Condos for Czech Republic workers. Luxury high-rises in Brazil. Former government-owned rentals in Germany. Massive new multifamily complexes in China. These are the surprising new targets of many U.S. multifamily firms. “Global real estate is a growth market,” says Gleb Nechayev, senior economist of the Boston-based research firm Torto Wheaton, a subsidiary of CB Richard Ellis. “In many areas, particularly emerging countries like India and China, local investors have little background in professionally-run apartment operations.”
Indeed, the huge volume of investment flowing into real estate across international borders bodes well for the multifamily sector. In its most recent full-year report, Jones Lang LaSalle, a real estate services firm, reported that cross-border transactions in 2006 accounted for 42 percent of the $900 billion invested in global real estate, up from 34 percent in 2005. With the proliferation of REITs and other investment vehicles worldwide, there's no shortage of capital. In the report, Jones Lang LaSalle CEO Tony Horrell cited a “large overhang of investment targeting the sector, with $5 of money chasing every $1 in property.” Still, experts say that much of this international investment is concentrated in commercial properties—multifamily real estate is not nearly as attractive. flat could change, as international housing regulations become less restrictive, and the rules of the real estate game abroad become more transparent.
The evidence seems to indicate that more and more U.S. real estate developers are anxious to parlay their domestic experience into handsome profits abroad. It's by no means a gold rush, but a look at the activities and target markets of some of the country's leading global pioneers suggests that, while there are cultural and legal challenges to overcome, overseas multifamily investment is here to stay.
THE HEAVY WEIGHTS Who is capitalizing on the global multi-housing expansion? Among the leaders, say the experts, are companies already entrenched as worldwide developers and investors—often in high-profile, mixed-use urban projects. David Takesuye, who reviews some of the world's leading real estate developments as director of the Urban Land Institute's Global Awards of Excellence Program, cites Hines as a prime example.
“They're based in Texas, but they would not want to be described as an American company,” Takesuye says. “They're typically involved with local partners and have their own local country managers who oversee their operations.”
Operating in global markets since 1974, Hines has investment and management teams in 33 cities outside the United States. And of the firm's nearly 130 projects now underway, many are on foreign turf, including:
- New Jiangway Town Center in Shanghai, a 45-acre, mixed-use project that includes 2.3 million square feet of luxury residential.
- Colonial Vidal, a conversion of a factory in Catalonia, Spain, into loft apartments, a 40-room hotel, and museum.
Imirim, a 2.2-acre site in São Paulo, Brazil, that will contain 376 condos in four towers. Last August, Hines also announced its first development project in India, a joint venture with DLF, India's largest real estate company. The two firms will develop a 15-acre master-planned site in Gurgaon, including office towers, retail, a hotel, and serviced apartments.
The ING Group, though Dutch in origin, is another example of an already entrenched global company with a strong hand in multifamily, including via its U.S. ING Clarion operation. Like Hines, the company stresses the value of local managers and developing joint ventures with local partners. In 2007, for example, ING Real Estate Investment Management announced that it would invest $35 million in a joint venture residential project with Longhu Real Estate Development in Chongqing, China. Also in 2007, the division announced successful closings of new funds to invest in residential properties in France, as well as in Central and Eastern Europe. In September, ING's development arm broke ground on a 16-building, mixed-use redevelopment project to include apartments on former docklands in Hamburg, Germany.
“There are some promising markets in parts of Europe where the rental stock is outdated and where there is currently a very limited number of modern apartments coming onto the market; examples include German and Dutch cities,” says Tim Bellman, global head of research and strategy for ING REIM.
Two takers are Fortress and Cerebrus. These two U.S. equity funds already have snapped up tens of thousands of units of government-owned apartments in the former East Germany, with the hope of realizing healthy returns from higher rents and, perhaps, eventual condo conversion. Since 2005, multifamily developer Archstone-Smith has spent more than $1 billion on European apartment acquisitions, including more than 8,300 units in Germany. Tishman-Speyer, which closed its acquisition of the Archstone-Smith Trust in October 2007, also has been stepping up its acquisitions in Germany.
THE NICHE PLAYERS Big-time developers and investors aren't the only companies capitalizing on the trend. Firms specializing in real estate management also have found a welcome mat in foreign countries. After a successful 2005 joint venture with a local Chinese company on an 840-unit condo community in Beijing, Seattle-based Pinnacle, an American Management Services company, created Pinnacle Realty Management International.
Based in Beijing, the new Pinnacle operation is launching sales and management activities—just in time for the Olympics—for Chevalier, another mammoth Beijing complex with 636 units in five residential towers.
“With the massive amount of development in Beijing, we saw a great opportunity for Pinnacle to combine our proven management expertise with local Chinese partners,” says Eric Schwabe, PRMI chairman.
Schwabe adds that the Chinese are looking for Western partners who can bolster the comfort level of investors. There's also a growing hunger for all things Western. Case in point: a sprawling new residential community called Jackson Hole, which is located in a mountain area about two hours from Beijing. Pinnacle will handle the sales of the units, priced from $150,000 to $250,000. And Pinnacle's next target is Shanghai, the Chinese city most open to Western influences.
Smaller players have a shot at the opportunities as well, says Torto Wheaton's Nechayev. “There should be plenty of opportunities abroad for entrepreneurial multifamily companies with strong expertise in niche markets such as senior housing, luxury units, or even lower-income projects,” he explains.
Wayne Vandenberg, chairman of the privately held TVO Realty Partners in Chicago, is developing condos in Central and Eastern Europe that cater to that region's growing ranks of well-paid skilled workers. “These people want something better than the substandard housing that was built during the Communist years,” Vandenberg says. Typical is his firm's mid-rise condo project in Prague, dubbed Central Park. The 900-square-foot units are selling for about $440 to $588 per square foot.
Other U.S. companies are setting their sights on Central and South America, as well as the Caribbean. GoldenTree InSite Partners, a New York City-based private equity firm, is developing three condo towers and one office project in Brazil with local partners. Buyers of the luxury condos, which range in size from 3,000 square feet to 5,000 square feet and cost up to $1 million, include local executives who want a secure downtown environment with full recreational amenities. But GoldenTree executives also plan to develop more moderately priced properties.
“Brazil is not without its risks,” notes Tom Shapiro, president of GoldenTree. “But we are very bullish about its prospects. The country is in its sixth year of growth, and inflation is tame.” He adds that while there has been a dearth of capital, the situation will improve as mortgage financing become available. His condo buyers typically pay 50 percent of the cost of the unit within eight months of signing the sales contract.
In Atlanta, two veteran multifamily developers, both frustrated by overbuilt markets at home, are seeking sunnier climates for development. Paul D'Agnese of Executive Enterprises is building a 17-story luxury condo in Grogona, Panama, about 45 minutes from Panama City. Meanwhile, Keith Poimboeuf of Pelican Properties is pulling the string on a longstanding dream to build villa-style condos on Eleuthera in the Bahamas.
“When the market is soft, you need to look for another niche,” says D'Agnese, who was pleasantly surprised at the cost effectiveness of building in Panama, which, like Costa Rica, has become a low-cost haven for U.S., Canadian, and European retirees. His land and construction costs amount to about $120 per square foot, and he expects to get $180 to $200 per square foot from buyers.
Poimboeuf is also targeting aging baby boomers for his 48-unit project in the northern sector of Eleuthera. The developer believes most buyers will use their homes seasonally, and his firm will handle maintenance and rental of the units while owners are away.
RULES OF ENGAGEMENT Still, these examples, though substantial, hardly constitute a stampede for foreign multifamily forays—and for good reason.
“If you're a multifamily developer, you just don't parachute into Germany and set up shop, as you would if you were a California builder looking to expand into Texas,” observes Stephen Blank, a ULI senior fellow specializing in capital markets. Blank points to a number of concerns, including each country's distinct ownership and rental patterns, as well as the dominance of local real estate interests in many nations. Cultural differences must also be taken into account. In Europe, for instance, young adults tend to save their money and live with their parents, rather then rent a place of their own.
Bellman of ING cites a litany of factors that his company scrutinizes before deciding to acquire or develop multifamily properties in any global market. They include government policies such as rent control and restrictions on foreign ownership; economic conditions, including interest rates and job and wage growth; and demographic trends. And that's just for starters.
Unfortunately, many American companies simply aren't prepared to tackle these daunting issues. Says Shekar Narasimhan, manager partner of Beekman Advisors in McLean, Va.: “If I'm the CEO of a U.S. multifamily REIT, how can I assure my board, the analysts, and my shareholders that there's enough of a premium on overseas activity to justify all the risk? Without compelling facts, foreign expansion will just be viewed as a distraction from more promising activities.”
Still, Narasimhan thinks enough of global prospects to start his own real estate finance and development management firms in India. Among India's most attractive opportunities: amenity-rich, extended-stay apartments in urban business centers. He adds that emerging countries also need the assistance of U.S. developers with proven experience in large, master-planned projects.
In short, interest by the U.S. multifamily industry in overseas opportunities is growing, Narasimhan says. “[It's not yet a] wave ... but there is a lot of sniffing 'round.”