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Global Land Rush: NREI takes a look at international approaches to commercial real estate

A decade of globalization generated enormous international opportunities for the U.S. commercial real estate industry. Today, real estate service companies, property companies and real estate investors have begun to explore their options for taking advantage of these opportunities. Service and property firms are following the international lead of the multinational client companies they have served domestically. For investors, globalization means an expanded universe of possibilities.

Take Dallas-based Trammell Crow Co., one of the largest commercial real estate service companies in the United States. Through Trammell Crow International, the company has been developing international business for nearly three decades. But Trammell Crow’s real opportunities arrived with the dramatic expansion of multinational clients in recent years.

"We have decided to focus our global expansion around corporate customers in need of tenant representation and outsourcing activities," said John Maher for Trammel Crow group president, Global Solutions. "Many of our U.S. customers have asked us to expand with them as they expand around the globe. They want us to ensure that they receive consistent service at predictable and lower costs wherever they go."

Trammell Crow satisfies this consistent service requirement by exporting the systems it has used to provide corporate services for years — often to these same clients — in an international setting. Costs go down, according to Maher, when clients turn to Trammell Crow as a single source supplier, eliminating other vendors.

For example, at the end of 2000, Trammell Crow signed two contracts with Exxon Mobil Corp. The first assigned Trammell Crow alone to development and project management services for all of Exxon Mobil’s domestic retail stores. The second gives Trammell Crow the responsibility for brokering all locations in Central America, the Caribbean Basin and Chile.

Trammell Crow has added another wrinkle to consistency and service: hiring its clients’ real estate people. "We recently hired 13 American Express people in Buenos Aires and Sao Paulo," Maher said. "They will provide real estate services using Trammell Crow systems to American Express in those South American locations. We plan to do the same thing with American Express in Europe and Asia."

The personnel transfer followed the signing of a long-term outsourcing agreement with American Express covering North and South America. Services will include facility management, project management and transaction services — essentially the same services Trammell Crow provides its clients in domestic settings.

Maher’s group completed a similar deal with Cisco Systems in Stockley Park in the United Kingdom, transferring 20 Cisco real estate people to Trammell Crow and setting in place facility and space management systems for three Cisco buildings.

Maher estimates that a majority of Trammell Crow’s 100 largest corporate customers are expanding globally while decreasing their number of service providers. "American Express has cut its providers from six to one," Maher said.

As these deals have grown in number, Maher said Trammell Crow has added approximately 300 employees around the world, all from real estate posts in client companies.

Success in such an undertaking requires understanding a client’s approach to real estate, which Trammell Crow achieves by hiring its clients’ professionals. But it also requires local real estate knowledge. In May 2000, Trammell Crow moved to establish an international network of offices staffed with local people and formed an outsourcing company in partnership with FPDSavills, a leading provider of real estate services in Europe, Asia-Pacific and Australia. Trammell Crow owns 51% of the new company, which will trade under the name Trammell Crow Savills.

Headquartered in London, the venture’s core services will include facilities management, transaction management and project management for corporate customers. Savills will contribute its facilities management subsidiary, Trigon Ltd.; its corporate services business; and certain project management personnel to the new company. Trammell Crow’s contribution will take the form of European and Asian assignments from U.S.-based clients. In return, Savills will serve as the new company’s primary execution arm for brokerage services in Europe.

Insignia/ESG, New York, has taken a different approach to globalizing its real estate service capabilities. In the United States, Insignia’s strategy has been to build pre-eminent offices in major cities such as Atlanta, Chicago and New York.

Over the past three years, the company has extended its strategy internationally through acquisitions. In 1997, the company purchased CAGISA of Rome and Milan, Italy. The following year, the United Kingdom’s Richard Ellis Group Ltd. came on board. In 1999, St. Quintin, also of the United Kingdom, came on board, followed by BDR of Holland in 2000.

At the end of 2000, Insignia operated 11 offices in the United Kingdom and four in Continental Europe, all based in major cities.

In December 2000, Insignia expanded into Central America and Asia-Pacific, with the opening of an office in Mexico City and the purchase of Brooke International, a commercial real estate services company based in Hong Kong with operations in mainland China and Thailand.

While Insignia’s approach to globalization differs from that of Trammell Crow, the goal is to take advantage of similar opportunities, particularly the movement of multinational corporations around the world. "Multinationals are driving this expansion," said Mitch Rudin, president of U.S. transaction services, with Insignia. "A good number of these multinational companies are headquartered in the United States or have significant offices here. They are accustomed to a level of professionalism in representation. In other words, a multinational doing a large transaction will want a certain kind of financial analysis, whether it’s pre-tax, after-tax, book or cash. They will want their Asian headquarters to provide the same operational qualities in terms of power, floor loading, proximity to transportation and office layouts as they have in their offices in New York."

Insignia provides systems that satisfy these quality expectations, while the company’s acquisitions team provides the local expertise necessary in finding locations, negotiating leases and accounting for local and regional differences in business practices.

To date, Insignia has completed a half dozen or so transactions. Three transactions situated Foote, Cone & Belding Worldwide in Paris; Levailois, France; and London. For DraftWorldwide, a subsidiary of the Interpublic Group of Companies Inc., Insignia structured a deal for approximately 60,000 sq. ft. in Chichey, France.

How important is global reach to real estate service companies? While comprehensive statistical studies are difficult to come by, research by Insignia Richard Ellis, Insignia’s U.K. operating company, found that U.S.-based companies accounted for more than 40% of the office space leased in central London between 1998 and 2000. In addition, during the first nine months of 2000, Insignia’s U.S. and European arms completed sales and leasing transactions totaling more than 160 million sq. ft., including more than $8 billion in investment sales. For that period, Insignia’s service revenues increased 38% to $639.1 million.

Property companies follow multinational expansion

Like real estate service companies, a number of U.S.-based property companies have found ways to tap into markets created by expanding multinationals.

ProLogis Trust, a real estate investment trust (REIT) based in Aurora, Colo., specializes in state-of-the-art bulk distribution facilities, light industrial facilities and master-planned full-service industrial parks designed to provide companies with one-stop, world-wide distribution solutions. The company targets 1,000 of the largest multinational users of distribution space and serves customers such as Nestle, Whirlpool, Kodak, FedEx, IBM, Ford Motor Company, Marriott International and RJR Nabisco.

The company began a European expansion in 1997 and currently maintains offices across that continent, in Amsterdam, the Netherlands; Barcelona, Spain; Birmingham, United Kingdom; Brussels, Belgium; Cologne, Germany; Milan, Italy; Paris; and Warsaw, Poland. It also has 18 million sq. ft. of space in operation or under development in nine European countries.

ProLogis expanded into Europe at the request of its customers. "A number of our U.S. customers told us to go to Europe to investigate what European unification will mean to their businesses," said Robert Watson, ProLogis’ European managing director and COO. "We have found that unification is restructuring the logistics platform across Europe. For example, you can now drive a truck from the United Kingdom through the Chunnel and then to Milan without stopping except for fuel. This means you can now look at Europe logistically in the same way you look at the United States, except that Europe has 360 million people."

Prior to unification, companies needed distribution centers in each European country to ensure timely arrival of shipments without customs delays.

According to Watson, ProLogis gained its foothold in Europe with the purchase of two companies: Kingspark Group Holding, United Kingdom, and Garonor SA, France. Together, those companies, which have adopted the ProLogis name, employ 210 people, including four Americans. "We didn’t load up a 747 to come here," Watson said. "Just like in the United States, real estate is a local business in Europe, dependent on local relationships and local customs."

On the other hand, the company has exported its basic concept of distribution facilities. "The box we build in Europe is essentially the same box we build in the United States," Watson said. "It is a 32-ft. high-sprinklered warehouse with a 120 ft. to 140 ft. truck apron. All we have had to do is apply our core principles to a customer base that we were already comfortable with."

Still, doing business in Europe requires dealing with a number of barriers. Watson calls the tax questions huge and said it took two years to get them right. "ProLogis in Europe is based in Luxembourg [Germany] and taxed under Luxembourg laws," he said. "In addition, we pay local taxes that accrue to the business through operations in local countries."

The financial results of these operations flow back to the U.S. operation through a structure called the ProLogis European Property Fund, formed in 1999. Nineteen global financial institutions, including one from the U.S., invested E$1.1 billion in the fund, while ProLogis contributed E$400 million, giving the fund a rough value of E$1.5 billion. The company plans to leverage the fund by 50%, adding another E$1.5 billion in debt, for a total of E$3 billion in capital that will be used to acquire and develop properties in Europe. "We own 40% of this fund and use it to do all of our business," Watson said.

Different parts of the globe require different kinds of business structures. When Chelsea Property Group, a Roseland, N.J.-based REIT, decided to expand to Japan, the retail outlet center developer formed a joint venture with two Japanese partners. Chelsea owns 40% of the venture, named Chelsea Japan Co., and its partners, Osaka-based Nissho Iwai and Mitsubishi Estate, Tokyo, own 30% each.

According to John McGinnis, a spokesperson for Chelsea, the company funded its equity portion of the joint venture through a yen-denominated line of credit from Bank of America. "The debt is held by the joint venture in Japan," McGinnis said. "As a foreign entity, we were able to borrow from the Development Bank of Japan, which is a quasi governmental entity. Domestic Japanese entities do not have access to this particular kind of financing."

To date, the venture has opened two outlet malls, Gotemba Premium Outlets near Tokyo and Rinku Premium Outlets on the southern rim of Osaka Bay.

The $40 million, 220,000 sq. ft. first phase of Gotemba is the largest outlet center in Japan, with the 175,000 sq. ft. Rinku placing second.

Among the complications of doing business in Japan is the 42% to 45% corporate tax rate levied on Chelsea Japan. McGinnis said that the company is exploring alternative structures, including a tax-free special purpose corporation and a Japanese REIT structure, which is currently under legislative consideration.

While owning and operating global real estate makes sense for REITs like ProLogis and Chelsea, it may not make sense for real estate operating companies.

In the hospitality industry, for example, building global brands usually takes precedence over building or even owning real estate. "When Bass [Hotels] bought Intercontinental, there was a tremendous amount of real estate associated with the transaction," said Arthur Adler, managing director of the Americas region of Jones Lang LaSalle Hotels, Sydney. "But we’re not seeing Starwood or Marriott buying a lot of individual hotel properties. While these companies may participate in transactions, they often won’t seek to become a majority owner. Why? The market will penalize public companies for having a lot of real estate on their balance sheet. A better use of hospitality company capital is to spread it out among a number of different transactions. Their goal is to grow their brands. They get more bang for their buck through franchise fees and management fees. Return on operating income and property appreciation does not provide adequate returns."

But investors have begun to buy

Real estate investors, on the other hand, do want to buy, and many are looking to the massive global commercial real estate markets to do so.

According to "The Case for Global Property Investment," a report issued in the summer of 2000 by Henderson Investors, Chicago, the global investible institutional property market totals approximately $4.3 trillion. North America and continental Europe account for the lion’s share of this property, with $1.6 trillion and $1.3 trillion in assets respectively.

But the property markets in Australia ($103 billion), South America ($131 billion), the United Kingdom ($361 billion) and Asia ($825 billion) combine to provide approximately $1.4 trillion in investible assets.

The Henderson report also estimates the size of the global institutional investment market to be $23 trillion. This figure totals the assets of pension funds and insurance companies in developed countries around the world.

Henderson notes in the report that these figures were developed through estimates and interpolations that likely include some level of error. Nevertheless, the point is that investible institutional funds far exceed the supply, however large, of global institutional real estate.

And investors have in the past couple years begun looking aggressively for global acquisitions. For example, two years ago the Blackstone Hotel Acquisitions Co. and Colony Capital Inc., both of New York, acquired Savoy Hotels plc for $866 million in cash in one of the hospitality industry’s largest transactions.

Just like any investment, global property investments seek a variety of goals, from income to opportunistic returns. "With some of our funds, we’ve been very aggressive," said Stephen Smith, managing director of global client services for LaSalle Investment Management, Chicago. "A recent transaction in France was handled with debt of 70% to 80% of total value. Elsewhere in Europe, however, we stay closer to 50/50 ratios because of the risk assessment."

According to Smith, higher equity investments take on some interest-rate risk in the form of floating-rate debt.

Smith must evaluate risks for clients that go beyond the financing risks typical of domestic real estate deals. "We keep a close eye on country risk," he said. "Before even looking at assets, you have to make sure you want to be in a particular country. Political instability, for example, is something you want to avoid.

"Currency issues are important too," Smith added. "We’re currently investing a fund in Europe that was raised in Euros. We try to mitigate currency risks further by doing leases in either Euros or dollars."

Perhaps the most important risk assessment involves transparency. How well do the figures that describe a property reflect its true value? "This is a key question," Smith said. "One of the added values we offer is that we have people in 39 countries around the world through our affiliates. These are the people who do the market intelligence work important to evaluating property in less transparent markets such as Kuala Lumpar or Bangkok."

Where are the world’s opportunistic real estate investments located? Smith said that locating such investments involves looking for areas where local capital has pulled out of the market. "In the early 1990s, that was true in the United States," he said. "Real estate was bleeding so heavily that the banks and insurance companies stopped lending, and the equity sources got out of the market. There was a complete dislocation of capital that created great opportunities for offshore investors.

"We found a similar situation in Paris four years ago. French investors left the market, and we were buying fully leased office buildings, highly leveraged, but returning 12% going in."

In the end, real estate opportunities are proliferating around the globe for service companies, operating companies and investors. Taking a real estate business global involves the same basic strategy that real estate professionals have always applied: understand what’s happening on the ground, wherever in the world the ground may be located.

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