As the globalization of real estate continues to grow, the need for professional property management and other skills is becoming even more critical. Economic reforms are rapidly transforming Central and Eastern Europe. The devaluation of the ruble and subsequent collapse of the banking system in Russia as well as similar crashes in Indonesia and Asia have resulted in a severe economic crisis. The speedy liberalization of prices and foreign trade, the establishment of convertible currencies, and permanent changes in corporate ownership through mass privatization and the attraction of foreign direct investment all are contributing to a changing environment abroad.
Moreover, as REITs turn their focus away from institutional-grade real estate in the United States, they're beginning to snap up properties in overseas markets. In doing so, they are expecting the same level of expertise they receive from U.S. property managers. By creating a standard of property management globally, investors can anticipate the same level of professionalism wherever they take their capital.
Moves are under way to establish this kind of worldwide platform, and one of the major laboratories is Eastern Europe. Representatives from the Institute of Real Estate Management (IREM(r)) have been active there since 1993, conducting training courses leading to the Certified Property Manager(r) (CPM(r)) designation as well as courses covering other aspects of real estate management. More than 4,900 students to date have attended courses in Poland, Russia, Hungary, Romania and the Czech Republic.
While countries in Central and Eastern Europe are progressing in their real estate management development at varying rates, they all provide avenues of opportunities for U.S. management firms that are ready and willing to pursue international expansion. Those foreign markets which appear to offer the most likely entree into the global marketplace include Poland, Hungary and Spain.
Poland has been attracting substantial foreign investment into real estate. In fact, according to a PricewaterhouseCoopers study, Poland has one of the fastest growing economies in Europe and is set to significantly outperform the overall European average in respect to all the key economic indicators over the next few years. New entrepreneurs are emerging in property management and, two nonexistent occupations under government ownership of properties. International companies such as Colliers are involved with offices in major cities.
Hungary is a country in transition right now, moving from a government-controlled to a private-property economy. There are shortages of quality office, industrial and retail space, and residential properties need substantial upgrades.
Spain is experiencing a pent-up demand for rental properties that are jut now being developed. With rent controls lifting, there is a substantial amount of construction expected. Condos are the dominant residential trend, with 88% of the Spanish population living in community association properties. American-style management services are needed for all property types.
With the tremendous opportunities that international expansion can provide, the challenge for U.S. real estate management professionals interested in getting a piece of the global pie is to maximize their services and expertise. Key to the success of building foreign business is establishing the right organizational structure to best prioritize and manage a global portfolio and creating a culture that fosters teamwork and maximizes the diverse talents of an international work force.
To adapt to this new global marketplace, real estate firms need to change their organization beyond just the structure of departments or reporting lines. They need to alter the way people think and act and change the way business teams work with one another. Real estate organizations must tapinto the brain power of people throughout the globe and empower them to make a d ifference.
One of the most powerful assets of a global company is the diverse, international group of people that work there. Too often the diversity of cultures and ideas is stifled by the corporate environment. In order for the global strategy to be effective, it must be built on the insight and participation of local markets and the experience of people throughout the organization.
Those real estate firms with an environment which fosters personal involvement, innovation and the continual exchange and creative use of knowledge across markets will be best able to take advantage of global business opportunities. Customized training, an awareness of cultural issues in different countries and an awareness of how they approach problem-solving are all essential to successful expansion efforts.
U.S. firms eager to explore overseas opportunities must first recognize that international relationships are a two-way street. They must learn to cultivate foreign partners, ideally with a local company. Obtaining local investment expertise, professionals and infrastructure is essential. The importance of being on the ground -- not with American expatriates, but with local professionals -- cannot be overstated.
Moreover, different cultures have different business practices, so it is essential to adapt to their ways of doing business. This often means learning the local language and culture. Managing these differences is an essential factor in determining global success for a U.S. real estate management firm.
Real estate has now become a global commodity. More likely than not, real estate firms interested in obtaining the greatest competitive advantage in the marketplace will be looking overseas. By developing an appropriate corporate culture, developing local partnerships and preparing themselves in terms of systems and processes, U.S. real estate management firms can successfully expand their reach into international markets.
As we all have witnessed first hand, the fast and furious market for real estate capital has undergone major transformations over the past few years. Although Wall Street-dominated lending is currently taking a breather, the heady days seem certain to return with greater attention to underwriting fundamentals and less reliance on structuring creativity. By weathering the convulsions and turmoil of the capital markets, securitization has shown staying power. There can no longer be any doubt that the use of commercial mortgage securities will remain a viable long-term financing vehicle.
It was not that many years ago that commercial financing was stratified based on risk profiles. At the conservative end of the spectrum you had life companies, typically seeking Class-A properties with strong tenancies coupled with low loan-to-values. Also, there were the savings and loans that seemingly lent too much money on anything that could be classed as property. Credit companies engaged in higher risk transactions with private money and a clear directive for achieving high returns. Whereas the credit companies specialized in commercial real estate finance, the S&Ls entered intoto accommodate relationships, often abandoning prudent underwriting, letting the personal interests of their directors dictate loan terms.
Somewhere among the life companies, the credit companies and the S&Ls, banks existed. Banks focused on local market lending and provided prudent/measured loans on multifamily and commercial properties supported by the personal guarantees of the transaction's principals.
Conduits, filling the financing void left by the S&Ls, initially entered the market seeking high margins on B-/C+ properties. Differing from the S&Ls, conduits conducted stringent due diligence. Rating agencies served as an external overseer of credit, and commercial mortgage securitization rapidly became an entrenched financing source. The conduit industry grew in short order from $4 billion in production in 1995 to upwards of $77 billion last year. Individual securitizations went from $150 million of pooled loans to more than $3 billion in a single offering. With the capital markets proving to be the cheapest cost of capital, life companies started to be squeezed out of the direct lending business instead purchasing the securities generated by Wall Street.
In the conduit world the playing field is much different today from what it was in early 1998. The numbers often cited were that only 15% of all commercial mortgages had been securitized vs. 65% or more of residential mortgages. Looking back, we see that the conduit business not only displaced traditional lenders by offering such attractive returns, but it also led to an artificial financing boom. Industry consensus is that roughly $50 billion in annual production is a sustainable level and that 10% annual growth is more likely the norm; equilibrium between supply and demand being essential in a "commoditized" business. By no means does the retreat of the conduit business from roughly $80 billion to $50 billion mean that there will be a liquidity crisis in term mortgage financing. Instead, financing will revert to the stratification mentioned earlier with life companies serving the upper end, banks providing construction and mini-perm financing on a recourse basis, conduits engaged in non-recourse term lending and credit companies filling out the spectrum.
A much more disciplined lending landscape that looks primarily to property fundamentals to achieve better subordination levels and better profitability will emerge. Gone are the days when deals could be priced at margin knowing that a declining interest rate environment would turn them into money makers over time.
Now that the structural aspects of securitization are better understood, investors will become more concerned with the soundness of the credit process underlying pooled collateral. Regional banks, along with select life companies and the major finance companies, will excel at this and be best positioned as the ultimate survivors in a maturing securitization market. The ability to warehouse loans on balance sheet until such time as a capital market execution is both possible and profitable is crucial. Brand identity will move to the fore as bond investors become increasingly concerned with an originator's credit culture and subsequent collateral quality. This will lead not only to better executions for originators, but increased liquidity for these investors.