The poet Robert Frost said the road less traveled made all the difference. Heitman LLC, a $12 billion real estate investment management firm, would probably agree. In 1995, the Chicago-based firm made a bold decision to enter the Central European market when few firms were willing to risk capital in the recently de-Sovietized regions.

Since then, under the tutelage of managing director Chris Merrill, Heitman has built a significant European infrastructure with 40 employees and offices in Warsaw, Frankfurt, Luxembourg and London. The firm manages about $1 billion in real estate in the Central European region through two funds comprising about $300 million in equity. In late 2003, after eight successful years in Central Europe, Heitman decided to enter the Western European market. NREI recently talked with Merrill about Heitman's strategies in Central and Western Europe and the changing European real estate landscape.

NREI: Why did you first go into Central and not Western Europe?

Merrill: Most real estate firms went into Western Europe first, but we saw Central Europe as an exciting opportunity for our investors. The market did not have capital and there was a tremendous need for quality office, warehouse and residential space. You had a situation where multi-national consumer good companies, and all the service firms that supported those companies, really needed space to operate. We were very excited about the risk-adjusted returns that we believed could be achieved.

NREI: What are the risks and rewards of doing business in Central Europe?

Merrill: The benefit to investing in Central Europe is the yield arbitrage between properties there and similar markets in Western Europe. A typical property is trading 150-400 basis points higher in Central Europe than in Western Europe. As we have seen over the last five years, yields have compressed and we believe will continue to compress closer to those in Western Europe. Our investment strategy is one of getting paid to wait for the markets to mature until they become closer to similar markets in Western Europe. Now that Central Europe is part of the European Union, a lot of risk has been removed from the investment.

NREI: What led you into Western Europe in 2003?

Merrill: We entered Western Europe after becoming the market leader in Central Europe. We were approached by First Islamic Investment Bank of Bahrain, a syndicate of Middle Eastern investors interested in developing a program in Western Europe. We set up a $350 million logistics fund called Crescent Euro Industrial to buy fully leased warehouse distribution properties. We felt that the combination of our skill sets and the team that we had created could take advantage of the opportunities in France, Germany and Italy.

NREI: Why the logistics and warehouse focus in Western Europe?

Merrill: We think the yields and the price related to replacement costs are attractive. There have been structural changes in Europe, like the expansion of the European Union and the formation of a single currency, that we believe will lead to long-term growth potential for those markets.

NREI: What kind of returns do you expect on your investments in Europe?

Merrill: We're looking to receive a 15-18% internal rate of return on our programs in Europe. That's what we're getting in Central Europe, where it's more a value-added strategy. In Western Europe our strategy is more of a core-plus. The U.S. returns are comparable from a yield standpoint.