With retail real estate assets in the U.S. fully-priced, more investors are looking overseas in search of bigger returns. They've been emboldened having witnessed the early successes of REITs like Simon Property Group, Taubman Centers Inc. and even embattled Mills Corp. Today, the pool of players investing internationally is to the point that large institutions and funds are joining REITs in buying afar.

At one time, U.S. investors lagged in the race for global investment opportunities, but no longer. In 2005, they dominated the European markets, with much of the $13 billion they invested last year flowing into Germany, France and the U.K., according to CB Richard Ellis.

The emergence of stable markets around the world is also causing foreign funds that had been flowing to real estate in recent years to be redirected to these same developing markets. In 2006,the percentage of the $45 billion that members of the Association of Foreign Investors in Real Estate (AFIRE) expect to spend in the U.S. will drop to 47 percent. (AFIRE members have $475 billion invested globally.)

Some say that's a good thing, especially when the investments are made in collaboration with partners who understand the local culture and own some of the local land. “It makes perfect sense, considering that America is over-retailed,” says Jim Keagy, managing director of Barclays Global Investors in San Francisco. Meanwhile, opportunities abound elsewhere.

“Whether they're Russian, Australian, German or American, there are a tremendous number of investors out there who are targeting retail,” says Noble Carpenter, international director for Jones Lang LaSalle. “As an asset class, it's at the top of the heap.”

Capital flows from U.S.

Certainly international investment has been a topic of conversation for several years. The big change today is that more investors are no longer just talking. They're actually on the ground, seeking out opportunities through the acquisition of existing buildings, the formation of joint ventures or the establishment of new offices. The most common custom: joint ventures.

Late March, Morgan Stanley Real Estate opened an office in Shanghai, about five years after making its initial investment into the Chinese real estate market. The institutional investor partnered with Simon Property Group Inc. and SZITIC Commercial Property Co. The trio plans to build Wal-Mart-anchored retail centers throughout China's Yangtze River delta, which includes Shanghai, and will break ground on five centers within the next seven months

For now, Simon is content to oversee the partnership from it headquarters in Indianapolis, leaving the day-to-day operations to Morgan Stanley and SZITIC, says Stephen Sterrett, Simon executive vice president and CFO. The REIT doesn't have any people on the ground in China permanently, although four Simon team members are spending a “fair amount of time in China” and may eventually move, he adds.

The REIT also holds partial ownership of retail assets in France and Poland and is expanding in Japan and Korea through Chelsea Property Group. Today, about 4 percent of Simon's income is generated from properties outside of the U.S., according to Sterrett.

“In every instance [of global expansion], we have had a very strong partner who brings a lot of intellectual firepower,” Sterrett says. “We don't pretend that we have anyone in our organization that is smart enough to tell us what is a good site in China. The key is marrying the capital capacity and operating experience of a company like Simon with a partner who has people on the ground who know the lay of the land.”

Simon and Morgan Stanley, which together have spent $1.5 billion on Chinese real estate since 2001, are just two of a number of large institutions that are increasingly interested in investing in real estate outside of the United States, particularly retail real estate.

German funds, for example, are increasing their allocations to Japanese real estate, while Australian investors are looking at Europe and Asia. The British are taking advantage of an expanding EU by investing in Central and Western Europe.

A new report by CB Richard Ellis says $173 billion were invested in European commercial property in 2005, a record-breaking 40 percent increase over 2004. More than half that took place in the U.K., with another quarter of the total in France.

Jewel in the crown

Investors, both private and public, are increasingly attracted to retail properties in Europe and Asia. “Retail continues to be the jewel in the crown as retail parks and shopping centers tie for first position for total return prospects by sector,” according to a PricewaterhouseCoopers report.

“In general, global investors have strong interest in retail properties,” says Richard Price, managing director of ING Real Estate Investment Management. “There's a lack of retail outside of the U.S. and the mall concept is relatively new. Many countries need more suburban retail with entertainment elements.” Specifically, Price points to secondary markets within the United Kingdom, Southern Europe (Spain, Portugal and Italy) and most of Asia.

PROJECTED CAPITAL FLOWS TO REAL ESTATE STRATEGIES, 2005 VS. 2006
Sector 2005
Mean (%)
2005 Projected
Capital Flows
($ Billion)
2006
Mean (%)
2006 Projected
Capital Flows
($ Billion)
Private Equity (Core) 38.7 $19.9B 21.8 $12.9B
Private Equity (Value-added) 20.5 $10.5B 26.2 $15.5B
Private Equity (Opportunistic) 23.7 $12.2B 26.7 $15.8B
Private Equity (Mixed) 0 0 5.7 $3.4B
Foreign Real Estate 8.4 $4.3B 10.3 $6.1B
REITs 5.8 $3.0B 5.2 $3.1B
Other 2.9 $1.5B 4.1 $2.5B
Total Capital Flows 100.0 $51.4B 100.0 $59.3B
Source: Institutional Real Estate Inc.

ING Real Estate has placed professionals in Milan, Lisbon, Hong Kong and Singapore in order to source deals, Price says. In southern Europe, the company hired a couple of locals and then grew the offices and investment portfolio around them.

Leaning on locals

ING Real Estate, like many institutional advisers, has millions of dollars to spend on non-U.S. retail properties. In fact, institutional investment managers plan to invest $6 billion on behalf of pension funds, endowments and foundations, according to a recent survey conducted by San Francisco-based research firm Kingsley & Associates and Institutional Real Estate Inc. They found that institutional advisers expect to spend $2 billion more in global real estate this year, roughly 10 percent of the overall $59 billion in assets they have under management.

GE Real Estate, for example, recently acquired three shopping centers in Slovakia from development companies EuroMax a.s. and SlovakiaMax a.s., adding to its $1.2 billion of investments in the region, which includes assets in the Czech Republic, Poland, Hungary, Slovakia and Bulgaria. The U.S.-based investor also purchased a shopping center in Madrid.

Similarly, another U.S.-based institutional investor, Heitman LLC, recently closed a $410 million fund focused on Central and Eastern Europe including Poland, the Czech Republic, Hungary and Slovakia. The firm is looking at even more far-flung locales such as the Baltics and Turkey, says Lewis Ingall, Heitman executive vice president.

“Our investing in retail in Central Europe is part of a diversified approach for the funds we've raised,” Ingall says, adding that Heitman's retail deals are done in joint ventures with European operating companies. “Leasing contacts are the key to retail and you have to team up with people that have these contacts.”

Like Heitman, most institutional investors find seasoned partners outside their home countries. The Mills Corp., for example, jumped into the global real estate market in 2002, partnering with a local Spanish firm to develop Madrid Xanadu outside of Madrid. And though it's hit upon hard times domestically due to accounting woes, Mills' international work has been successful.

The REIT followed with the acquisition of St. Enoch Center in Glasgow, Scotland in collaboration with Ivanhoe Cambridge and outlined plans to redevelop an historical site called Mercati Generali in Rome. And, just last year, Mills Chairman and CEO Larry Siegel said the REIT was searching for additional development opportunities in Italy, Spain and Singapore. But accounting irregularities and poor financial performance compelled Mills to scrap all its international plans except for St. Enoch and Mercati Generali. Mills wouldn't comment for this story.

Similarly, Australian investors such as Galileo and Macquarie Bank Ltd. fine-tuned the partnership strategy through their efforts to expand into the U.S. Today, these investors are heading to Europe and Asia. “Our partnerships in the U.S. with Regency Centers and Developers Diversified Realty worked well because they brought complementary skills, rather than competitive skills,” says Mark Baillie, head of real estate for Macquarie North America and Europe. “We bring capital-raising skills, and our partners bring local market knowledge.”

Right now, Macquarie is focusing on Europe and China and has teams on the ground to search for the right partners and the best opportunities, Baillie says. However, he expects that the company will establish many partnerships as part of its Pan-European expansion. “In Europe, the retail real estate market is much more fragmented than the U.S.,” he explains. “In the short term, we could have country-by-country partnerships until we can buy small management teams.”

Additionally, Baillie is moving to London in June to build Macquarie's European office. “We look to local expertise and understanding, but it's a balance to infuse it with the company outlook,” he notes. “Our track record in the U.S. is a good case study of what we hope to achieve in the European and Asian markets. But, it might take us a little longer.”

For its Asian activities, Macquarie has tapped DDR, its longtime partner in the U.S. The two firms have hooked up with a Chinese developer and are looking at several development sites that the local partner already had locked up, says Tim Bruce, DDR executive vice president of development.

As of mid-April, DDR hadn't made firm commitments to any specific projects in China, Bruce says, but is particularly interested in one development that would include an enclosed mall and parking structure as part of a mixed-used complex.

“Once the papers are signed, we'll open an office in Shanghai and staff it with DDR people from the states,” Bruce says, adding that the project has a three-year timeline. “It's a sizeable investment in both capital and time.”

Simon and DDR aren't the only U.S.-based REITs that are making significant investments in foreign markets. Another destination: Latin America. Both General Growth Properties and Kimco Realty Corp. have made inroads into Central and South American markets. Moreover, General Growth has looked deep into Asia, with plans to buy and build centers in Turkey. Neither would comment for this story.

Also, Bloomfield Hills, Mich.-based Taubman hired Morgan Parker, a former Morgan Stanley executive, to head up Taubman Asia, its Asian operations.

Working out of Hong Kong, Parker is overseeing a staff of 10 people who are evaluating half a dozen retail projects in South Korea. “All of the projects in Asia will be with a partner,” he says. “To execute a deal in a foreign market, it's important to have a local partner because they will likely bring land and have the ability to get the approvals.”

In the last year, Parker says he's looked at 50 deals by leveraging resources in the U.S. and in Asia. The REIT expects to nail down at least one project in the next 12 months and hopes to commit to as many as two projects annually going forward.

Parker says that Taubman is actively looking at opportunities in China, Japan and India, although it is not close to announcing a deal. “In the U.S., we work on transactions for three or four years on average — some projects take a decade,” he points out. “Asia is no different for us.”

A Different Approach

Westfield does international growth its way.

Compared with most institutions and REITs investing outside of their home countries, The Westfield Group has a unique strategy. The Australia-based REIT generally eschews joint ventures with local operating partners when entering a new market, preferring to staff its global offices with American and Australian executives and build the business from the ground up.

“Partnering is an effective way to source deals, but it's not the only way to do it,” says Noble Carpenter, international director for Jones Lang LaSalle.

By all accounts, Westfield's strategy has been more than successful, says one industry expert who declines to be identified. “It's terribly difficult to get an international operation up and running without having someone local hold your hand,” he says, “but Westfield has made it work for them.”

The company is far more experienced than other retail REITs when it comes to international expansion, having entered the U.S. market in 1977 with the acquisition of Trumbull Shopping Park in Trumbull, Conn. (The REIT still owns the center.) “It takes a lot longer to build a presence the way we do it,” acknowledges Peter Lowy, group managing director of Westfield. “But, the way we look at it is that we're not giving away half of the upside.”

Since then, Westfield says, buying opportunities have come its way. As the biggest REIT in terms of market capitalization and biggest retail real estate owner internationally, it hasn't had to go hat-in-hand to find partners who would share in any upside return. Also, Lowy says, Westfield doesn't want to dilute its corporate culture.

Today, Westfield owns 68 shopping centers in the U.S., in addition to seven in the United Kingdom, 11 in New Zealand and 43 Down Under. When Westfield entered the U.K. retail real estate market 10 years ago, it brought on an Australian to run the local office. “We had a small team on the ground in the U.K. before we bought our first property,” Lowy says.

In 2000, the REIT ended up buying ownership interests in several existing retail assets from the Post Office Staff Superannuation Scheme, a U.K.-based pension fund and MEPC plc, a local developer. Today, Westfield has the largest development/redevelopment pipeline in the U.K., Lowy says. Moreover, the REIT has about 250 people in its U.K. office and 450 people at both its global headquarters in Australia and its office in the U.S.

Lowy notes that Westfield will use its existing offices to expand into new countries. “We could use our U.S. operations to go into Canada and our U.K. office to penetrate the rest of Western Europe,” he explains, adding that the REIT is not looking to invest in Asia or Central or Eastern Europe because those markets are not mature enough to provide opportunities to redevelop existing malls.
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