Global Viewpoints

Hospitality Sector Grows in the Middle East

By Melissa Securda

Throughout the Middle East, there is an emphasis on real estate development across all sectors.  Growth in hospitality, particularly five-star accommodations, is taking off. Dubai City in the United Arab Emirates, for example, is planning impressive growth levels over 29 percent by 2016. Director General of the Dubai Department of Tourism & Commerce Marketing Khalid bin Sulayem reports that hospitality revenues reached $1.8 billion during the first half of 2007, and the city accommodated 3.4 million guests during that period. 

Abu Dhabi, the capital of UAE, has 8,500 hotel rooms under construction and the Emirate hopes to increase demand for leisure travel by developing destination attractions, according to a report by Colliers International. The city will play host to Formula 1 racing in 2010, and the world famous museums Louvre and Guggenheim will open their Middle Eastern locations in 2012 in the hopes of attracting tourists to Abu Dhabi.

Across all markets in the Middle East, the majority of the hotels under construction boast every imaginable amenity and luxurious accommodations beyond expectations. Current demand for luxury hotels remains high in each market, but what will happen when the new, spectacular product delivers to the market? Will demand remain high? Or will construction deliveries outpace consumer demand for such accommodations?

The success of this region, as well as the success of hospitality and other real estate ventures, is influenced by the global economy, politics and the environment. We can only provide the data now and hope that this region's real estate growth will remain at the top and that it will avoid any major downturns.

Beyond the Mall

The start of the holiday shopping season is a good time to talk about how and where Americans shop.

Today, many shoppers are bypassing malls in favor of lifestyle centers and urban street-front locations. That doesn't mean that the mall is dead – far from it. But, it does mean that more retailers are looking for off-mall locations, and many of them are slowly increasing the number of stores they have on urban street-fronts and in lifestyle centers.   

In fact, retailers plan to have 11 percent of their stores in urban street-front locations by the 2007, compared with eight percent last year, according to the 2007 NRF Retail Real Estate study, which was conducted by AMR Research.

The survey also found that retailers are continuing to move toward lifestyle centers, with nine percent of company stores in that format compared with eight percent last year. To compensate for the re-allocation, retailers have cut back slightly on their number of mall and strip mall locations (44 percent this year vs. 48 percent last year).

“Urban storefronts are beginning to play an increasingly important role in retailers’ real estate strategies,” says NRF Chief Financial Officer Carleen Kohut. “Throughout the country, traditional main streets are being revitalized to include an assortment of new retail shops, from department and clothing stores to coffee shops.”

Part of the shift in American shopping patterns can be attributed to the increasing popularity of the open-air town centers and mixed-use projects. If you look around your community, you'll see that almost no new malls are under construction, but there are plenty of open-air centers being built both in urban areas and in the suburbs.

And you probably will notice at least a couple of malls that are so-called declining malls – those that have lost their department store anchors and are no longer meeting the needs of the community. The question now is what to do with these old malls?

One Man Gathers what another Man Spills

By Barry Tuman

Someone’s pain can be someone else’s opportunity. We’ve all heard that before, and in the property markets we have seen that situation play out numerous times. The more things change, the more they stay the same.

Processes are being developed, strategies are firming, people are re-potting themselves within different internal operational structures and markets are moving… fast.  

Large well capitalized players are taking difficult valuation adjustments and at the same time boldly stating that they are looking to maybe take advantage of market opportunities.

You just have to love this industry. Usually fortune favors the brave. In commercial property it also favors people brave enough to have a sound long term strategy.

Those with the good fortune of having stuck to their strategy, who did not get caught too close to the edge of the roof as the earth moved may find themselves in a position to catch some opportunity that will now come spilling over the top.

Although the top is sometimes a difficult place to spot.

Why Investors are Interested in the U.S. – Part II

By Pius Leung

Last week we discussed the first three reasons why investors are interested in the U.S. – solid returns, investment security and residency and citizenship. This week we will discuss four more reasons: diversification, owner's rights, quality of investments and hedges for the future.

Diversification – Investors’ diversification strategies involve geographic relocation of wealth to increase capital’s safety and stability. According to AFIRE's 2006 survey of its members, the U.S. provides the best opportunity for capital appreciation with India, China, Germany and Russia rounding out the remaining top four spots.

Owner’s Right – There are no ownership limitations for foreign interests to purchase investment properties in the U.S. Investors enjoy ownership rights in the U.S. that they might not have in other countries.

Quality of Investments – There is an abundance of high-quality, investment grade properties in the U.S. from which investors can choose. Investors favor the quality and size of U.S. investments over comparable properties in other countries. Moreover, quality is also an important element when contemplating exit strategies.

Hedge for the Future – Investing in the U.S. will hedge against possible of inflation in investors' own countries as well as hedge against fluctuations of currency exchange.

Hardcore frothing?

By Stephen Lowrance

“Hardcore, bottom slice, froth…”— what possibly could these three terms have to do with commercial real estate?

Spend any time in the UK and you will quickly learn some colorful new ways to describe ordinary things. The subway is called the underground or the tube, the restroom is the loo, French fries are chips, cookies are biscuits, the hood of a car is a bonnet and the trunk is a boot. 

Sit down with a British property valuer or “surveyor” (preferably over a pint!) and you may find yourself talking about hardcore valuation methods and top slice/bottom slice or term and reversion techniques.

Generally, these terms all describe various ways of looking at and analyzing rental income for the purposes of property valuation. In the hardcore approach, the surveyor values current rents, or “passing rents”, being paid by existing tenants into perpetuity (the bottom slice), and separately, the deferred value of the difference between market rent and the passing rent is determined (the top slice).

Similarly, the term and reversion method values the rental income stream associated with each tenant in two pieces; however, in this method the passing rent is valued over a finite period (the term) while the market rent is valued into perpetuity (the reversion).

Valuation practice in the UK is really a lot more sophisticated than my 100 word description above and people there study for years to become surveyors. As a whole, the profession is highly respected across the British property market and wherever the British flag has flown, but how cool is it to use a beer reference— froth —as a way of to describe an ‘over rented’ or above market rent situation? 

What interesting or colorful real estate terminology is common in your market? Please email me at slowrance@argussoftware.com, and I will share these terms with our readers in a future blog.

The Ties That Bind

By Barry Tuman

The Royal Institute of Chartered Surveyors (RICS) has just confirmed what local market participants have been quietly discussing for months. Demand in the UK for Commercial Property is now at a 4 year low. No kidding…

The London equivalent of a REIT index is at a new low and has seen an average loss of 40 percent year to date across the sector. The retail property sector is driving the slide for the overall index. Recent sizable comparables are confirming that values have moved downward.

The thread that initially ties the sub prime residential financial market meltdown to commercial property begins here. When housing values stop rising or begin to fall, retail shoppers feel less secure and pull back the reins. Less consumer spending affects the ability for owners to increase rental rates. Less liquidity overall does not help matters.

In the short to mid term we will see how many other threads are going to be sewn together. After all it is a marketplace…

Why Foreign Investors are interested in the U.S.

By Pius Leung

Investors are interested in the U.S. for the following reasons:

• Solid returns
• Investment security
• Residency and citizenship
• Diversification
• Owner’s rights
• Quality!  Quality!  Quality!
• Hedge for the future
• Movement of funds
• Technology considerations
• Currency exchange

I will discuss the first three reasons in today's blog and the other reasons in future blogs.

Solid returns – The ability to achieve stable returns is a major reason why investors are attracted to the U.S. Typically, investors are unable to match in other countries the internal rate of return (IRR) they can receive in the U.S.

Investment security – According to the 2006 AFIRE Annual Survey, investors around the world believe U.S. will offer the most stable and secure investments with the UK, Canada and Germany next in line.      

Investors are concerned with the safety of their capital, as well as the “return on” and “return of” of the initial capital. The U.S. provides a safe, secure environment that other countries may lack of due to governmental influences, government instability and currency fluctuations.

Residency & Citizenship – Some of the investors are hoping for the eventual possibility of gaining U.S. citizenship or permanent legal residence by investing in the U.S.

Seriously, what is a hedge fund?

By Stephen Lowrance

If you’re like me, you’ve heard about hedge funds, but nothing concrete. You may have a vague notion that they are private investment funds for the "über rich" and that they somehow "hedge" risk. You would be partially right. 

According to Investopedia.com, hedge funds are "aggressively managed portfolios of investments that use advanced investment strategies." It goes on to say that they are usually private partnerships with limited memberships (members must be accredited and have a net worth of $1 million or more), very high initial investment requirements (to avoid regulation by the SEC) and minimum investment periods (typically members can’t touch their money for at least a year, and some hedge fund managers have the ability to deny withdrawals at certain points in the cycle in order to protect the larger fund). 

Unlike mutual funds, hedge funds are largely unregulated, and hedge fund managers have a lot of freedom to employ different strategies, including the liberal use of debt to finance investments, long and short positions and derivatives. Most hedge funds have the goal of maximizing returns and "carry more risk than the overall market". This means hedge funds have the potential to deliver big returns or big losses. 

The name, hedge fund, originated in 1949 to describe the investment strategy of Alfred Winslow Jones, who had the idea of simultaneously taking long positions in certain stocks, while short selling others. The combined position "hedged" the investment against changes in the overall market. Today this is just one of numerous strategies employed by hedge funds.

It’s these strategies, many of them risky (including 90 percent plus leverage in some cases!) and the huge amount of capital in play ($2 trillion worldwide according to a New York Magazine article) that have led some analysts to speculate the potential for hedge funds to dwarf  the recent sub-prime lending mess in the worst case "great unwind" scenario.  What do you think?  Are hedge funds the next sub-prime mortgage fiasco in the making?

U.S. REIT Market Loses its Dominance

By Melissa Securda

A recent report issued by global consulting firm Ernst & Young reported some surprising information about the global REIT market – after decades of being the dominant REIT market, the United States has been eclipsed by the rest of the world.

In 2006, North America was home to 253 public REITs compared to 198 REITs throughout the rest of the world. As of June 2007, the rest of the world housed 253 REITs compared to 195 in North America. However, the United States remains the largest single REIT market with 169 REITs.

Although the U.S. lost almost a quarter of its REITs through privatization and mergers, the report noted that total market capitalization of publicly-listed REITs around the world reached $764 billion in June 2007, up from $608 billion a year ago. This represents more than 25 percent growth in the last 12 months despite what happened in the U.S. REIT market.

Essentially, we've seen a dramatic shift in REIT formation away from North America and toward Asia and Europe in the last 12 months, according to Michael Frankel, Ernst & Young's global director of REIT Services. Asia and Europe's REIT markets have experienced a tremendous outpouring of capital and REIT regimes in the U.K and Turkey have helped the rest of the world surpass the U.S. for the first time in total number of REITs. Moreover, recent or pending REIT legislation in three major European real estate markets the UK, Germany and Italy are just beginning to fuel growth in the global REIT sector. 

Maturing REIT markets around the world such as Australia, Canada, and the Netherlands may witness a similar privatization wave, though on a lesser scale, in the year ahead because of tax considerations in some countries and a higher cost of public capital. In Australia, there have already been two large listed REITS within that market delisting via private equity deals.

This shift creates some interesting opportunities for institutional investors and private equity groups.

Is Infrastructure Investing the Next Big Thing?

News of the bridge collapse in Minneapolis shocked and horrified most Americans. But some commercial real estate experts have been warning for some time that the U.S. infrastructure – roads, bridges, power plants and the like – is in terrible condition.

Money for basic infrastructure repairs is running out: the Federal Highway Trust Fund, which provides the monies to maintain and construct interstates, will be bankrupt by 2009. The challenge now is to find a way to pay for American infrastructure.

The U.S. will under spend on needed infrastructure investment by approximately $1.6 trillion dollars over the next five years, according to the Army Corp of Engineers. Infrastructure projects are expensive and complex. For example, modernizing the 52-year-old Tappan Zee Bridge, which connects Connecticut, New Jersey and New York City, could cost anywhere from $3 billion to $15 billion.

Ernst & Young predicts the infrastructure investing market will quickly rival other real estate-related investment markets such as CMBS, REITs, and private equity in terms of market size. "The private sector is going to play an expanded role in the coming global movement to build and modernize the world’s infrastructure," says Dale Reiss, director of Ernst & Young's Global Real Estate Group.

Booz Allen Hamilton says that building, repairing, operating and owing infrastructure projects around the globe can be very profitable. The firm estimates five-year returns for infrastructure assets range from 11 to 13 percent for airports, 10 to 13 percent for toll roads, 8 to 10 percent for rail and 10 to 14 percent for wastewater plants.