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GE Expands in Central Europe

The global search for attractive risk-adjusted returns continues to draw real estate investors into new and riskier territory. In one of the latest forays outside mature markets, GE Commercial Finance Real Estate picked up three, grocery-anchored retail shopping centers in Slovakia. The deals constitute the real estate giant’s first acquisitions in tertiary Slovakian markets, and further the company’s efforts to pursue high returns wherever it finds them.

“We expect to close more deals in this region in the near future,” says Jonathan Kern, global chief investment officer at GE Real Estate. “Because of their size and economic potential, the emerging and re-emerging markets in Central and Eastern Europe are very attractive and important to our future growth.”

GE closed in February on the acquisitions from developers EuroMax a.s. and SlovakiaMax a.s., including:

• The 107,639 sq. ft. Max, in Trnava, for 14.2 million euros or $17 million. Completed in 2004, the 65-store center includes a multiplex cinema and is anchored by Austrian supermarket chain Billa. • Two more Max centers — one in Poprad and the other in Trencin — that opened in December. Both of those centers are anchored by Hypernova supermarkets.

Slovakia joined the European Union in May 2004, and has annual GDP growth of about 5%. As part of changes in recent years to encourage foreign investment, Slovakia’s government adopted a flat tax rate of 19% on corporations and individuals alike, and eliminated taxation of dividends.

GE isn’t alone in seeking higher returns from emerging markets. With competition driving up prices and squeezing capitalization rates in the United States, Britain and other mature markets, a growing number of investors are seeking higher returns in Eastern Europe, Asia and other fledgling markets, says Alex Darragh, senior managing director for international operations in the Chicago office of The Trammell Crow Co.

As markets experience rapid economic growth, improving standards of living will likely increase consumers’ discretionary spending and drive demand for modern commercial retail centers. Darragh advises investors to do their homework before branching into unfamiliar territory, however. “Investors are going farther a-field to find assets with an attractive risk-adjusted return,” Darragh says. “But the risks you have in these emerging markets occur on several levels, from investment to operational and liquidity risks.”

Investment risks may include difficulty in obtaining comparable market data to evaluate an acquisition. On the operational side, emerging markets may lack experienced property managers, brokers and other professionals. Even providing basic utilities may present problems in some locales. “All the things you might expect from a property manager in the U.S. or the U.K. may not exist from a real estate manager in (an emerging market),” Darragh says.

Investors should plan an exit strategy before acquiring an asset in an emerging market, he says, or risk being unable to find a buyer down the road in the event that other real estate groups don’t move into the same market. Working with a local partner with rich market knowledge is essential.

“While going global may provide you with some level of diversification, there may be multiple risks involved,” Darragh says. “It places a much greater emphasis on the relationship between the capital source and the person who is executing the investment and managing the asset.”

GE Real Estate has been increasing its stake in Central Europe for some time. Last September, the company acquired a 266,891 sq. ft. distribution center in Poznan, Poland, from Dutch developer Grontmij Real Estate International for 12 million euros or $14.3 million. Also in September, GE joined a joint venture to develop the Mall of Sofia, a 360,590 sq. ft., mixed-use project under construction in Sofia, Bulgaria.

GE Real Estate plans to grow its presence in Central Europe. The company already has assets in the Czech Republic, Poland, Hungary, Slovakia, and Bulgaria.

“We don’t view investment strategy as an either/or proposition; instead, our focus is on targeting markets that offer the most promising growth opportunities,” says GE Real Estate’s Kern. “Our shopping centers deal in Slovakia is indicative of our bullish outlook for this region, as are our two other recent deals.”

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