Financing Focus

Exporting Capital

Sky-high U.S. property prices send real estate investors overseas.

As economies throughout the world continue to expand, the flood of real estate investment capital headed overseas has swelled to record levels. This unprecedented growth is expected to continue throughout the year and well into 2006.

Despite a weak dollar, investing in commercial real estate overseas remains sound. It now is accepted as a legitimate asset class throughout the world with many countries becoming competitive with or even exceeding U.S. returns. Real estate’s liquidity, as well as the transparency and availability of financial information, has significantly improved around the world. Differing economic cycles provide portfolio diversification and the passage of real estate investment trust-like legislation in many countries inevitably will provide additional real estate investment opportunities.

Another primary reason REITs, opportunity funds, and pension funds are stepping up foreign investments is the soaring price of domestic product. Recent surveys indicate that large tax-exempt institutions are boosting funds allocated to overseas commercial real estate from 3 percent of total real estate investments in 2004 to more than 8 percent this year.

Currently, approximately 60 percent of capital raised by U.S. opportunity funds is headed overseas, according to Ernst & Young. For example, U.S. investors were the most active buyers in the United Kingdom in 2004, acquiring some $13.5 billion of U.K. properties.

REIT Markets Emerge

Some 20 countries including Australia, Belgium, Brazil, Canada, China (Hong Kong), France, Greece, Italy, Japan, Mexico, the Netherlands, Singapore, Spain, and Turkey recently passed legislation to create REIT-like structures. Australia and the Netherlands currently have the most established REIT markets. Germany recently announced plans for its own REIT market by 2006, and similar legislation also is pending in the United Kingdom.

REIT legislation in these countries will provide new opportunities for property owners to obtain liquidity. In addition, U.S. REITs are likely to increase overseas merger and acquisition activity. REIT legislation also will open up global real estate markets to individual high-net-worth investors seeking alternatives to the U.S. real estate market.

Global Demand Grows

Recent notable examples of large U.S. REIT transactions include ProLogis, which plans to develop 1.1 million square feet at China’s Beijing Airport, and General Growth Properties, which has committed more than $100 million to joint ventures in Brazil and Costa Rica.

Two additional sizable U.S. REIT investments include Simon Property Group’s interest in 49 shopping centers in France, Italy, Poland, and Portugal and four outlet centers in Japan. In addition, the Mills Corp. recently partnered with Spanish investors on Xanadu, a mixed-use entertainment development in Madrid, Spain.

Due to the current trend toward European companies monetizing their real estate holdings, U.S. institutional investors are seeking opportunities to acquire real estate through sale-leaseback transactions in the European market. For example, W.P. Carey & Co. LLC recently formed an international fund that purchases and leases back single-tenant corporate and industrial facilities in Europe.

On the pension fund side, the California Public Employees Retirement System teamed up with Hines and Prudential Real Estate to invest approximately $250 million in Mexico and, along with Secured Capital Corp., has spent close to $100 million to buy Japanese properties.

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