When Metropole Zlièín, a 570,500 sq. ft. retail center in Prague, traded hands recently, it was accompanied by a title insurance policy. The buyer, a fund from Germany, purchased the guaranty from Stewart International for its first acquisition in the Czech Republic, well known to investors for its low prices and hefty rewards.
The high returns available through foreign investment often come with higher risks, cautions Dale Anne Reis, global director of real estate, hospitality and construction for Ernst & Young. She notes that many foreign real estate markets are not as transparent as investors need them to be. “Titles to land are not clear in many cases,” she emphasizes.
Investors, both from the U.S. and abroad, are willing to make the leap into riskier markets, but only with the safety net that title insurance provides. As a result, cross-border investment — the flow of capital from one country to another — is driving title insurers to expand their offerings into countries where they've never before done business.
“Investing in real estate in many foreign countries can be perceived as more risky than in the U.S. or even Western Europe,” says Joel Peck, senior vice president of Richmond, Va.-based Land America Commercial Services' International Group. “But investors no longer have to accept that risk when title insurance is available. If they're going there, we can make real estate deals easier and safer.”
Have title, will travel
Once only available in the U.S., title insurers now offer title insurance policies in far-flung locales such as Turkey and Korea. “Title insurance gives investors a degree of comfort beyond relying on a local system,” says J. C. Calder, vice president of international underwriting for First American Title Insurance Co. “Our growth is driven by existing clientele that is going to a new part of the world, and they ask us to come along with them.”
The Santa Ana, Calif.-based company's international title insurance revenues grew 46% to nearly $177 million in 2004, compared with $126.6 million in 2003, according to financial filings with the U.S. Securities and Exchange Commission.
In 2004, cross-border investment amounted to nearly $100 billion, according to Jones Lang LaSalle Inc.'s Global Real Estate Capital Report. Specifically, the report notes that cross-border investment in Asia-Pacific and Europe grew more than any other segment with European investment reaching $54.1 billion in 2004, a 70% increase compared to just four years ago.
As a result, Central and Eastern Europe have emerged as fertile ground for both investors and major title insurers. India and Asian countries such as Japan and Korea are experiencing increased demand for title insurance as well.
“The biggest change for our company has been the globalization of real estate and the opening of cross-border investment,” says Peck of Land America.
In an effort to grow its international business, Land America's strategy begins with domestic clients. “Our mission is to work with U.S. customers that are doing transactions globally,” Peck explains. “A large percentage of our customer base is doing business all over the world.”
Local expertise, global presence
Title insurers meet some resistance when introducing title insurance to new countries. In extreme cases, title companies have been accused of trying to Americanize a process that has been around in some countries for hundreds of years, and of pushing a product that is perceived as neither necessary nor wanted.
Title insurers argue that without title insurance, investors are forced to self-insure against any potential title issues. And a lot of these issues can arise from improper land conveyance.
Moreover, there's nothing like a little foreign investment to stir up local territorial sentiment, one source says. For example, if an investor buys land in Poland, there's the possibility that the land registry system may not record the proper chain of title at the time of the sale. Consequently, a claim of ownership — perhaps from a former heir — could be lodged against the new owner.
“(Investors) had no one to turn to if there was a claim,” Peck points out. “They could run up a lot of legal bills, spending money out of pocket to defend against the claim.” He adds that these types of claims can cause a default under the mortgage, or they can affect the liquidity in the property because the owner may not be able to sell the property.
Working the system
Rather than challenge the local government's system for title conveyance, Land America's approach is to work within the existing structure. “We work within the existing systems, and we use local counsel and the local notary,” Peck explains. From its offices in Geneva and Frankfurt, the company works with local counsel on title opinions to underwrite the risk.
Similarly, Fidelity National Financial Global Solutions based in Jacksonville, Fla., calls upon local resources when it's involved in insuring a title outside of the U.S., says vice president and manger Ed Heim. In fact, the company prefers to grow international business through its U.S. offices, utilizing existing sales people and producers rather than opening new offices outside of the U.S.
With a group of international specialists based in New York, the title insurer is able to insure a deal in Turkey as easily as it can in Texas. As a result, the firm's international revenue has grown 100% over the past 14 months. “We're doing it all from the New York office by using local expertise,” Heim says.
Land America and Fidelity National Financial's methods of growth are a marked contrast to Stewart Information International Inc., which has 15 offices outside of the U.S. in Asia, Australia, Canada, Europe and Latin America. In fact, the Houston-based company was one of the first of the title insurers to open an office in Turkey — although Land America, First American and Fidelity National Financial all offer title insurance in that country.
Since the international title insurance market is in its infancy, it's far too early to tell which title insurer is making the biggest foray into the international title insurance market. The companies that prefer to manage their international operations from a few select locations say that they're saving money, time and energy.
“We don't feel that we have to have a presence in every single country to communicate with our customers effectively,” Peck says of Land America. Stewart International, on the other hand, believes that the uniqueness of each real estate market requires a local presence and local solutions, according to a company spokesperson.
Industry experts even admit that it's difficult to wrap their arms around the true size of the market, although one source speculated that less than 2% of all commercial real estate transactions outside of the U.S. involve title insurance — meaning that the market potential exceeds $2 billion.
Minimizing the risk
The growing international title insurance market isn't driven only by American investors who are asking for title insurance, even though title insurance is a uniquely American invention. While many foreigners may not see the need for title insurance, global investors — ranging from traditional real estate investors to businesses that are conducting mergers and acquisitions that involve real estate — are clamoring for it.
“I am not convinced that the rest of the world wants title insurance, but I am convinced that commercial real estate players doing business on a global scale want title insurance,” says Heim of Fidelity National. “Title insurance brings a huge sense of comfort to our clients.”
In fact, Peck says that more and more investors are requesting title insurance because they aren't familiar with local laws and regulations. “I have seen a German bank ask for title insurance when making an investment in France,” he says. “They're confronting a different legal system, and they want the risk mitigation that we provide.”
In particular, investors look to title insurance in Central and Eastern Europe, where land registry systems are obsolete and decades of Communist rule have affected real estate ownership and conveyance regulations. However, the region's emergence as a booming title insurance market has caught some experts by surprise.
In fact, most title insurers initially believed that Western Europe, with its more established real estate markets, would generate the most demand for title insurance. A greater familiarity with customs, cultures and even language made Western Europe a less risky investment market in the eyes of investors.
Nonetheless, foreign investment in Central and Eastern Europe exceeded $2.6 billion for the second consecutive year, according to Jones Lang LaSalle. In fact, 31% of all international investment is directed toward Central and Eastern Europe, more than France, Germany, Spain and Belgium combined, according to an Ernst & Young investment survey. Studies suggest that Western Europe's economic promise doesn't compare favorably with former Eastern bloc countries.
“We're seeing more opportunities in Europe, especially Central and Eastern Europe because, when you look at these countries, there is a still a degree of concern that they are less developed systems, and investors have less confidence in them,” Calder says.
Poland, the Czech Republic and Hungary, for example, are expected to show the best economic growth opportunities, according to ING Real Estate Investment Management's “European View,” a quarterly market report. Over the next two years, a 5% growth rate is forecast, as cities such as Prague, Warsaw and Budapest appear on investors' radar screens, although not necessarily replacing more familiar investment locales such as London, Paris and Milan.
To that end, Central and Eastern Europe are rapidly growing markets for Land America, says Peck. “Because of the growth and investment activity, we are looking at devoting more resources to that part of the world,” he says.
Land America is not the only title insurer that is focused on Central and Eastern Europe. Stewart, for example, issued the first commercial title insurance in the Slovak Republic last August. The title guaranty, issued to HCEPP II, Heitman LLC's Central European Property Fund, covered a portfolio of office buildings located in Bratislava totaling more than 90 million euros, or $120 million, at the time of the deal.
Such large transactions in this part of Europe were largely unheard of, Calder says, but title insurance has the ability to change the capital markets. Acquisitions such as Rodamco Europe and ING RE Investment Management's recent buy of Zlote Tarassy, a 400 million euro shopping center and hotel project in the center of Warsaw, are easier to get off the ground with title insurance and safer for investors.
Similarly, title insurance could encourage new construction activity in emerging economies like Poland and the Czech Republic. New projects such as Denver-based Prologis' logistics hub in China could obtain financing much more easily and quickly with title insurance, industry experts say.
East to the Orient
Beyond Europe, investors also see the upside in Asia, Reis says. In Japan, for instance, investors are increasing their stakes in property firms and REITs, and creating more demand for title insurance. At the same time, the REIT market continues to grow beyond $14 billion in 14 REITs. Meanwhile, Korea's burgeoning securitization market, not to mention its REIT sector, also is creating a market for title insurance.
First America has fully operating offices in Hong Kong and Seoul. “We are doing work there both with local companies, for example, Korea First Bank, as well as directly with U.S. companies,” Calder says. The company has insured many high-profile projects in the area including the Dongyang Building, a trophy property in Seoul's CBD.
Elsewhere in Southeast Asia, India's government has been working to change its foreign investment laws and regulations to encourage more investment from outside the country. In February 2005, that work was rewarded by landmark legislation that allows foreign direct investment in Indian real estate. This legislation is anticipated to inject more than $1 billion dollars annually into India's development and construction industry, according to Reiss.
In fact, India has displaced Mexico as the third most preferred country for foreign investment, according to a recent report by Ernst & Young. Moreover, foreign investment in India is expected to reach $15 billion this year, triple the 2004 investment volume.
“We're seeing major U.S. investors go to India to do major development,” Peck says, adding that the country's economic growth and strong middle class is driving investment. “We don't have any offices in India, but we're looking at it now when we wouldn't have a year ago.”
Development opportunities — and therefore title opportunities — in India range from office campuses to retail centers to multifamily housing. For example, the country's growing information technology sector is expected to reach 50 million to 70 million sq. ft. over the next two to three years.
Indeed, the reach of title insurers is growing daily due to cross-border investment. Three more Eastern European countries — Bulgaria, Romania and Croatia — hope to join the European Union in 2007 and thus become more politically and economically attractive to investors. There's also a strong expectation that title insurance companies will have new markets to tackle — on nearly every continent.
Jennifer Popovec is a Fort Worth, Texas-based writer.