Think Globally, Even If You Operate Locally

Real estate has traditionally been a local business. After all, to make informed decisions about whether to sell, buy, build or lease real estate, you require access to detailed information on local customs, zoning regulations, tax laws and market and environmental conditions. Yet, in the past 10 years, the nature and scope of, and the opportunity for real estate investment has changed dramatically, as an increasing number of investment vehicles have encouraged capital deployment to real estate on a global basis.

Take, for example, just one segment of our industry:  REITs.  REITs or REIT-type vehicles now operate in more than three dozen countries around the world, and more local jurisdictions are adopting REIT-type legislation every year, the latest being Mexico, which just last year amended earlier legislation to make the formation of tax-advantaged real estate companies (known locally as Fibras) more attractive to real estate investors.  

The widening playing field created by REITs offers investors the opportunity to invest across a global platform, diversify country risk and make sector investments that may not be available in their home markets. REITs also allow countries to attract investment into their real estate sectors, often from abroad, increasing market transparency and liquidity and, ultimately, spurring economic growth.  (Our Global Real Estate Center will be releasing a new report on the global REIT market later this year.) 

Given the global nature of our business, and the growing connectivity between our capital markets, it’s increasingly important to have access to global information, even if your firm operates only locally.  Last month, three of my colleagues – Ad Buisman (Netherlands) representing Europe, the Middle East and Africa; Maggie Eather (China) representing Asia-Pacific; and Mike Straneva (USA) representing the Americas, joined me for a webcast discussion hosted by Globest.com  and focused on global real estate trends.  Here are some of the key observations from that webcast, entitled Around the World in 60 Minutes:

Amid an uneven recovery in the Americas, Mike Straneva sees REITs as one potential area of opportunity for real estate owners and developers in 2011.  “Real estate currently presents investors with low returns in a world of no returns,” he said, “and the REIT market in the US is benefitting from increased investor appetite so I expect to see more IPO opportunities this year.” He also believes there will be buying opportunities in secondary markets where some mispricing of assets remains.  Apartments will be prime targets for investments with hotels, retail, industrial and office assets following in that order.

“Europe is getting on with the business of recovery,” said Ad Buisman.  Cautioning that inflation and rising interest rates could put a damper on any real estate market recovery in the Eurozone, Ad also sees strong opportunities in Europe’s real estate markets, especially in Germany, which he views as an engine of the region’s real estate market growth.  Limited construction in other prime markets such as London and Paris means that supply is unlikely to meet demand, so investment in office and other key commercial assets in prime locations represents a good option for local and global investors, he concludes.

Maggie Eather expects to see further opportunities for foreign investors to invest in China this year, since 8% economic growth is currently leading all global markets.  Despite monetary tightening by the government, there is still strong liquidity in China’s capital markets, but that situation could change given the strong desire to keep property prices in check.  Nevertheless, Maggie says, a relative lack of experience among China’s local real estate sector gives experienced foreign partners a tremendous opportunity to participate in the market.

All in all, the sentiment of the discussion was that, while no one is prepared to say that their local markets have completely turned the corner, the increasingly sophisticated investor needs to watch global trends as attractive investment opportunities can emerge from anywhere around the globe.

Howard Roth is the global real estate Leader and a partner with Ernst & Young LLP’s Real Estate practice. You may contact him at howard.roth@ey.com. The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP or ALM’s Real Estate Media Group.