Where do real estate consultants go for their expertise before meeting with corporate real estate professionals to plot strategy? Besides drawing on their own professional credentials, many attend educational meetings of The Counselors of Real Estate, a Chicago-based association of real estate consultants. The group’s Midyear Meeting in Seattle, held April 18-21, was a good example.
Sessions at the conference ranged from the intersection of real estate and technology to financial strategies in the current capital markets to developments in the legal, corporate and institutional investment arenas that impact consultants and their provision of knowledge to their clients. One 80-minute session in particular, a breakfast seminar on the global economy, served a key purpose. “The Virtual Global Economy — Update on the Euro, the Asian and Latin Markets and What’s Happening at Home” helped put recent and current global economic forces in perspective so that client strategies can be crafted from a position of strength rather than puzzlement as to how it all might turn out down the road. It’s not that the speakers know the eventual outcome of global economic trends. But their guesses are more than educated.
Speakers were Hugh F. Kelly, national director of research at Landauer Associates, New York; Dr. Peter Linneman, senior managing director, Equity International Properties, Ltd., Chicago; and Franc Pigna, deputy chairman and executive managing director, Latin America & Caribbean at CB Richard Ellis in Miami. David Kirk, principal at Kirk & Co., Boston, moderated the panel.
The speakers largely succeeded in illustrating the interconnectedness of the world’s economies. Markets will continue to exhibit unique dynamics, and certain market forces will impact whole regions, as was the case in Asia. But borders between markets are increasingly transparent. Consider the volume of capital moving between markets.
“Every day, about US$1.5 trillion in cross-border capital flow occurs,” says Kelly. “That’s about a third of the value of real estate in the United States, which is astonishing. And that movement of funds has been in a largely unfettered environment.” Europe’s economic union, trade pacts such as NAFTA and Mercosur and other mechanisms all help stimulate this capital flow.
Until now, mutlilateral monetary agencies, such as the International Monetary Fund, have reacted to financial crises as they have emerged, Kelly observes. But that is changing.
“Such entities are increasingly concerned about the potentially destabilizing effects of these unregulated flows that put at risk currencies, markets and the economies of nations and world regions,” Kelly notes. “Over the next few years, we will begin to see a more proactive approach on the part of some of those organizations. I expect we will see more uniform financial standards being discussed and implemented across borders, and more oversight in the application of funds, particularly in terms of the amount of leverage used in cross-border transactions,” he maintains.
“We also will see the introduction of some market circuit breakers to temper crises before they escalate out of control,” Kelly continues, “and greater central banking coordination, with the bankers becoming more policy-oriented and proactive rather than reactive.”
Japan is No Cure
For the Asian Flu
Don’t wait for Japan to pull the rest of Asia out of its economic slump, urges Equity International’s Peter Linneman. The notion that this is the year Japan — the world’s second-largest economy — will snap out of its recession and launch a regional economic turnaround is false, as it will be in 2000, he argues.
“Japan is an enormously powerful economy, but they are massively in debt to themselves, and they can’t service their own debt,” Linneman explains. “It’s an enormous game of musical chairs. It’s slow, it’s tedious, and nobody wants to end the game.”
In addition, Japanese society shuns conflict, Linneman adds, so political leaders are chosen from within the system based on their ability to not make waves — or changes to the status quo. “What Japan desperately needs,” he stresses, “is a Margaret Thatcher
Above right: Dr. Peter Linneman, senior managing director at Equity International Properties
Changes are occurring somewhat more quickly for two reasons in Thailand, where much of the Asian economic troubles originated. The Thai economy is a mere fraction of Japan’s, and the International Monetary Fund helped bail water from the sinking ship. But the latter point is troubling to Linneman. The funds came from middle-class taxpayers of major Western countries and went mainly to a dozen or so very wealthy families in the Asian countries that received the funds. This redistribution of wealth should not go unnoticed, he points out. “It’s not about whether we should continue to fund the IMF, but rather the accountability of
And real estate buyer, beware. During the U.S. real estate slump a decade ago, property in, say, Dallas, was bought by investors because enough companies were growing to lease them out. “In Thailand, the companies are all at death’s door,” Linneman noted, “and those companies don’t lease space.” The average face value of real estate debt being sold in Thailand at present is $800,000, of which an investor would buy maybe 30 at 10 or 20 cents on the dollar. “I ask you: Are most of the people we know of recycling $50,000 and $60,000 loans? I’d say not. It’s not a real estate business yet as much as it is a paper-recycling business.”
Other problems in the region, particularly in Thailand, include relatively unsophisticated legal and legislative structures, particularly where real estate ownership is concerned. “Forty percent of the legislators in Thailand are bankrupt by any reasonable definition of the term,” Linneman observes. “They’re writing bankruptcy legislation based on their own experience of it. I don’t expect a real lender-friendly set of bankruptcy law and interpretation coming out of that system [any time soon].”
Above right: Franc Pigna, deputy chairman and executive managing director, Latin America and Caribbean at CB Richard Ellis.
The lesson: Economic health may well return to much of the region before long, but the underlying financial, political, economic, legal and investment structures are not changing significantly enough to let down one’s guard where property ownership or investment is concerned.
What Ails Russia
Nor should Russia be counted on for much in the way of long-term economic, ergo real estate, potential, added Linneman, because some basic ingredients are missing from the recipe. The federal government lacks the central structure of its Western counterparts, and the efficacy of the country’s financial market and legal systems is suspect. Still, “Russia’s not without economic activity — it’s a big country,” Linneman asserts. But is it the kind of economic activity that will attract foreign interest as it sorts out its domestic reforms? Yes and no.
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Which has not stopped Russia from excavating its national resources as if there were a substantial world market in its products. “Russia right now is a little like being freezing cold in a little house, and you’re tearing the wood off the walls and burning it to stay warm, Linneman says. If you don’t, you’ll be very uncomfortable and will eventually freeze to death. If you do, you’ll be warm for a while and then you’ll freeze to death.” Russia’s “wood on the walls” are its oil, gas, copper, aluminum, tin, silver and other resources. The Russians are extracting them in a non-optimal way, says Linneman, selling them to foreign markets for much needed cash.
Central Europe, which Linneman calls “the battleground of the Cold War,” is enjoying robust growth — a sustainable rate of 4.5 percent in many cases — and increasingly stable economic environments. Productivity is high relative to major Western markets, and it’s growing.
In Western Europe, things get very interesting. “It’s embarking on one of the great experiments of our time,” Linneman relates, referring to the region’s economic and monetary union. Previous unification attempts have failed, he notes, because nations wouldn’t surrender sovereignty. Interestingly, European nations are simultaneously trying to give up their sovereignty while working to preserve it, Linneman points out. “That’s a very hard thing to do,” he adds. “They’re trying to keep national borders and national support systems but be fully integrated [with other markets].”
People in Paris will not move to Milan, much less Stuttgart, Linneman says, contrasting the European business scene with that of the USA, where people routinely relocate from one region to another to pursue career opportunities. “If they were willing to give up sovereignty on all matters except military, then I think the EU would succeed; without giving up sovereignty; it essentially becomes a system of fixed prices. And most of us don’t believe fundamentally that price fixing works.”
Linneman says Western Europe will benefit during the next two years from the attempt to integrate economically. “In the run-up to it, the biggest thing the European Union has done has already occurred, which is that countries have reduced their deficits from 100 percent of GDP to 60 percent.”
Latin America: The
Global Underdog
The dark years of the 1980s are an increasingly distant memory for those enjoying the fruits of Latin America’s turnaround in the 1990s. Just as Latin Americans were passionate about communism and socialism in years gone by, they are equally passionate about free markets and capitalism heading into the next millennium, notes CB Richard Ellis’s Pigna. “Latin America is one of the most dynamic world markets we have and it represents a massive opportunity in real estate from a medium to long perspective.”
Opportunity in the region is due to two factors. Firstly, the real estate inventory in the region is functionally obsolete, thanks to a dearth of development investment in the years leading up to 1992. Secondly, “We still have a perception of risk in the region that is not, in my opinion, in synch with reality,” Pigna notes, “although there are some serious areas of concern in the region. These include Mexico, with crime and corruption; Colombia, with narco-guerrillas of the economic type backed by the drug trade; and in Venezuela, the Chavez factor, which is a knee-jerk reaction to 30 years of inefficient government.”
By Latin American standards, the current economic crisis is highly manageable, Pigna relates. Argentina, Brazil, Chile and Mexico have the most mature real estate markets, and the Andean Pact markets of Peru, Ecuador, Colombia, Bolivia and Venezuela are worth watching for substantial real estate activity, particularly Peru, which Pigna says is poised for a significant upturn.
“This correction will be relatively short and has already resulted in numerous opportunities [for investors],” Pigna concludes. “In Brazil, for example, there are tremendous opportunities in class A office buildings — it’s not that you’ll buy real estate at 30 or 40 cents on the dollar. Traditionally, even in the worst of times, real estate has held its own. In general, for the last 15 years vacancy rates have been single digits, and probably less than 5 percent.”
Once regional financing standards take shape, securitization of real estate assets will emerge as a new trend in Latin America. “Those standards will develop when the international service providers come in, such as my firm, Jones Lang LaSalle and Cushman & Wakefield,” all of which are expanding their presence in the region. Typical investment strategies in the region include joint ventures with local developers, investments with local pension funds and investments in sale/lease-backs of multinational facilities.
“We are entering the 21st century in a dynamic way in the Latin America region,” Pigna says. “The region is leapfrogging what we in the United States and Europe experienced in the last 15 years, similar to what’s happened in the telecommunications industry. All the telecom giants are there, but they’re not hardwiring the region because it’s obsolete and too expensive. Nor will they go cellular, because that’s obsolete. They’ll go right to satellite digital. Phone booths in Guatemala have solar panels, no electrical hookup. In telecom and real estate, the industry is adopting state-of-the-art standards, because it’s the most efficient thing to introduce. And international firms will put that in place.”
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