This CCIM finds satisfying challenges in advising global clients.
While some real estate professionals are just starting to work with inbound foreign investors, others already have substantial portfolios with global clients. As executive vice president of Falcon Real Estate Investment Co. in San Diego, Scott A. Sweeney, CCIM, CPM, oversees a 44-property portfolio for investors from around the world. Commercial Investment Real Estate sat down with him to discuss his experiences and his perspective on this niche.
CIRE:Where are your current international clients from and what property types are they interested in?
Sweeney: Falcon advises a wide range of inbound foreign investors such as institutional investors, fund managers, private banks, family offices, and high-net-worth families and individuals. The majority of our business comes out of the Middle East, Europe, Asia, and Latin America.
A large portion of Falcon's client base is risk adverse. They mostly seek well-located core assets in major metropolitan and gateway areas. Typically, they want stable income with minimal leasing risk. Currently, our asset management portfolio consists of about 13.5 million square feet with almost half of it in single and multi-tenant office properties.
CIRE:What types of services are inbound foreign investors looking for from U.S. real estate companies? How do they differ from U.S. clients?
Sweeney: Many non-U.S. investors have not set up shop in the U.S. due to the added costs, increased management, and difficult regulations involved. Instead, they rely on U.S.-based advisers to provide services on a turn-key basis. They often look for advisers who provide unbiased fiduciary recommendations, as well as experienced management, customized investment strategies, comprehensive services, broad geographic coverage, institutional relationships, and an impressive track record.
Many inbound foreign investors require assistance in formulating an investment strategy that accurately assesses and meets their risk and return objectives. This includes an understanding of the particular tax consequences and holding structure issues that might come into play for each client depending on where they live. International investors also want expertise in all areas of real estate investment including acquisitions, dispositions, asset management, financing, and consulting.
In particular, the tax implications can be significant when non-U.S. investors want to send cash flow offshore or when they want to repatriate their investment capital. Also, inbound foreign investors need to carefully manage their currency exposure, something U.S. investors don’t have to consider.
CIRE:How does Falcon market to inbound foreign investors? Where do you find these clients?
Sweeney: Falcon's track record with inbound foreign investors plays a very important role in our marketing efforts. Since our formation in 1991, we have completed about $6.9 billion in transactions and, as of year-end 2008, our investment returns to our clients have averaged 16.9 percent. This compares very favorably to our benchmark, the NCREIF Property Index, which stands at 8.2 percent for the same time period.
Also, knowing how important it is to have broad geographic coverage for international investors, Falcon purposely has set up six offices in major markets across the country. This provides inbound foreign investors with the comfort level that we do have the national coverage they require plus the local knowledge and expertise in the markets that they are most likely to invest in.
Generally, most of our business is from referrals. Falcon attends the annual ExpoReal and MIPIM international real estate exhibitions where we meet with many inbound foreign investors. We also are an active member of the Association of Foreign Investors in Real Estate. Most importantly though, this is a business of personal relationships and Falcon regularly sends company members overseas to meet in person with existing and potential clients.
CIRE:What is the most unique project you have worked on with foreign investors? What were some challenges you encountered?
Sweeney: It was a luxury retail property known as Two Rodeo, a 126,500-sf high-profile property located on the world famous Rodeo Drive in Beverly Hills, Calif., with tenants such as Tiffany, Versace, Cartier, Breguet, and Gucci.
Falcon acquired Two Rodeo on behalf of a European trust toward the end of 2000 for $132 million. In 2007, we sold it for $275 million to Sloane Capital, an investment group based out of Ireland. When we first purchased the investment, it was basically a value-add play with 30 percent vacancy anticipated in the first couple of years of ownership.
About a year into ownership, Sept. 11 occurred and tourism halted completely. Because this property was very dependent on tourism, vacancy spiked to about 40 percent. Making this situation even more difficult, the majority of the vacant units were all in the 3,000-sf to 7,000-sf range with some of the spaces below grade. But tenant demand was in the 1,000-sf to 1,500-sf range at street level.
To address these issues, Falcon put together a team of management, leasing, marketing/merchandising, architectural, and construction experts to create a strategic plan designed to maximize the return to ownership.
The biggest hurdle was selling the best luxury retailers on the property's success with such a high vacancy rate in place. Falcon accomplished this by completing long-term lease renewals with the two largest anchor tenants -- Versace and Tiffany -- to show their commitment to the property. We then began marketing the vacant space to a very select group of high-end retailers that we felt would complement each other and add to the brand of Two Rodeo.
We also had a viable plan for splitting the large vacant below-grade units into smaller street-level units. In fact, the premium in rent for the smaller units more than offset the cost to reconfigure these spaces while adding significantly to the property’s value. In the end, Two Rodeo was 97 percent leased at the time of the 2007 sale.
CIRE:How has the current economy affected inbound foreign investment?
Sweeney: Similar to U.S. investors, acquisition velocity for foreign investors is down approximately 80 percent over the past 12 to 18 months. When the market does turn around, Falcon expects that the U.S. investor segment will enter the market first, closely followed by the international investors. This is because inbound foreign investors will want confirmation that the local players are back prior to entering the market.
But we are starting to see some highly desirable properties priced to offer very attractive risk-adjusted returns from owners with debt maturity issues. As the year progresses, we expect to see more of these opportunities. We are advising our international clients to consider acquisitions today in a highly selective manner focusing only on well-located, core assets leased to quality tenants on a long-term basis.