Global Viewpoints

A Spreading Cold and the Typical Cure

By Barry Tuman

The USA caught a financial cold as a result of the meltdown in the residential mortgage business and the resultant liquidity crisis. It became rapidly obvious that the UK, linked at the hip with the US, caught the same cold. The germs first surfaced in the fourth quarter of 2007 with the high (low) point revealing itself as the face of Northern Rock and its line of depositors lining up around street corners to withdraw funds.

The residential mortgage mess continued to germinate rapidly, and from that point on all the connected parts of the economy were exposed to the malady. Constantly escalating housing values and cheap easy to procure mortgages had helped spur a consumerism boom over the last few years which propelled the economy to generate consistent strong retail sales results across most sectors. These strong sales, occurring quarter after quarter for the prior years, propelled an increase in rental rates for existing shops and properties as well as an almost insatiable increased demand for more space from rapidly growing retailers.   

Developers, and subsequently the lenders who back them, had jumped in to fill the projected space requirements. A mini boom in retail development began based on a demonstrated and historically high demand curve with a corresponding set of newly established and historically high retail rental rates that would make almost any project feasible when values and cash flow projections were calculated using the data.  Fortunes were only a spreadsheet away…..

Ah, the good times. They cannot and of course, did not last forever.

Reading through the news in the UK this last week one constantly notices the large print screaming that large retail developments completed recently are not leasing to plan.

You can also read that many proposed retail developments have been postponed or worse yet, cancelled. What happened?

A combination of decreasing rental rates, which were driven by decreasing sales results at the major retailers, which is tied directly to less discretionary spending by consumers, which is influenced of course by lower housing values which is directly impacted by the inability to procure new mortgages which we all know is the result of the US mortgage market problems.

The known cure for this cold is to sell the project at a discount to the inflated assumptions. The old reliable money, too conservative to ever make the “right type deals” in a transaction frenzied environment, is now out and about making these type house calls. These doctors are administering the shots as necessary to clear the system, but this medicine is very expensive for the patients.

What is Public Relations, and What It’s Not

Today we have a guest blogger: Edward M. Bury, APR, Director of Public Relations for the CCIM Institute.

Modern public relations probably is one of the most misunderstood disciplines in business today. In this initial posting, we’ll define public relations as it’s practiced today, point out differences between public relations and other communications practices and dispel some myths about media relations.

Authoritative text books on public relations differ slightly in their definition of the practice. This one encapsulates PR and is widely recognized as being definitive: “Public Relations is the management practice designed to build and maintain mutually beneficial relationships between an organization and its publics, on whom its success or failures depends.”* A key word here is “management,” because PR campaigns must have input from and support of management in order to be successful.

Too often, public relations gets lumped into efforts to generate publicity through media relations. True, media relations constitute a visible component of public relations, but effective campaigns transcend far beyond newspaper clippings or 30 seconds on the evening news. 

“Free publicity” is a misnomer!   This does not happen in a concerted PR program for several reasons, including:

·     PR pros charge hourly or monthly retainer fees for their services – including media relations.

·     Clients also pay many other fees – postage, photography, print production – as part of a campaign.

·     Publicity or news coverage inherently in its essence is free, but the process of securing it is not.

Public relations focuses on communicating a message, but it differs from other forms of communications like marketing and advertising. The former centers on identifying human needs and wants, offering products or services to satisfy those needs and wants, and creating a transaction for something of value (usually money). The latter is a controlled method of placing messages through the media by paying for them.  These days, many communications programs combine PR, marketing and adverting disciplines.

Now, let’s address some misconceptions about dealing with media. 

1.     It’s widely believed that communicating through media relations – distributing a news release – will guarantee placement.  False.   There is absolutely no guarantee your message will be delivered.

2.     There are no risks in media relations because the media always get the story right the first time.  False.  There are plenty of risks in media relations.

3.     Writing an effective news release is easy.  False.  Crafting a message that gets read and included in the news requires a great deal of skill.

You can contact Mr. Bury at: pr@ccim.com.

*Effective Public Relations by Cutlip, Center and Broom.

European Fund Returns Fall Sharply

Investment returns from European non-listed real estate funds fell sharply in 2007 as the credit crunch began to bite into fund performance, the INREV Institutional Vehicles Index showed.

When measured in euros, the INREV Institutional Index produced a -3.9 percent total return in 2007, compared with 21 percent in 2006. This dramatic fall can be explained by the euro increasing in strength against the dollar and sterling as well as a poor performance from the UK market for non-listed real estate funds.

“What these results mask is the fact that Continental Europe still turned in a strong performance at 12.5 percent in 2007 as shown in our new Europe Ex-UK sub index. This is still down on the 16.1 percent from 2006 but demonstrates that the impact of the credit crunch is varying greatly across the European markets with the UK taking the greatest hit so far,” said INREV Chief Executive Lisette van Doorn.

The majority of Continental European funds have performed far better than vehicles in the UK, as shown by the overall 2007 index figures, according to Michael Morgenroth, member of the board of Germany’s Gothaer Asset Management. There was, nevertheless, an increase in yields, but the underlying market was not as affected by the credit crunch as the UK. With the return of risk considerations into pricing, there could be further rises in yields to come on the Continent this year.

 

The strong influence of currency factors in the performance of the INREV Index in 2007 can be seen when the results were expressed in sterling producing a return of 4.8 percent, or in dollars at 6.6 percent, but the heavy weighting of UK market in the overall index was also a major contributory factor in the low European total return. In sterling, the UK market returned -5.9% compared with -13.8 percent in euros.

“The closing months of 2007 saw the fastest ever re-pricing of the UK property market after four successive years when UK funds outperformed those in Continental Europe ," notes Andrew Smith of Goodman Property Investors, who chairs INREV’s Benchmarking Committee. Leveraged vehicles suffered disproportionately as capital returns turned negative, and the effects of tighter credit markets began to make an impact. 

And, the extent of the re-pricing means that the UK is now coming back onto many international investors’ radar screens, with underlying yields looking more competitive than they have for three years, Smith says.    

The INREV Index measures annual net asset value-based performance for non-listed real estate funds investing more than 90 percent of its allocation in Europe. The 2007 release of the Index covers 257 vehicles (including retail vehicles) with a total net asset value of €162.3 billion and reports breakdowns on countries, property sectors, vintage, gearing levels and investment style, with a time series from 2001. The INREV Index is collected and calculated by Investment Property Databank (IPD).

Recession: Its Impact on CRE

By Melissa Securda

Since January, economic conditions have become increasingly more strained and it seems everywhere you look, there’s another story about our nation’s economy. Cushman & Wakefield recently released a report dedicated to the impact of the current situation as we move through 2008 and what we can expect in 2009. 

The report, titled “Braced for Tough Times: How This Recession Is Likely to Impact Commercial Real Estate,” points to 2007’s severe housing market and credit problems as the root cause of the recession. However, the increasing unemployment rate, significant job loss, plunging consumer confidence and dismal retail sales were contributing forces that further pulled the U.S. economy into a recession. 

The question “Are we in a recession?” has been replaced with “How long will it last?” Previous recessions in 1991 and 2001 spanned nine months, and in each case, the first year of recovery showed almost no economic growth. Cushman & Wakefield’s report estimates this recession will continue for nine to 12 months, followed by a sluggish first year of recovery. 

Employment sectors facing the most trouble are financial services and residential real estate.  Areas of the country with a high concentration of these types of jobs, such as New York and Los Angeles, will feel a more severe impact. However, cities such as Houston and Chicago will weather the storm with less damage since they have a high concentration of jobs in the energy sector and manufacturing exports.

On a national level, commercial construction activity is in check, though a few markets may experience upwards pressure on vacancy due to additional new construction deliveries in saturated markets. More job losses over the remainder of 2008 could affect office-using tenant demand, contributing to negative absorption and slower rent growth. 

Cushman & Wakefield indicates two sectors which offer opportunities for the U.S. economy as the year progresses, tourism and exports. The dollar’s current position makes the U.S. an appealing tourist destination and U.S. exports are becoming more attractive on a global basis. 

Brazil's Hot for Investments... and Dengue Fever

One of the hottest regions for real estate investment is Brazil. In fact, Brazil is the B in the BRIC nations that all investors mention when they talk about "up and coming markets". (By the way, if you're wondering what the RIC stand for: Russia, India and China.)

Just last month, in fact, The Economist wrote a huge story on Brazil. The title of the story? "Land of Promise". In the last quarter of 2007, Brazil's GDP grew at an annualized rate of 6.4 percent. And it seems that plenty of foreign investors definitely agree: foreign direct investment last year increased 84 percent to a record $35 billion in Brazil, according to the United Nations Economic Commission for Latin America.

More than a few U.S.-based real estate investors are taking a stake in Brazilian soil. Hines, for example, implemented of a nationwide investment program two days ago. The program will acquire or develop strategically located logistics parks on major highway intersections in various Brazilian cities to serve the needs of logistics and transportation clients.

Currently, the firm has five logistics parks underway or completed in Louveira, Araucaria, Rio, Embu and Manaus. Hines plans to develop an additional 14 parks over the course of the next three years. It already has two speculative modular warehousing projects under development in Louveira Swans Industrial Park and Cajamar Distribution Park.

Like all emerging markets, Brazil is risky, and some of the risks are typical: politics, currency valuations and the like. For example, this October the country will hold municipal elections for mayorships and 2010 heralds a presidential election.

But Brazil's risks are not just financial or economic – for millions of people, Brazil is risky to their health. Right now, the country is in the grip of one of the most severe outbreaks of mosquito-borne dengue fever. In Rio de Janeiro alone, more than 30,000 people are sick, many of them with the deadly hemorrhagic variety.

With this kind of health threat in Brazil, the whole idea of managing real estate risk sounds kind of silly.

Europe's growing demand for infrastructure

Like the U.S. and most other industrialized countries around the world, Western Europe has failed to keep up with the demand for new infrastructure, according to a new report by Ernst & Young. The report, Bridging the Gap, examines the existing environment and future opportunities for private investment in infrastructure in Europe including emerging markets in eastern and central Europe.

The EU's own trans-European infrastructure plan calls for massive development of transportation and other infrastructure at a cost in excess of 550 billion euros by 2020 with more than 90 percent of costs expected to be covered by EU member states and private investors.

Across Europe, one of the key issues for governments will be the promotion of more open cross-border competition in order to attract foreign investment in an increasingly competitive environment, says James Neal, Head of Ernst & Young's Infrastructure Advisory group.

The countries studied in this report are currently at varying stages of maturity as it pertains to attracting and utilizing private investment capital for infrastructure, commonly called public private partnerships (PPPs).

For example, since creating the legal frameworks for PPPs in 2004, France reported 35 agreements have been reached, including privatizing three toll road companies for 12 billion euros. However, as of 2006, Germany has seen slower growth with a modest 1.4 billion euros of private investment in infrastructure.

Even as governments struggle to build the infrastructure needed to support growing economies, in some countries new development is drawing political opposition due to environmental, economic or social issues such as pollution, displacement of homes or businesses. In addition, with global warming a growing concern many countries are struggling with how to protect valuable infrastructure from flood, fire and other catastrophes likely to occur over the next 50 to 100 years.

According to the report, private investors are likely to increasingly turn their attention to emerging markets in central and eastern Europe. In 2008 and 2009 look for investors to focus more of their attention on the emerging infrastructure investment markets in Turkey, Czech

Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia.  Since 2003, Hungary, Poland and the Czech Republic have approved PPP legislation.

Spotlight on Poland, Part 2

By Melissa Securda

This is the second part of two-part blog on Poland. The first blog was posted on Friday, April 11.

Increases in consumer spending, and consumer demand for higher quality and luxury items, has encouraged rapid expansion among retailers. ING Real Estate developed Warsaw’s large scale retail development Zlote Tarasy in 2007, which is the flagship location for many retailers in Poland.  Internationally recognized fast food brands such as Starbucks, Burger King and Subway are appearing throughout Poland.

Record breaking leasing activity took place in the industrial sector, bringing figures over the 1 million square meter mark for the first time. Growth in the retail sector is driving demand for warehouse facilities and most of the activity is taking place in smaller cities where the cost of labor and land is generally less expensive.

Total investment transactions totaled just shy of €4 billion in 2007, with 59% of that invested in the retail sector. With the steady pace of construction activity and sustained tenant demand, new investment opportunities will continue to present themselves in the coming years.  Because of the global financial market situation, Poland will probably not see the same transaction velocity in 2008-2009.

Poland finds itself in an exciting part of the real estate cycle. The economy is growing, real estate fundamentals remain strong and show no signs of slowing, and consumers across the country are gaining spending power. These factors should combine to bolster the country against any serious fallout from the global financial crisis. 

Continued investment in America's urban cores

More and more institutional investors are making investments in urban areas, especially those city cores that need to be revitalized. For example, the Canyon-Johnson Urban Fund, a partnership of Canyon Capital Realty Advisors and Earvin “Magic” Johnson, just closed its $1 billion Canyon-Johnson Urban Fund III.

This fund eclipses the combined $900 million in equity of the two predecessor Canyon-Johnson funds and will facilitate more than $4 billion in new development and urban revitalization in the top 40 U.S. metropolitan markets. Its focus is to identify, enhance and capture value through the development, redevelopment, acquisition and repositioning of real estate in densely populated, ethnically diverse neighborhoods with strong market fundamentals for retail and housing.

Canyon-Johnson says Fund III received commitments from a broad range of public and private pension funds, endowments, foundations and investment companies from throughout the nation. 

“The success of the Canyon-Johnson Urban Funds has proven that investing in ethnically diverse markets can not only generate strong financial returns, but also benefit local communities and facilitate a positive environmental impact,” says Bobby Turner, the fund’s Managing Partner. “The continued investment by our institutional capital partners and the sheer scope and size of the third fund and its resulting capacity for revitalization in urban neighborhoods speaks volumes about the continued opportunities in our nation’s cities.”

Like the two previous funds, Fund III seeks to provide and foster economic opportunities for underserved residents of the urban neighborhoods in which it invests and to enhance the environment by pursuing LEED certifications and supporting transit-oriented housing that helps to reduce traffic and accompanying emissions. It will look to partner with local communities and developers, providing them with the much-needed capital and development experience to facilitate urban revitalization.

Market fundamentals point to continued growth in ethnically diverse communities across America. Over the next 10 years, population growth will generate demand for 14.6 million units of housing, with minority populations projected to account for 70 percent of that demand. Moreover, urban retail represents an unmatched investment opportunity due not only to the gap between supply and demand of retail within inner cities, but also demand density.

European Property Investment

By Barry Tuman

The commercial property sector in the UK managed to slow the decline in asset values for the third month running in March, although returns were still negative as capital values continued to fall. Capital values of commercial property fell 1.3 per cent in March, according to IPD, the benchmark index for property in the UK.

“Capital values are still falling, but the rate has moderated month on month this year and rents continue to grow in all of the three main sectors,” said Malcolm Frodsham, IPD research director in an interview with The Financial Times. “The results may not signal the bottom of the market just yet but at least investors have a better idea of where the floor is likely to be.”

Good news for investors? Maybe… maybe not.

It is always a little disconcerting when people involved in investments are looking for signs of the bottom,  but this is encouraging analysis at least, specifically the point about rental values contrasting with the capital values.

While the UK tries to recover from the liquidity cold, investors think the cure may be found across the bordering bodies of water, heading in both directions.

According to the London Times, Quinlan Private, the Irish property investment group, is reacting to the UK and western European property downturn by heading eastward in search of higher yields. Quinlan, which manages assets of €11.5 billion ($18.2 billion), expects to focus up to 70 percent of its activity on central and eastern Europe, up from less than 20 percent three years ago, according to partner Peter Donnelly. The group is also diversifying its financing by raising an expected €400 million with its first US fund, 70 percent of which it expects to spend on the region.

Markets and investors are not all operating the same in the Euro Zone. Following the money flow is always a good pointer as to where returns are still to be found for the near term. Interestingly enough, increasingly the US is being targeted along with Eastern Europe here as a growth opportunity, albeit with a slightly longer return horizon.

Hmmmmm…

Legislative Update

Last week, Senators voted 88-8 for the "Clean Energy Tax Stimulus Act of 2008," a real estate-backed amendment offered by Senators John Ensign (R-NV) and Maria Cantwell (D-WA) and co-sponsored by 31 other Senators. The amendment proposes a one-year extension of the Section 179 energy efficient commercial buildings deduction (until Dec. 31, 2009), and would raise the deduction from $1.80 to $2.25 per square foot. It also would extend for eight years clean energy production incentives such as the Roundtable supported Section 48 solar energy and fuel cell investment tax credit.

The Senate housing bill was also amended to include the "The REIT Investment Diversification and Empowerment Act (RIDEA)", supported by the National Association Real Estate Investment Trusts (NAREIT). If enacted, the bill would (i) allow foreign currency gains to be permissible REIT investment income; (ii) raise the taxable REIT subsidiary income limit from 20 to 25 percent of REIT gross assets; (iii) change the prohibited transaction safe harbors for dealer sales from 10 percent of aggregate basis to 10 percent of fair market value; (iv) conform the tax treatment of health care facilities to lodging facilities; and (v) reduce the safe harbor holding period for REIT properties from four years to two years.

While the Senate bill faces opposition in the House (where a competing measure has cleared the Ways and Means Committee) as well as from the White House, both parties signaled a willingness to work together toward a bipartisan solution. The W&M committee version excludes the NOL carry back provision and the proposed tax credit for buyers of foreclosed homes. Instead, it provides a $7,500 means-tested tax credit for first time homebuyers that amounts to a 15-year interest free loan. It also temporarily increases the Low-Income Housing Tax Credit (LIHTC) per capita state authorization to $2.20 from $2. Further, it allows the credit to be deducted against the AMT and excludes tax-exempt mortgage revenue bond interest from the AMT.