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Cross-Border Investment on the Rise

Despite the belt-tightening occurring across the globe, there is an abundance of capital looking for a home in commercial real estate. Buyers are increasingly looking outside of their own borders to clinch deals in a competitive market.

Last year, global cross border activity jumped 25 percent year-over-year to U.S. $134 billion among all property types, according to Cushman & Wakefield. One of the key strategies fueling that cross-border activity in the retail sector is a continued flight to quality.

“There is a huge amount of capital directed at top markets such as New York, London and Paris, and we have seen demand for that product increase in 2012 over 2011,” says Janice Stanton, a senior managing director at Cushman & Wakefield in New York. Much of that investment capital is gravitating towards blue chip, “bankable” or best-in-class properties in prime retail trade areas, such as a Bond Street in London or a Fifth Avenue in New York.

“We see the same flight to quality internationally as we do here domestically,” agrees Mark Keschl, national director of retail at Colliers International in Fort Lauderdale, Fla. Buyers prefer core, urban properties in high street locations, as well as investment stakes in malls that hold a dominant position in a particular market.

Retail investment has clearly recovered since its low point in 2009. Globally, the Americas remain the most attractive retail investment region. In 2011, the Americas reported a 37 percent year-over-year increase in total dollars invested in retail properties at $31.9 billion; the EMEA reported a 14 percent increase to $50.9 billion; and Asia Pacific’s retails rose a slight 3 percent to $22.7 billion, according to Cushman & Wakefield.

There continues to be plenty of capital in both domestic and international investment arenas, adds Keschl. “The bigger challenge is one―finding retail properties that make sense for them and pass their underwriting standards, and two―purchasing centers at cap rates that make long-term sense,” he says.

There is a tremendous amount of investor interest in the U.S. from both domestic and international investors. The U.S. has already seen $12.5 billion in retail sales during first quarter 2012, which is nearly double the $6.6 billion in sales that occurred during the same period a year ago, according to New York-based Real Capital Analytics. The problem is a scarcity of core retail properties on the for-sale market.

“When economic times are uncertain, everyone wants safe, durable cash flows and there is a limited amount of product in that bucket,” says Stanton. That same competitive environment exists in the U.S., as well as top markets around the globe. “As you get into secondary assets in primary markets or secondary markets, the supply and demand is a lot more balanced,” she adds.

Capital chases yield

In addition to the penchant for the relative “safety” of core assets in a turbulent economy, capital also is flowing to high growth markets around the globe. Some investors are following the growth in the luxury brand market. Luxury brands are marching across the globe into emerging markets across Asia, South America and the Middle East. For instance, Louis Vuitton and Hermes International both saw a big jump in Asia Pacific sales last year at 27 percent and 28 percent respectively, according to Cushman & Wakefield. Money also is flowing to the growing middle class in those emerging markets. “As you build the middle class, the middle class wants to shop,” adds Stanton.

The turmoil in Europe is continuing to drive investors to focus on core yield. “In developing markets such as China and Singapore and Mexico and Brazil, we are clearly seeing more interest to chase that growth,” says Dale Taysom, chief operating officer at Prudential Real Estate Investors (PREI) in Parsippany, N.J. A big part of that growth is concentrated on the expanding consumer base. That growing middle class is fueling investor demand for both housing and retail property investments. “We have seen the most increase in investor interest for retail investment in Asia,” says Taysom.

Last fall, PREI closed its $3 billion Pramerica AsiaRetail Limited fund that invests in shopping centers on behalf of institutional investors. The fund is one of the largest funds in the region, and it will focus on acquiring core, suburban shopping malls. “We have a very successful retail investment operation in Asia, and we are looking at new opportunities throughout Asia in China, Singapore and other countries,” says Taysom. AsiaRetail, which also consolidated PREI’s closed-end Asian Retail Mall fund, currently has 11 retail assets totaling some 3 million sq. ft. in Singapore and Malaysia, including Hougang Mall and White Sands Shopping Centre in Singapore.

Prudential is targeting primarily class-A properties, both existing centers and increasingly new development due to the heightened competition for existing core properties. “As you get into development, lenders are very reluctant to commit to a lot of new development activity. So the sponsor of a project is very important, and that gives us a big leg up,” says Taysom. “With our name and our franchise, and with a strong local partner, we’re able to get a pretty good pipeline, both in Asia and in Latin America.”

Although Taysom expects its placement of capital to be slightly ahead of 2011 due to increased acquisitions in the U.S., the volume of capital raised from investors will likely be relatively flat. “We still think it is a very challenging year to raise capital globally, because everyone is so uncertain of what is going on—both with the economy and all of the different elections occurring,” he adds.

A look at how investors are evaluating strategies and making deals for retail assets internationally will be the subject of the Global Real Estate Investment Strategies: Keeping the Flow of Capital Around the World panel at the ICSC Retail Real Estate World Summit.

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