."

Overall, however, the enormity of the office market provides inventory and liquidity, notes Liang of Prudential. "Investors have more options,” he says. “And, when it comes to exiting the market, there's consistent demand so liquidity is not an issue."

Still, with global cap rates falling in office properties, some of the biggest investors are expanding their global footprints via retail—usually by teaming up with strong local partners. These include Apollo Real Estate Advisors, GE Real Estate and ING Real Estate Investment Management, all of which made significant retail acquisitions in 2006.

In 2006, GE Real Estate Central Europe, for example, acquired a portfolio of 16 hypermarkets in Poland from Groupe Casino, a French hypermarket operator, for €555 million. The acquisition doubled GE Real Estate's presence in Poland.

When Apollo Real Estate did its first deal in Moscow last year, it took the retail route, acquiring a three-year old shopping center. "We're definitely biased toward retail," Benjamin admits, adding that roughly 50 percent of Apollo's global portfolio (about $450 million) is retail, including shopping centers in Glasgow and Los Angeles and a stake in New York’s Time Warner Center. "We tend to find that retail is more defensive because retailers will commit to longer leases," he says.

Benjamin also acknowledges that retail properties can be more management-intensive. "That's why we always enter a local market with a joint venture partner," he points out.

ING Real Estate's European investments were concentrated in the office sector, until recently. In  2006, however, the investment manager became the largest buyer of retail properties in Europe, investing €3 billion. Management remains aware of the challenges, says José Borrégon, country manager for Spain and sponsor of the company's Global Retail Platform. "Retail is the most difficult asset class and you have to combine local competence with global strategy," he says.

GE Real Estate Europe entered Turkey by acquiring a $50 million stake in Garanti Gayrimenkul Yatirim Ortakligi, A.S, an Istanbul Stock Exchange-listed REIT that invests in commercial real estate assets and development projects in the retail and residential sectors. It currently owns six properties in Istanbul and Antalya, Turkey and Bucharest, Romania.

"The demand for retail is just huge," says Jeremy Eddy, director of European retail capital markets for Jones Lang LaSalle. "If you have specific retail management skills you can add value pretty quickly." JLL counted €26 billion in retail deals in Continental European last year, up 77% from 2005 and more than three times the 2004 rate.

Copyright 2007, Prism Business Media. All rights reserved. This article is protected by United States copyright and other intellectual property laws and may not be reproduced, rewritten, distributed, re-disseminated, transmitted, displayed, published or broadcast, directly or indirectly, in any medium without the prior written permission of Prism Business Media.