Global Viewpoints

Australia's REITs Taking on More Risk

Despite the fact that Australia’s listed property trusts (LPTs) are traditionally viewed as a defensive investment, LPTs have outperformed the ASX 200 Index, the benchmark index for the top 200 companies in Australia, for the last few years. That's because Australian LPTs, known as REITs in other countries, have taken on more risk and allow for greater investment returns, according to a report by PricewaterhouseCoopers.

Australia has one of the oldest and most developed REIT regimes in the world. The first REIT was listed in the Australian Securities Exchange (ASX) in the 1970s. There are now approximately 34 REITs trading on the ASX. The ASX 200 Index includes 21 REITs with total assets of $164 billion.

Originally the model was simple. REITs raised capital through listing on the ASX, mixed with a moderate amount (often 20-40) of debt. The weight of money flowing into superannuation schemes through mandatory employer contributions increased demand for such a low-risk investment. Steady cash returns provided an income for pensioners to live off whilst their income was protected against inflation through fixed or inflation-linked rental review clauses in property leases. The long-term trend of upward property valuations also provided an increase in their capital base and hedged their investment against inflation.

However, the Australian core commercial property market is one of the most highly securitized in the world in that 95 percent of retail property and 70 percent of office property is institutionally owned. There is very little available stock for purchase by LPTs in Australia, and this has meant property trusts have had to either look overseas for continued growth or develop their own assets.

Given the long history of the local REIT market in Australia LPT fund managers were well placed to use their expertise to expand offshore. The local LPT sector is now substantially invested offshore. Twenty-three out of the 34 LPTs in Australia have at least one asset overseas, and of the top 10 LPTs, 45 percent by value of their assets were overseas at the end of 2007.

This has brought with it all the risks associated with offshore investment, such as foreign exchange risk, more complex investment structures and frequently the need to enter into joint venture arrangements with new business partners more familiar with the local market.

Westfield and Macquarie were the Australian LPTs that pioneered investing offshore. They were followed by a number of the existing domestic LPTs which expanded their Australian portfolios to include overseas assets, usually located in the US and Europe. Over the last three to four years a number of more specialized funds dedicated to specific markets, such as Japan, have emerged.

U.S. in Better Shape than Perceived, Economist says

By Melissa Securda

While attending the National Council of Real Estate Investment Fiduciaries (NCREIF) conference last week in Washington D.C., Greg Leisch, President and Founder of commercial real estate research provider Delta Associates, spoke to the audience about the state of the national economy.

His view was encouraging: the national economy is in better shape than perceived.  Unfortunately, negativity feeds into the minds of the general public through various media sources, and the fact that it’s an election year has the candidates focusing on everything wrong with the economy. To make matters worse, the sitting president is unpopular, which only emphasizes problems facing Americans. 

In reality, we’re not doing that bad.  Leish pointed out that 73 percent of the S&P 500 companies met or beat estimates. But, the broader economy is in a period of slow growth, and the possibility of a recession is not out of the question. The estimated recovery period will be a slow, contracted time frame spanning 2010 to 2011.

The slowdown experienced in the US is consumer driven. Subprime delinquencies are up to 17 percent and consumer sentiment is down significantly. Leish points to five factors we need to drive the return of consumer confidence:  (1) Positive media coverage (2) Housing market activity, which should be at normal levels by 2011 (3) A stronger US dollar, which will happen when interest rates rise (4) A stable credit market (5) A consistent stock market.

Canada Offers Opportunity for Branded Hotel Investment

Canada remains vastly underexposed in branded hotel rooms compared to the U.S., according to a recent report by Jones Lang LaSalle Hotels. The report, " FocusOn Canada: Hidden Value in a Resource-Rich Nation", found that investors have a great opportunity to invest in branded hotel rooms.   

“Surprisingly, the Canadian hotel market is often overlooked by investors," says Kristina Paider, senior vice president of research and marketing for Jones Lang LaSalle Hotels.

Canada displays all the characteristics of a market with the potential for lucrative returns, according to Alan Tantleff, an executive vice president for Jones Lang LaSalle Hotels. Brands such as Courtyard by Marriott, Hampton Inn and Holiday Inn Express have proven to be successful in Canada, leading their markets in rate and occupancy. “Despite their success, large international operating companies are far away from being as represented in Canada as they are in the U.S.,” Tantleff says.

A per capita comparison of the number of internationally branded hotels in Canada and the U.S. highlights the vast difference. The mid-scale branded segment is the most under-represented in Canada, with well under half the number of mid-scale brands per capita compared to the U.S.

While the major budget brands show a wider distribution in Canada, their per capita representation is only two thirds what it is in the U.S. Canada has 28 percent fewer internationally branded full service hotels per capita than the U.S., exhibiting the smallest segmental gap.

Canada encompasses the infrastructure and strong demand generators necessary to support a thriving investment market while lacking in lodging supply and brand saturation as seen in many U.S. markets.

“There is a pronounced opportunity to develop the supply of branded hotels in Canada, particularly in mid-scale brands in secondary and tertiary markets,” Tantleff says.

FocusOn Canada: Hidden Value in a Resource-Rich Nation can be accessed at www.joneslanglasallehotels.com.

Looking for the Easier Life

By Barry Tuman

At dinner in London the other evening I met a couple of young local attorneys specialising in real estate finance. They both practice at (separate) large city firms and were getting ready to move home, back to New Zealand, after a few years working in the UK.

 

They found the work they had been doing over the last few years in London real estate very exciting as well as financially and intellectually rewarding. They had challenging days and a “ton of fun”, as they put it, structuring transactions and creating developments and entitlements as the market continued to move. They seemed to be living an almost glamorous life going from deal party to deal party. 

Leaving London was not something they had been contemplating. Life was easy the last few years. They were not real estate professionals before coming to London, but they had been swept up into a booming industry in need of talent.

Fast forward their lives to now, and life in London real estate circles is not that easy. Deals are scarce. Financing is very difficult. Quiet workouts are in fashion. Relationships that had been friendly are getting a little contentious. Expense accounts are down so low as to be almost nonexistent so, of course, those deal parties are a thing of the past. The easy life has taken a vacation holiday from the real estate community.

And so are the young attorneys taking a holiday. They are going to New Zealand where “business is light and people have fun”. Their comment to me was that the work was going to be hard over the next year or so and life is so short…

And so we see the repeat of yet another part of the cyclical story of the real estate business. As the work gets harder, real knowledge and perspective becomes a key to success. Hangers on begin to drift away from the business leaving (or in many cases bringing back) the industry lifers who, having been through these things before, see that hard work is not the opposite of the “easy life”, it is simply a well worn step to get there.

Canada Overtakes US & Australia as Most Transparent CRE Market

Canada now ranks as the world's most transparent commercial real estate market, according to the latest Global Real Estate Transparency Index from Jones Lang LaSalle and LaSalle Investment Management.

Previously, the commercial real estate markets in Australia and the United States had long occupied the number one spot, and they remain among the most transparent in the world, ranking two and three, respectively.

The Index, which provides a rigorous framework for comparing the level of real estate transparency in 82 markets around the world, shows that nearly half of the countries surveyed in 2006 demonstrated a significant improvement in their transparency score two years later. Transparency levels globally are improving as governments seek to streamline regulatory and legal hurdles to aid cross-border movement of capital and corporate facilities.

Emerging markets have significantly improved their levels of real estate transparency, according to the Index. It reveals that in 2008, eight countries moved up a full transparency tier since the last index in 2006.

Dubai, Romania, Ukraine and Russia showed the biggest improvements in transparency over the last two years. Only Venezuela posted a lower transparency score this year compared with 2006, principally due to changes in government regulations and new taxation policies targeting foreign investors.

Top Ten Most Transparent Countries

1. Canada
2. Australia
3. United States
4. New Zealand
5. United Kingdom
6. Netherlands
7. France
8. Sweden
9. Belgium
10. Ireland

Should the U.S. Kick LIBOR to the Curb?

A couple of months ago some experts questioned whether the daily updates for the London Interbank Offered Rate, or LIBOR, were rigged to be artificially low. If LIBOR rates are set too low, borrowers might get an undeserved windfall at lenders' expense, according to a recent article published by "Knowledge at Wharton" from the University of Pennsylvania.

The article says that as much as $350 trillion worth of financial products worldwide are tied to LIBOR, which is the biggest benchmark for short-term loans in the world. Currently, the three-month LIBOR is around 2.7 percent, compared to 1.9 percent, for three-month U.S. Treasury bills. The three-month LIBOR started the decade at more than 6 percent, fell to just over 1.1 percent early in 2003 and climbed to more than 5.6 percent last September before starting back down.

LIBOR rates are used as a basis for setting values of all sorts of financial instruments, from the exotic, such as forward rate agreements, to the ordinary, such as mortgages. The six-month LIBOR, for instance, is used in many adjustable-rate home loans in the United States. Typically, the mortgage rate charged for the next 12 months is figured by adding a "margin" -- perhaps 2.75 percentage points -- to the LIBOR rate on the adjustment date. If LIBOR has gone up over the previous 12 months, the homeowner's monthly payment goes up as well, and vice versa. Many floating-rate corporate loans are based on LIBOR as well.

Questions this spring centered on whether some of the 16 banks that contribute data to the LIBOR calculation were reporting lower-than-actual figures to ease doubts about their own financial health. The first concerns were raised by some banking experts in April. Then, in May, The Wall Street Journal reported that its own study showed the LIBOR inexplicably diverging from what other interest-rate data suggested it ought to be.

If there are doubts, why use LIBOR at all? Why not use an alternative that is beyond question, such as the going rate on U.S. Treasury bonds or some other index? Wharton finance professor Richard Marston says LIBOR reflects lenders' real cost of money better than Treasury rates can, since LIBOR measures what the banks actually charge one another.

The broader question is whether LIBOR rates are the best index for U.S. institutions. Even if LIBOR rates are accurate, the fact that those rates are now unusually high relative to Treasuries means Americans with LIBOR-based loans are paying billions more in interest than they could with an alternative index. Some experts have suggested adopting a new index, tentatively labeled NYBOR, for New York banks, to reflect their borrowing costs.

However, the article suggests that it would be terribly difficult to switch from LIBOR to something else. While Treasury rates are used for some floating-rate loans, they cannot substitute for LIBOR in all cases because they do not fully reflect bank's money costs, Marston says. And, as much as some experts would like to see LIBOR replaced, there's no easy way to scrap it when trillions upon trillions of dollars of debt are already linked to it.

What do you think about the U.S. creating its own index and kicking LIBOR to the curb?

Report from NRCEIF Summer Conference

By Melissa Securda

This week’s travels brought me to our nation’s capital for the National Council of Real Estate Investment Fiduciaries (NCREIF) summer conference. A very full agenda is packed into two short days, and I will share with you some of the valuable industry insight disseminated during the conference. 

Yesterday I sat in the Valuation Committee’s meeting focused on International Valuation, a topic of particular interest to me since I recently completed a global valuation methodology study. Jay Marling, managing principal at Capright Property Advisors presented the challenges associated with valuations in emerging markets.

Marling’s primary focus is Brazil, a country of 192 million inhabitants experiencing a strengthening and growing economy. Since the economic breakdown in the mid-1980s and ensuing government intervention to counteract hyperinflation of 2500 percent, Brazil’s currency has appreciated, the mortgage market has opened, which has allowed its residents to obtain 30 year mortgages, and the economy stabilized.

Recently, Brazil received investment grade status by Standard and Poor’s and Fitch rating agencies with Moody’s expected to follow soon. These factors all contribute to foreign investors showing increasing interest in the market. 

Despite all the growth, as Marling pointed out, Brazil is not without its serious problems. Socio-economic problems, severely lacking infrastructure, and institutionalized corruption are at the top of the list. 

So, what does all this mean for the appraiser? Because of the lack of market transparency, gathering data is extremely difficult and has to be done in person and often through several sources to ensure you have correct information. Additionally, when valuing a property outside of your country’s borders, it’s imperative that you take into account market nuances when putting together a discounted cash flow.

Marling pointed out three major differences in Brazil versus a discounted cash flow in the U.S.:

1) There is no lease protection.  A tenant can get out of the lease at the lease year anniversary.  However, demand is so high right now (zero vacancy in Sao Paulo) that securing another tenant is not a problem. 

2) Deposits can be used to fund construction. 

3) The unpaid balance on sales revenue is indexed to inflation. 

With the globalization of the real estate industry, property appraisals on a global basis will become more and more prevalent. For accurate valuations, investors need to look to local resources as a key provider of information and technology as a universal translator of data. 

UCLA Economists Still Say No Recession

In its second quarterly report of 2008 released yesterday, the UCLA Anderson Forecast cautiously affirmed the “no recession” prognostication it has been advocating over the past several quarters.

However, economists also acknowledged that the most recent employment data – an increase in the unemployment rate from 5 percent to 5.5 percent – falls within “recession range.” Recession or not, the Forecast acknowledges that Gross Domestic Product (GDP) could dip into the negative range over the next six to nine months, as the housing bust continues to wreak havoc on the national economy.

In the first of a pair of essays on the national economy, UCLA Anderson Senior Economist David Shulman says, “Although the economy will likely avoid falling into a formal recession, the economic outlook through the end of 2009 is decidedly subprime.” The UCLA Anderson Forecast asserts that real GDP growth from the third quarter of 2007 through the end of 2009 will average “a very tepid” 1.2 percent, adding that “we expect that the current quarter real GDP growth will come in at a minus 0.7 percent and the first quarter of 2009 could be negative as well.”

Additionally, unemployment will reach 6 percent by the end of 2009, with a caveat that states if the May 5.5 percent unemployment rate is duplicated in June, a 6.0% unemployment rate would come much sooner.

The Forecast report also says that the Federal Reserve Bank is beginning to shift its attention from the financial system, which has been negatively impacted by the housing bust, to its more traditional concern about inflation. As a result, the Forecast does not believe that tepid economic growth will prevent the Fed from raising interest rates in the middle of 2009.

In an accompanying essay, UCLA Anderson Forecast Director Edward Leamer addresses the most recent unemployment data and reveals his economic bottom line: “I am holding to what is now a shaky view: no recession this year.” Among Leamer’s arguments is that the rising unemployment rate is more of a “hiring freeze” than the massive layoffs associated with an actual recession. This one month’s unemployment figure stands alone and, therefore, does not indicate a negative trend.

Internal Focus in a Developing Market

By Barry Tuman

Real Vienna is a real estate industry event that has been gaining popularity every year. The Austrian-based conference focuses on Central and Eastern European countries including Russia and the former Soviet Republics. These markets have been hot investment areas over the last few years, drawing funds from many parts of the world.

Property development has been expanding at a rate normally seen in developing countries with an additional growth kick from newly found political and more importantly, currency stability in these areas.

The focus for some of the larger investors who attended the conference in this still expanding marketplace is now as much on tightening internal processes and systems as on new investments. The shifting capital markets and a tricky demand model are providing a pause in the pace of investment.

This breathing space is making the top owners investors and operators look inward and search for improvements and efficiencies in their processes and procedures. The goal is to improve operating platforms and prepare for the next wave of investments while gaining more insight into their holdings now. 

After huge growth spurts, portfolio strategies are now being developed with operating efficiency as well as growth through acquisition stressed. The number of companies at the conference in Vienna discussing this as a priority was encouraging.

Movement in these markets towards standardization and transparency is proceeding as investors seek to expand their options for trading properties and attracting fresh capital. Some businesses will lead in this, some will follow and some will not adapt to the new changing market and capital realities and will fail.

Commercial Property Values Up Year-Over-Year

Standard & Poor's March results for the S&P/GRA Commercial Real Estate Indices show that commercial real estate prices are up 5.1 percent in the 12 months to March 2008. The indices measure the change in commercial real estate prices by property sector and geographic region in the United States. The S&P/GRA Commercial Real Estate Indices comprise ten commercial real estate indices: a national composite, five geographic regions, and four national property sectors.

The National composite reported an annual price appreciation of 5.1 percent versus March of 2007, down from the 5.5 percent reported in February's data, remaining well below this cycle's peak of 14.5 percent, reported in June of 2006.

The five regions reported mixed results. Three of the regions reported positive monthly returns, while two regions reported negative returns. The National composite was slightly positive, up 0.1 percent in March versus February. After reporting the highest return in the January/December period, 1.4 percent, the Northeast reported the largest price declines in the February/January period, -2.4 percent and again in the March/February period, -1.4 percent. The region that performed the best during the March/February period was the Pacific West, 1.7 percent. Over the past twelve months, the Pacific West has the highest return of 10.3 percent, at least double the return of any other region over the one-year period.

In the property sector, industrial warehouses reported the biggest gain for the one-month period, 0.9 percent, and apartments reported the highest 12-month return, 7.7 percent. Three of the four sectors reported positive returns over the March/February period. Apartments were flat. Office has the lowest returns over the past year, returning 2.3 percent.

"Overall, the results for commercial real estate were modest for the month," says

David Blitzer, Managing Director and Chairman of the Index Committee at

Standard & Poor's.