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A SUPPennsnt LeRe
CLO A RTERLY DD
A Bleprint for Global Real Estate Volume 6, Number 4
Fall 2008
Building an Overseas Real Estate Program Takes Onside Patience and Discipline
by Drew Campbell
5 GLOBAL REAL ESTATE INVESTING Plan sponsors in the United States have
HITS CRITICAL MASS groun more comfortable with the idea of INSIDE FEATURE
During the past two decades the trend of investing outside of their domestic mar- Institutional capital flows
economic globalization has changed how kets, and increasingly these plans target to China's second-tier Indian high-tech business gets done property in places such as London, Tokyo
cities will increase workers travel to Silicon Valley for good China and India, The time and effort it
job opportunities, Coca-Cola and McDon takes to nun a global real estate mandate is
ald's export their products around the a challenge; however, the reality of global 8
world, and the ease of investing in foreign economic trends bave changed the way INVESTMENT GUIDE stock markets drives cross-border invest- institutional investors approach their real
A list of 33 global real ment. A globalized world is now a reality estate programs.
but global property investing did not reach estate securities managers
a critical mass until more recently early 75 percent of the world 66
N
Four years ago, there were man economy resides outside the
10 dates that were global, but there was still United States," says Steve flow of investors who Marsh, managing director, real estate, with MARKET FOQ JS a continuing strong
were looking for regional mandates MIT Investment Management Co. Mumbai, India is a global
U.S. investors looking for U.S. real estate of these economies and their underly financial and high-tech
securities and European plans looking for ing demographics are expected to grow center.
European securities, says Ritson Ferguson at rates in excess of those in the United
CIO with ING Clarion Real Estate Securi States, while others have real estate
ties. "Today I would say that for every 10 markets that are undergoing favorable 11
searches for a real estate securities man structural changes GLOBAL REAL
date, probably 80 percent to 90 percent are The benefits of diversification and a ESTATE SECURITIES
defining a global real estate securities man wider set of opportunities have made over-
Volatility unnerves listed date as opposed to a regional mandate seas real estate markets attractive, but the
real estate markets process is complex. Differences in culture
THE RIGHT VEHICLE business practices, legal frame- language The process of moving from a domestic works, economics, tax and currency make
allocation where the rules of the game 12 international investing a challenge At
are well understood to a globally diversi the end of the day, you need to have an A LAST WORD fied portfolio can be daunting, especially appreciation for the level of risk you are Quotes from the fall
for plan sponsors that often have only exposing your plan to in order to achieve Editorial Advisory Board
one or two people dedicated to the real your investment goals,' says Marsh meeting Plan sponsors that do invest in global estate program
For a plan starting an international real estate will have to get comfortable with
allocation, a commingled fund is a good the new environment in which they will
place to start," says Henrik Jones, princi- operate and understand the effects it can
pal, and head of the real assets group at have on a program before committing large
sums of capital. any other investment San Francisco-based Hall Capital Partners
An experienced global manager can pro- program, you have to identify your goals
vide opportunistic investments, econornies and establish a business plan with sufficient
of scale, diversification, and alignment of resources in order to execute effectively
interest with other investors adds Marsh.
Jones explains that active strat- tains prudent investment underwrit m egies such as direct investments or ing standards, even if it means slower GLOBAL
progress in building the program separate accounts demand expertise Quarterly to buy, manage and sell assets. Active says Marsh. "It is simply not worth
strategies also require dedicated man- compronnising due diligence standards Vol. 6, No. 4 Fall 2008
agement and higher start-up costs just to put push-pins all over a map PUBLISHER & EDITOR-IN- -CHIEF
Real estate securities funds are Another distinction investors Geoffrey Dohrmann
another avenue a first-time investor should consider is whether they want
should consider," he says ASSOCIATE PUBLISHER to start with a global investment
& MANAGING DIRECTOR Each plan sponsor will decide the U.S. and overseas markets or with
Alex Eidlin
best strategy for overseas investment 100 an international investment
depending on the size of the plan, its percent outside the United States EDITORIAL DIRECTOR
staff and the resources it has, as well A plan should consider a global Larry Gray
as its objectives fund that allocates where the opportu EDITOR
The advantage of securities is nities are most compelling, including Drew Campbell
if you are willing to consider a com- This the United States," says Jones
mingled vehicle, even a very mod COPY EDITOR strategy offers the plan an opportunity
Loretta Clodfelter est investment $1 million to put a toe in international waters can
be made into real estate securities while evaluating the performance of ART DIRECTOR
however, if you wanted to engage portion based the global fund's U.S Susan Sharpe
a manager like us for a separate on the sponsor's knowledge of the RESEARCH & IT DIRECTOR
account, typically that is at least $10 domestic real estate market. A plan Temy Deming
million," says Ferguson For direct sponsor, for example, can set up a vehicles, that threshold gets much hub and spoke system, where the VICE PRESIDENT, MARKETING
higher. Even if you are using funds global fund is the hub. As the plan Sandy Terranova
or funds of funds, you have to com- sponsor gains knowledge, experience CHIEF ADMINISTRATIVE OFFICER
mit a higher amount than would be and conviction the sponsor can attach Terri Chang
needed for securities. And if you are spokes to that hub in the form of
going to go into a separate account, niche funds,' he says CONFERENCE DIRECTOR
then you have to invest much more Jennifer Pesini
significant sums $50 million or THE RIGHT MANAGER SPONSOR BENEFITS MANAGER
$100 million or more Once a plan has made the decision Jennifer Kowalski
There is nota best way to to invest in global real estate markets
invest in global markets, and an another hurdle they will face is access Copyright @ 2008 by Institutional Real
initial investment could take many Estate, Inc. Material may not be reproduced in Compared with U.S. markets, securing forms however, one bit of advice a global real estate allocation can be whole or in part without the express written
all plan sponsors may want to fol permission of the publisher. more difficult because there are sim-
low is to take an incremental The publisher of Global Guarterly :s not ply fewer global and international real
approach and do not try to do too estate vehicles available engaged in rendering tax, accounting or other
much all at once professional advice Uhrough this pubrcation. No Start by identifying your return
At the highest level, I would goals and your risk appetite, and with statement in this issue is to be as a
advise executing at a pace that main that you have criteria to think about recommendation ary securily or other investment
Cross- -Border Buyers by The information presented in this pub Global Trade Routes
Capital Sector lication has been obtained from third-party
SoureeTarget sources considered to be reliable. Sources are
1 U.S not required to make representations as to U.K. 14.777
the accuracy of the information, however, and 2 Australia U.S 14,369
consequently, the publisher cannot guarantee
its accuracy 3 U.S Germany 13,996
Rent Estate, Inc. 4 U.S. Australia 7,814
2274 Camino Ramon
5 U.S France 7,657 oa San Remon, CA 94583 USA
Tel: (925) 244-0500 6 Canada Australia 6.057 Fx: (925) 244-0520
7 U.S Japan 5,615 E-mal: irei@irei.com
www.irei.com 8 Germany U.S 5,209
19%
9 Israel U.S. 3,801
VS
2007 Acquisitions (in billions) U.S. 10 U.K. 3,765
Source: Real Capital Analytics Source: Real Capital Analytics
ei.com Fall 2008 1 GLOBAL QUARTERLY www. irci.com
meetings, presentations, finalists and the vehicles you want, says Fergu
then a winner. A global investment son. "Only the largest plan sponsors GLOBAL can take more time because of the can realistically address international
QUARTERLY complexity involved as well as the opportunities through a segregated
distance between the investor and account or a true direct program. For EDITORIAL BOARD
the managers that are based overseas plans other than that, and even some George Ahl
Plan sponsors should resist the urge very large plans, the preference is to Edgar Alvarado
to quickly decide on a manager. use funds or commingled vehicles to Trina Bigby- -Sanders
Maintain patience while devel address the international opportuni E. Todd Briddell
oping competency and take the time ties. Then it becomes trying to iden- Lourdes Canlas
S. Bradford Child to understand the investment and tify the universe of managers who are Heather Christopher
offering access to vehicles to get the macro dynamics," says Jones. "Some Timothy Clark
international markets are growing international opportunity, he says Victor Del Pizzo
more quickly than the United States Traditionally, international real Christy Fields
International strategies are often estate markets represented oppor- Gloria Gil
dependent on successful growth tunistic investments for many plan Christine Gogan
Heather Goldman and development. To optimize the sponsors. As institutional capital Steve Gruber
flows increase in global markets plan sponsor's risk-adjusted returns Christopher D. Hughes
an international investment should and these markets and economies H. Lawrence Hull
have the same level of standards and mature, property assets and vehi Lewis Ingall
cles are developing a wider range of return expectations as a U.S. invest: John "Jay' 'Jarrett Jr.
return opportunities, including core ment. We have spent considerable HenrikJones and value- -added time in different markets and some- MilbreyJones
Tom Klugherz All plan sponsors have differ- times we have invested and some Bill Krauch
ent criteria, so some plans may want times we haven't," he says Eric Lang
the opportunistic returns," says Fer- To winnow the field, plan spon James Lavan
but some investors coming sors will meet with managers to get guson, David Lewandowski
to it naively may just grab the offer a sense of their capabilities These Peter Lewis
off the shelf and think, 'this is my managers travel to U.S. investors on Lester Lockwood
opportunity to invest in international road shows and conferences, and Christopher Longee Glenn Lowenstein not recognizing that what they this is an opportunity for plan spon
Christian MacDonald are really doing is making a decision sors to meet them and get to know
Ashley Marks not only to diversify their geogra their offerings. Through this pro
Steven Marsh phy but to get into the higher-return cess, a short list can be developed, Richmond McCoy and the higher-risk spectrum of real and the next step often is to visit Fred McIntosh
the managers offices and its peo- estate investing David McWhorter
The universe of global and inter- ple in their home country before a Herb Meiberger
Thomas Mizo national real estate managers is large commitment is made Eric Mogentale Once a plan sponsor has decided on Dr. Louis Moret
a vehicle for its global allocation, the MANAGING THE PROGRAM Thomas Mulvin
next step is to find the right man Once a plan sponsor has made Laudan Nabizadeh ager. The process is similar to how an allocation to a vehicle one of Lee Neibart
a domestic manager is selected the next steps is to monitor the Michael O'Brien
Donald Paiva
Top 10 Countries by Net Acquisitions in 2007 ($ billions) Richard Plummer
Stephen Quazzo EXPORTERS IMPORTERS
Robert Ratliffe China
Michael Restuccia
John Ryan U.S.
Robert Savage Jr. Hong Kong Robert Schau
Vicky Schiff Ireland
Brian Schneider
Jamie Shen Germany 16.7
Jeffrey States
Max Swango UAE
Jean-Guy Talbot Canada
David Tepperman
Bill Thompson Israel
Steve Walker
Matthew Walley U.K. S9.0
Scott Wandro
Robert N. Weaver Sweden 16.7
James Woidat
Micolyn Yalonis
Source: Real Capital Analytics
in the listed pricing is creating an investment could target a geographic investment and build knowledge
attractive entry point certainly area, for example, a pan- -European in the markets in which they are
on a price to value ratio, real estate vehicle or a pan-Asian vehicle, and invested. This is accomplished sev
stocks are much cheaper now tha finally, depending on the goals and eral ways, including periodic reports
they were 12 months ago objectives of a plan sponsor, a pro- supplied by the manager:
Valuations in the direct markets gram can be fine tuned with invest- The reporting is largely akin to
are down, too. According to the IPD ments in country- -specific funds or U.S. reports, but there is more infor-
U.K. All Property Index (a measure of property- -specific funds, such as mation to examine,' says Jones. *An
unleveraged direct real estate invest Asian industrial markets or European investor needs to take into consider-
1.1 ments) returns were percent Not all plans will ation the roll-up of all the currencies office markets
in August 2008. For the 12 months different tax practices, account decide to build out a large overseas
ending in August, values are down ing and unique characteristics of real estate program
17.1 percent. A plan sponsor that has A smaller plan with more lim- certain markets
not invested in global markets may ited resources will likely have to Beyond the reporting, plan
not have the confidence to invest in choose where it wants to focus its sponsors also will discuss the
the United Kingdom or continental in international real estate investment with their manager and energy
but now could be a good Europe says Marsh. "Several learn the subtleties of these mar- investing time to put capital in those markets
options may be available depending kets. "German apartment cash flows U.K. managers report that City
upon their goals and philosophy are more stable because people of London real estate has recently
including a targeted geographic pri- don't move as often they move declined to a level at which one can
achieve opportunity target returns
however, is Financing says Jones
currently scarce. Investors may not
understand the rapid change in valu- The fundamentals at the real estate level have ation or have as high a degree of
continued to be relatively sound, and many institutional conviction until they have invested
globally and are able to compare investors correctly perceive that this markdown in the one market to another with a degree
listed pricing is creating an attractive entry point of confidence based on their know!
edge of global markets
Allocating capital across multi- Ritson Ferguson, CIO, ING Clarion Real Estate Securities
ple global markets can help even
out the ups and downs in a portfo-
lio. For example, while the United
Kingdom has declined significantly
the past 12 months, Japan's during
property markets have performed vate equity program, use of asset 14 years, whereas in the every well. According to the IPD Japan allocator funds, or even a global real United States, people move every Monthly Indicator (the index reports estate securities program. My only The
three years or so," says Jones direct unleveraged investments), Jap- recommendation for smaller plans does not always give that reporting
with limited resources would be to anese property returned 9.1 percent information. Common U.S. metrics avoid trying to be all things in all in 2008 through May
are often not transferable to interna Real estate market performance places at one time tional real estate. It's easy to make
in the United Kingdom and Japan assumptions and be wrong
ood IS NOW THE TIME TO during the past 12 months areg Through regular reports and GO GLOBAL? examples of the benefits plan spon- conversations with managers, a plan
In the midst of a global financial sors can gain by expanding a port- begin to learn and sponsor can
crisis, it might seem like an inop- folio beyond domestic markets understand the issues associated with portune time to invest in global real Because commercial real estate currency fluctua
global investing values are tightly tied to the local estate; however, for plan sponsors
tion, tax treatment, contract enforce- with a long-term horizon, values in economic cycle, investors that open as well as gauge the
ment, etc many markets have declined and their portfolios to a global playing resources needed to manage global could be attractive feld and build a program based on the time and
property investments Interestingly, we have seen a the economic prospects of regions staff resources needed to manage the
marked pick-up in institutional inves- countries or cities, thus protecting investment. Plans also can measure
a portfolio from poor performance tors' interest in global real estate the effect a global investment has
investing because of the declining in any one market and also expos on the overall portfolio and decide
ing capital to opportunities across prices," says Ferguson. "The funda whether to move forward or not
mentals at the real estate level have the world. becomes When a plan sponsor
continued to be relatively sound comfortable with an initial global
with and many institutional investors cor- Drew Campbell is a senior editor
investment, it could begin to build rectly perceive that this markdown Institutional Real Estate, Inc.
A second a more robust program
Fall 2008 GLOBAL QUARTERLY www .irei.com
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