Guide to Global Real Estate

David Lawson - 2002

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HISTORY

1945-60 - postwar reconstruction creates European real estate industry

Sixties   -  Pension funds/insurance companies move into real estate

Seventies – Bretton Woods agreement ends – international investment expands           

Eighties 

-     Japanese investment  into Europe/US/SE Asia

-         Dutch funds expand across Europe/US

-         Scandinavian investors expand cross Europe

-         REITS take off in US

Nineties

-      Japanese withdraw to home markets

-         SE Asian international investment expands then eases

-         Fall of Berlin Wall opens up Central/Eastern  Europe

-         US/UK  vulture funds move into Europe/SE Asia

-         REITs suffer downturn then recover

2000-02

-    Global economic slowdown

-         REIT consolidation

-         Vulture funds continue European expansion

-         Occupiers/governments begin asset sale to private sector

OVERVIEW

There’s an old joke that the three most important factors in real estate are location, closely followed by location and backed up by location.   Professionals can’t see the humour. Of course looks are important, otherwise there would be no architects. So is interior design. But  for investors the critical factor is how much buyers or occupiers will pay – which in turn  depends on  a complex pattern of demand and supply.

  The balance varies not just from country to country, nor even city to city but right down to neighbourhoods and streets. Architects will  create almost identical buildings in Manhattan, Manchester or Montevideo but their value can be very different.. Local knowledge of the forces which determine rents and investment value is critical, which is why real estate has always been the most local of industries.

  Gradually, however, national boundaries are dissolving.  International diversification  took off in the 1970s following the demise of the Bretton Woods system (which had controlled capital flows) and other deregulation, according to a study by Prudential Real Estate Investors and  The UK College of Estate Management.  This was reinforced by developments in financial economics which showed how risk could be reduced by diversifying across borders.

  Real estate has played a significant role in the upsurge of international capital flows  both through direct development and investment in equities. Short-term investors have often been forced out of home markets when the  weight of capital exceeded local opportunities. Middle-eastern oil states and Japanese conglomerates made heavy inroads into the US and UK in the Seventies and Eighties, followed by the Dutch, Scandinavians, Germans and South-East Asians. Insurance companies and pension funds have become heavily involved as they seek to spread risk, improve long-term performance and use tax advantages.

Global Real Estate Markets

USA

Total Retail Stock

Not Available.

   

Total Office Stock

3.4 billion sq ft

   

Total Industrial Stock

11.0 billion sq ft

UK

Total Retail Stock

84,976,000 sq metres

   

Total Office Stock

63,556,000 sq metres

   

Total Industrial Stock

300,000,000 sq metres

   

France

Total Retail Stock

Not Available 

   

Total Office Stock

40,500,000 sq metres

   

Total Industrial Stock

40,000,000 sq metres (estimated)

Australia

Total Retail Stock

1,090,000 sq metres (urban area only)

   

Total Office Stock

2,647,000 sq metres (urban area only)

   

Total Industrial Stock

2,090,000 sq metres

Source: ONCOR

Global  Commercial Real Estate

 

GDP

($ bn)

Percent

of total

Higher-grade

commercial real

estate ($ bn)

Percent

of Total

Asia excl. Japan

2,693

9.8%

312

6.8%

Japan

4,103

15.0%

784

17.1%

Western Europe

8,956

32.7%

1,576

34.4%

Eastern Europe

636

2.3%

46

1.0%

Latin America

1,810

6.6%

177

3.9%

US and Canada

8,664

31.6%

1,598

34.9%

Others

562

2.1%

82

1.8%

Total

27,424

100.0%

4,575

100.0%

Source: Economist Intelligence Unit and Prudential Real Estate Investors

    Capital began to flow in the opposite direction as the 20th century closed. The fall of the Berlin wall attracted US interest to  former Soviet bloc countries but the main influence came from vulture funds swooping into the UK and France to take advantage of  cheap assets left by the widespread economic slump. By the turn of the century, foreign investors owned close to 20 per cent of French real estate after being involved in around half the transactions in the late Nineties. 

  This fell away as the world economy slowed but was still running at Euro 4.5bn by the third quarter of 2001, with US investors accounted for 45% of all cross-border investment in Europe, according to DTZ Research.. The UK attracted 38% of investment followed by France at 27%.

   Overlaying these ebbs and flows, major occupiers like  IBM, Mitsubishi, Coca-Cola and Microsoft have come to treat the world as a single market and demand similar provision of real estate everywhere. International mergers have reinforced this trend and the real estate industry has raced to match the demands. Advisors went through their own mergers, forming global networks like Jones Lang LaSalle, Insignia and CB Richard Ellis.

  They worked closely with financial groups such as Morgan Stanley, CSFB and Goldman Sachs in guiding US capital to new opportunities.  Even after the sharp economic downturn some $25bn was earmarked to flow into Europe and South-east Asia in 2001, although some of this could also be diverted into emerging markets like Latin America. Meanwhile Despite the slowing world economy, German open-ended investment funds need an outlet for more than Euro1bn pouring in from private investors every month. With around Euro50bn already invested in property ranging from British offices to Spanish shopping centres, the funds have looked again at opportunities in US real estate. Other buyers include Dutch pension fund managers, Israeli private investors and Australian investment funds. 

STRUCTURE

The change in approach to real estate investment still has a long way to go to erode  the traditional structure of the industry, however. Money flowing out of the US palls beside a total market worth around $3 trillion. The biggest players are Real estate investment trusts (REITs), tax shelters which captured the hearts of private investors and institutions alike, soared in value from $8bn to around $150bn in 10 years. They suffered setbacks in the late Nineties but came back into favour as technology stocks collapsed.

   Most focus on home markets but high net-worth players and institutional funds have spread their interest further afield over the last decade. Expertise gained in handling billions of dollars worth of property debts after the collapse of  the US savings & loan movement led the big financial groups to set up pooled funds which took advantage of similar opportunities in Europe, Japan and South-east Asia.

 At first they concentrated on distressed debt in countries like France but names like Security Capital, PRICOA and GE Capital became bolder, setting up teams to scour Europe for potential. They tend to buy portfolios or developers with the intention of selling out within five to seven years.

  Within Europe, Holland pioneered international investment by taking advantage of regulations that allowed companies tax transparency  provided they distributed all their income, says the CEM/Prudential study. Prime examples are Rodamco and Wereldhave. Open and closed-end funds also provide opportunities for international investment and REIT-style vehicles have developed in the Netherlands, Belgium (SICAFI) and Spain.


International real estate securities
 

Investment Trust

Property Company

Australia

n

l

Canada

n

l

Germany

n

l

France

 

n

Hong Kong

 

n

Japan

 

n

Malaysia

 

n

Netherlands

n

l

Singapore

 

n

Spain

 

l

Sweden

 

l

Switzerland

n

l

United Kingdom

 

n

United States

n

l

n = Dominant          l =    Small Sector

Source Jones Lang Wootton 1999

   Despite having one of the most sophisticated and substantial real estate markets, the UK has struggled to develop the kind of  vehicle which offers liquidity, security and management skills to investors. Unit trusts have been around for some time but are minor players compared to Australia. Nor are there the open-ended investment funds such as in Germany, which also provide access for ordinary investors into commercial real estate.

    Financial groups have dabbled with securitised single-asset vehicles and property derivatives  but the most significant progress has been in limited partnerships and off-shore investment trusts, which had drawn in more than £10bn by the beginning of 2002, according to international real estate consultant DTZ Tie Leung. This is partly because traditional real estate companies are losing their attraction. Share prices have always traded at discounts to asset values but this gap grew to 30% or more in the Nineties as investors tired of poor performance and liquidity. Many  companies have been privatised, including MEPC, one of the country’s top five names.

  MARKETS

US

Real estate, like the economy, saw its longest-ever bull market through the Nineties. City centre and suburban offices were among the major benefactors as rental values soared, with particular hotspots in technology centres such as New York and San Francisco. Ironically, dotcom fever spoiled the party. First, real estate investment trust [REIT] prices dived as  technology stocks stole the limelight. The NASDAQ crash swung back the balance but also tipped the economy into recession, driving down demand by occupiers.   Rents began dropping and vacancy rates rising in 2001, dragging the REIT Index from double-digit increases into minus figures. Lower rents and growing vacancies were anticipated to reverse this year but uncertainties following the terrorist attacks and Afghan War have pushed recovery back. Few expect the kind of  problems seen in previous recessions, however, because developers did not overbuild nor lenders overspend as they have in the past.    Pain will be most intense in sectors such as retailing, which was already over-supplied before the threat of online shopping arose. High-tech centres and new media markets  will also struggle.

Largest REITS [Nov 2001]

 

Market Capitalisation ($million)

Equity Office Properties Trust

12,334.9

Equity Residential Properties Trust

7,795.2

Plum Creek Timber Company, Inc.

5,393.8

Simon Property Group, Inc.

5,008.2

Archstone Communities Trust

4,541.5

Public Storage, Inc.

3,862.0

ProLogis Trust

3,833.5

Vornado Realty Trust

3,799.9

Boston Properties, Inc.

3,374.8

AvalonBay Communities Inc.

3,315.4

Apartment Investment & Management Co.

3,305.5

Kimco Realty Corporation

3,255.9

Duke Realty Corporation

3,113.2

Host Marriott Corporation

2,209.4

AMB Property Corporation

2,146.2

Liberty Property Trust

2,131.3

General Growth Properties, Inc.

2,095.4

Health Care Property Investors, Inc.

2,062.5

The Rouse Company

2,026.2

Crescent Real Estate Equities Company

1,888.8

  Source: National Association of Real Estate Investment Trusts

Europe

 European markets  recovered more slowly than the US after the early-Nineties recession and have declined again more gently  - one reason why so many dollars have crossed the Atlantic. But the global slowdown was still expected to cut activity across the continent by half in 2002. The UK cycle lies somewhere between the two, so investors have juggled resources between the three markets. Office rents in London, for instance, peaked last year, well before those in Paris, Berlin and Rome.  Like the US, the recession will be less severe than the past because development was more restrained during the Nineties boom than in past cycles. Rental growth is expected to continue to exceed inflation even if demand falls.

  A European “super league” of cities was identified by Ernst & Young, based on international companies’ investment intentions.  The top five were London, Paris, Barcelona, Amsterdam, and Dublin, which grabbed 18% of investment in 2000.  One problem is that this came from sectors such as  software, telecommunications, business and financial services, so recovery will hinge on how well these pull out of their own problems.

 The severity of the downturn is being eased by filling gaps in the real estate market. Cross-border development was growing even before the introduction of a single currency across most of Europe, so investors were transferring attention from, say, London offices to Spanish shopping centres much more readily. Retailing remains an uncertain sector, however, with polarisation between high-demand prime sites and weaker secondary property.   Central and eastern Europe will offer further new opportunities as countries like Hungary, Poland and the Czech Republic whip their economies into shape and  join the European Community but they are vulnerable to downturns in dominant markets such as Germany

  The central attraction for opportunistic investors is likely to be the growing trend among governments and major companies to outsource property. Financial re-engineering of real estate is likely to be the dominant factor of the early 21st century, according to international consultants Jones Lang LaSalle. Some 70% of property is owned by occupiers – twice the level of the US – and this will be exchanged for  cheap capital to invest in core operations.

European real estate companies [Nov 2001]

[£bn market value]

Land Securities.................................... UK                  6.68

Canary Wharf Group                            UK                  4.74

British Land                                          UK                  3.87

Rodamco Europe NV                           Neth                 3.04

Unibail SA                                            Fr                     2.67

Liberty Intl                                            UK                  2.16

Slough Estates                                      UK                  2.16

SIMCO-Union Pour L’Habitation         Fr                     2.06

Rodamco N America NV                     Neth                 2.02

Gecina                                                  Fr                     1.72

Corio NV                                             Neth                 1.61

Klepierre                                              Fr                     1.39

IVG Hldg AG                                       Ger                  1.30

Vallehermoso SA                                 Sp                    1.13

Chelsefield                                            UK                  1.13

Drott AB B                                          Swe                 1.13

Haslemere NV                                     Neth                 1.11

Sophia                                                  Fr                     1.07

Fonia Lyonnaise                                   Fr                     0.95

Metrovacesa SA                                  Sp                    0.93

*November 2001

Source: SCHRODER SALOMON SMITH BARNEY

 European  Commercial Real Estate Markets

Western Europe

Population

(millions)

GDP

($ bn)

GDP per capita ($)

Population per square mile

Commercial Real Estate

($ bn)

Austria

8.1

210

25,864

252

38.6

Belgium

8.3

245

24,000

874

43.9

Denmark

5.3

173

32,686

322

33.9

Finland

5.2

121

23,542

43

21.0

France

58.9

1,414

24,011

278

252.4

Germany

82.3

2,116

25,727

622

390.0

Greece

10.5

120

11,390

210

16.5

Ireland

3.7

75

20,416

134

11.7

Italy

27.6

1,169

20,293

507

192.4

Netherlands

15.7

375

23,864

1,195

65.5

Norway

4.4

144

32,685

37

29.6

Portugal

9.9

108

10,890

279

14.0

Spain

39.3

550

13,980

204

80.1

Sweden

8.9

228

25,742

56

42.2

Switzerland

7.2

262

36,621

472

54.5

Turkey

64.7

198

3,058

213

16.2

UK

59.1

1,416

23,945

628

273.2

Sources: Economist Intelligence Unit and Prudential Real Estate Investor

Asia

After the excesses of over-borrowing and over-development in the late 20th century, the region was looking at slow recovery until caught in the backlash of the September 11 attacks on the US. The potential of 1.6bn people, rapidly diversifying economies and relatively high GDP is an undoubted attraction to investors but the future will depend on whether governments will be strong enough to clear up the problems of the 1997 crash.  Asia will emerge as the world’s growth engine if it can sort out a huge backlog of non-performing loans, according to a study by Ernst & Young in early 2002.  Unfortunately, governments appeared to be going backwards, as these grew from $1.5trillion to $2trillion in 2001. Restructuring will open up enormous opportunities fro global real instate investors, however, as assets are packaged for sale into investment trusts, much as they were when European countries when through a similar – if less severe – crisis. Japanese banks alone were estimated to have $1.3trillion of assets on their books.

New Technology

New technology has had major impact on real estate. A computer on every desk accelerated obsolescence as offices required extra space for cabling and heat extraction. High-tech companies almost single-handedly drove development out of towns and cities into greenfield  business parks – first in the US and then across the world. Then came the internet, adding a new layer of space-hungry telecommunications occupiers and promising to transform building services by linking every company via high-sped networks.

  But the revolution has been postponed. The dotcom crash left acres of empty buildings and failed projects. Internet-based brokerage gained a foothold in places like the US, where vast distances can separate buyers and sellers but struggled elsewhere. Landlords ran out of resources to thread high-speed cable links to every building and creation of a new kind of real estate to hold clusters of computer servers ground to a near-halt as telecom companies ran into trouble.

  Changes will continue, however. As economies recover, cabling and wireless  connections will accelerate, further changing the nature of buildings. Call centres  and web hosting ‘hotels’ will mature into a new real estate sector. One downside could be the impact on retailing as customers become more accustomed to ordering from computers. US shopping centres are already under threat because of over-supply. Europe has much less space per head and can feel more secure. High streets around the world will also survive by concentrating on ‘touch and feel’ products like fashion and food.

Further Information

International Real Estate Federation –  www.fiabci.net

International Development Research Council [CoreNet]  – www.idrc.org

Building Owners and Managers Association – www.boma.org

International Real Estate Institute - www.iami.org/irei

US

Association of Foreign Investors in Real Estate - www.afire.org

National Assoc of Real Estate Investment Trusts - www.nareit.com

National Assoc of Corporate Real Estate Executives [CoreNet] – www.nacore.com

UK

Royal Institution of Chartered Surveyors – www.rics.org

British Property Federation – www.bpf.propertymall.com

Nacore  - www.nacore.org.uk

College of Estate Management - www.cem.ac.uk

Freeman’s Guide - www.propertyatfreemans.co.uk

Other

European Property Federation - www.epf-fepi.com

European Valuers Associations - http://www.tegova.org

Property Council of Australia - www.propertyoz.com.au

Hong Kong Institute of Surveyors - www.hkis.org.hk

International Real Estate Digest – www.ired.com

Pikenet – www.pikenet.com

Globe Street – www.globest.com

Costar – www.costargroup.com

Inman News – www.inman.com

Realty Times – www.realtytimes.com

Commercial Property News – www.cpnonline.com

National Real Estate Investor - www.nreionline.com

Property Week – www.propertyweek.co.uk

EGi - www.egi.co.uk

Europroperty – www.europrop.com

Netherlands - www.vastgoedsites.nl

Property Web  – www.propertyweb.com.au