'99 Global markets to survive economic melee Although caution always has been the better part of wisdom in overseas commercial real estate, could it now be a word to live by? Judging from industry-member feedback, chaotic economic factors and uncertain local market conditions have contributed to the widely cited implosion of international business attitudes - in real estate or otherwise.
Still, say some in the industry, there are just as many reasons to color future business with a somewhat rosy brush. While economic events of recent months might continue well into 1999, long-term success is attainable, they say, with smart investing and the ability to see the wider picture.
John Bralower, president of Sonneblick-Goldman Co., says the downturn in global markets could pose a slate of opportunities for real estate firms with the right positioning. One of the keys to evaluating reverberations from the global economic fallout, he says, is how much a given firm has exposure to the Asian market.
"It's a two-edged sword," he says, adding that U.S. firms are likely to see true investment chances after the dust settles. "With heavy-duty exposure to Asia, for example, firms may not be in a great position to invest right now. But part of how we affect world economies is where and how we as Americans invest. And it's clearly an incredibly opportune time for American groups to invest overseas."
Jeffrey Finn, president of Hightstown, N.J.-based New America International, agrees, acknowledging market volatility and how investors will need to learn to swim in rougher waters. "Recent market events have brought many transactions to a standstill," he says. "Markets are in the process of being reprised as risk, and return profiles have changed substantially. Unlike public equity markets, the results are not visible as quickly, so it will take some time for sellers to adjust to the new market."
Global investors should look to events in the United States over the past 10 years and see how markets and business can rebound, according to Jim Quille, chairman and CEO of Lend Lease Global Properties - the global real estate arm of Atlanta-based Lend Lease Real Estate Investments.
"There is no doubt that whenever instability occurs, it brings a degree of nervousness," he says. "When that occurs, those who can have solid, research-driven decision making can make a lot of money."
Where should investors go to market? With confidence shaky and overall markets in somewhat of a holding pattern, the cycles in Asia are arguably garnering the most press. Asian market conditions are often the embers that can spark either large sell-offs or sizable gains. According to John Coppedge, executive managing director for New York-based Cushman & Wakefield, investors can trace their worries in world markets back to Asia, where the threat of economic risk made its presence known.
"If you look domestically, the cracks really started happening in the worldwide economy in Asia," he says. "Americans' first reactions were, 'Well, this isn't going to affect us because the engine is running pretty well over here.' What we have seen happen is the larger firms that were dependent on import/export from Asia took a hard look at what was happening. That started to affect the service manufacturing side of it as well as financial markets."
Asianconsummation presents a challenge because the transaction parameters are not nearly as defined as in the United States, says Bralower. "It's hard to know exactly what the rules are," he adds. "Given what's been happening in the capital markets, the concept of investing in places where they don't have bankruptcy laws makes any kind of capitalist investment a dicier game."
Despite how Asia may still be an uncertain real estate vehicle, Quille notes that the region still could house investment possibilities. Success depends in part, he says, on increased market transparency.
"As those economies put quite a degree of transparency into both their public and private enterprises - which they must do in order to entice global capital back - there are going to be almost one-off opportunities to acquire properties or companies that, under normal circumstances, would not be available," he says. "We think there are some great opportunities emerging in Hong Kong and Singapore. A bit further down the track, perhaps Japan [will show some positive signs]. Other countries will be a fair bit behind that."
Finn agrees that, despite higher-than-average risk factors, Asia and Latin America are both showing promise. "We see tremendous mid- to long-term opportunities in both Latin America and the Asia Pacific region," he says. "While the risk profile is generally high throughout the regions, well-timed selections of assets in prime locations will yield strong returns."
Coppedge notes that, although institutional investors are not likely to look at Asia in the near term, other markets such as Europe have become more attractive. "You've got the institutional investor looking at the more mature parts of Europe," he says. "London, Paris and Brussels, for example, are markets that U.S. REITs have moved into. It will be interesting to see if they stay, but we have never had REIT money looking at Europe until about eight months ago."
Bralower notes that certain markets in Europe will emerge as strong, reliable contenders in a tight market. "Paris will be great long term," he says. "Ithink a lot of people have felt that it was a hard place to actually get a deal done but, for those who have, I think they've found Paris rewarding."
As an important subset of European property markets, the hotel industry seems to be setting the standard for international investment. According to its European Property Investment report, New York-based Jones Lang Wootton notes that hotels could well embody the true spirit of international real estate.
"Long seen as an arcane subsector of the property market, hotels may, in fact, hold lessons for the rest of the industry - the close relationship between investor and occupier, which other markets are now looking to achieve has been standard practice in hotels for many years," the report states.
"I think hotels is the property type that, at the end of the day, really lends itself to the international approach," adds Bralower. "For hotels, London is a very hot market right now. Some people feel it's reached its peak and it's cooling down now, but I think there's still room for good things to happen to London."
Quille emphasizes that 1999 should pose a number of interesting options in European markets and beyond. "Next year will be a turning point year," he says. "There are going to be some good buying opportunities in Spain, parts of France, Poland and, to a lesser extent, Hungary. And in the first six months of 1999, a number of solid opportunities will emerge in Singapore and Hong Kong."
Corporate America with worldly reach The question facing some of the larger real estate players is how best to position themselves for the future of global real estate. According to Coppedge, Cushman & Wakefield had been integrating with Europe-based Healey & Baker for some time, culminating in a $112 million merger in September.
"We had been integrating our services for some time," he says. "The official merger allows us to move our integration and globalization of real estate services to the next level, which is everything from our research function to ouractivities."
For the purposes of gaining international reach, both now and in 1999, Bralower suggests mergers are the preferred mode for global business expansion. "I can only liken joint ventures to human relationships," he says. "They might have fun for a minute but, unless there's a total 100% commitment, there are going to be a lot of problems and a lot of stress. So unless it's a well-crafted alliance, it won't work."
Finn disagrees, arguing that free-flow of information and fewer integration needs make alliances a more advantageous route for overseas real estate. "International markets are moving very quickly and rapid access to information and opportunities is vital," he says, adding that a network structure allows quick access. "Alliances can be as effective, if not more so, than mergers due to local-level commitment, integration of process and service delivery. We have built a global management, communication and information infrastructure, as well as an on-line process management system, which makes doing global business easier and more efficient for our clients."
Looking long-term If a cautionary mode does prevail in international real estate, it may only be for the near term, say some industry members. The chances for investment are there, they say, and it will take some economic stabilizing - coupled with appropriate government action - to right the capsized boat.
Bralower notes that a time of pulling back an international investment or development plan might actually lead to smarter, more aggressive decision making down the road. "I know of several groups who want to buy buildings in Asia and have not done it, partly because they can't figure out how to do it effectively," he says. "But they're getting ready, and it doesn't mean they won't do it. We're likely to see more of that happening in the future."
Quille notes that American real estate investors, albeit a smaller, more select group, are currently poised to survive increasing risk to a profitable outcome. "There is an amount of capital in the United States that can lead international investment," he says. "I think there are few U.S.-based organizations who are particularly well-poised to execute international investment well. Some of the Wall Street firms have presence in a number of markets but, beyond that, it's pretty difficult to see who else has the ability to access those markets in a way that's going to provide strong risk-adjusted returns."
The ability of local municipalities to react to and grow from these unpredictable times, says Coppedge, will drive global real estate opportunities in 1999. "The government reaction to market conditions should be in controlling future development, through zoning or planning regulations," he says, adding that the same problem is now plaguing Asia. "In the United Kingdom, for example - which has four or five regional malls - will not receive planning permission for another mall for the foreseeable future. Those countries that allow people to come in and do anything are dangerous, which is exactly what happened in Asia."
"Asia had all these huge buildings getting built, often with government encouragement, but with no tenants or significant infrastructure," he continues. "The planning and zoning process there will be key in the future."
"The main issue today is timing," says Finn, stating that what goes down often is a precursor for market upswing. "The markets will continue to be cyclical, and investors should work closely with service providers that have strong access and insight to local markets, to understand both the macroeconomic factors driving the region as well as the microfactors driving the asset."
Bralower suggests taking focus off shortsighted nervousness, adding that firms that get too bogged down in this skittish economy might lose sight of the big picture. "Success will be in having a long-term outlook," he says. "If a company feels the need to shift gears every two minutes - like an investor who watches the stock market and gets in and out every 10 seconds - then those companies are going to have problems in the coming international market."
"But if companies maintain their view of the long-term horizon," he adds, "I think they'll do very well."