Global Viewpoints

France Ranks as Most Expensive Country for Business Taxes

There's a huge variation in business taxes across the globe, according to KPMG's international city-by-city study of tax costs in 35 cities in 10 countries. The study, commissioned by KPMG's Canadian member firm, looked at taxes paid by businesses in Australia, Canada, France, Germany, Italy, Japan, Mexico, the Netherlands, the U.S. and the U.K.

The study found that businesses have the highest average tax burden in France, where total taxes paid are more than 2.5 times higher than those in the lowest tax country, Mexico, and more than double those of France’s European near-neighbor, the Netherlands.

Of the 35 large cities (cities with populations greater than 2 million) highlighted by the study, Paris is the most expensive for taxes, followed by Naples, Frankfurt, London and Yokohama. The cheapest is San Juan, Puerto Rico, the self-governing commonwealth in association with the United States, where special concessions reduce the tax burden to less than a quarter of that in Paris.

Many of the low tax cities are found in Mexico, the U.S., or Canada. The exceptions are the Australian cities of Melbourne and Sydney, which come in at 10 and 14, respectively. The cheapest European city is Manchester in the U.K.

Greg Wiebe, head of tax for KPMG’s Canadian member firm, says the study highlights that businesses should look beyond the corporate tax rate charged by a country to assess the tax cost of running a business in that jurisdiction. Companies also need to consider the sales, property and other taxes that businesses pay to various levels of government in a location, and the tax incentives they can achieve by undertaking specific business activities there.

"Our survey found, for example, that companies in France must pay significantly more in statutory labor costs than they do in taxes on corporate income," Wiebe says. "This is true for all of the European states we have studied. But it is not true for the states outside Europe, some of which, the U.S. and Japan in particular, have rates of corporate income tax that would be regarded as high by European standards."

While, Wiebe says that tax is rarely a reason by itself to locate or not to locate in a particular place, it is clear that tax costs can vary much more widely than labor or transportation costs due to the huge variations in tax policies around the world.

India Attracts Private Equity in Droves

Private equity has emerged as a popular financing option in India for capital investment and expansion programs, according to Walkers, a global offshore law firm based out of the Cayman Islands.

"The global credit crunch has tightened the availability of banking finance, forcing investors in India and worldwide to reach out to private equity funds as an alternative source of funding their capital investment/expansion programs," according to Caroline Williams, private equity partner in Walkers' Cayman office. "Despite India's recent weakened economic outlook and inflation at a 13-year high, the infrastructure sector continues to attract global equity funds. Additionally, India is realizing increased interest from offshore money, which will be invested into the national infrastructure program over the next five to seven years."

In 2007, India attracted more private equity funds than China, and it also has more private enterprises. The high priority for development of infrastructure, anticipated to need US$500 billion in the next five years, makes construction one of the most popular segments for investments.

As an example, last month, Red Fort announced an infrastructure fund focused on ports and power station development that is estimated to raise in excess of US$600 million by the end of 2008. The company has already closed seven deals in the real estate market worth US$200 million in the first half of 2008 and anticipates investing another US$300 million by the end 2008 to make a total of around 10-12 deals in 2008.

"The driving motivation for foreign direct investment inflows into India continues to be double tax treaties associated with offshore jurisdictions," says Philip Millward, a private equity partner in Walkers' Hong Kong office. "Private equity funds establish wholly-owned subsidiaries in offshore jurisdictions to invest into the Indian target company."

Despite some concern over valuations of Indian companies, the high growth of the Indian economy has kept it attractive to private equity. Private equity investment has risen consistently from US$2.03 billion in 2005 to US$17.14 billion in 2007. And the deals are getting bigger. In 2007, 48 deals of more than US$100 million were closed compared to 11 deals of more than US$100 million in 2006.

Sovereign wealth funds (SWFs) such as Temesek, Dubai Investment Corp. and others are also investing heavily in India. SWFs tend to be known more for providing cash rather than management expertise. However, SWFs are evolving, hiring staff with similar skills to those in private equity houses and morphing into a type of private equity firm, themselves and so leveling the playing field.

Tossing and Turning in Property Markets

By Barry Tuman

Lehman Brothers recent brush with the news regarding the possible sell off of $40 billion of real estate related security certainly got a lot of attention. It should have.....events of that size occasionally indicate market reference points. Time will tell if this was simply media hype or serious news drifting into the public domain.

The last reference point I can recall was the sale of the Equity Office portfolio which stands out as a “ceiling” event in my mind. The sale of that portfolio was just a short while ago, but seems to be from another almost ancient reality in terms of property business cycles.

The recent earnings announcements in the UK by Hammerson, the retail and offices property developer that owns London’s Brent Cross shopping centre, are also potential markers. The company reported a pre-tax loss of £417 million, from a profit of £368 million profit a year ago – because of the devaluation of its properties by some £407 million. Hammerson saw a 4.4 percent increase in like-for-like rental income, while total net income reached £145.8 million, a 5.4 percent rise on a year ago. Capitalised value, however, has been hit hard and led to the reported results. Real estate fundamentals (income related) were much less affected.

Liberty International, the property company that owns London’s Covent Garden, lost £458 million in the first half of the year as the first signs of a weakening retail sector exacerbated the effects of the real estate downturn. There was a 7.4 percent fall in value of its properties, knocking £639 million off its £8 billion portfolio. As a result, the company reported a £458 million pre-tax loss for the half-year to June 30, compared with a £552 million profit a year ago. More pain for shareholders that was not driven as much by property fundamentals as market conditions.

Into this sea of difficult property related news sails TIAA-CREF, one of the world’s biggest money managers, announcing that it is to open its first overseas office by setting up a base in London to step up investments in European property.

The U.S. pension fund’s decision to open the first non-U.S. office in its 90-year history highlights the intent of cash-rich investors to take advantage of the financial crisis to pick up assets at attractive prices. The fund has spent about $600 million a year on average on European properties.

The current economic realities could lead TIAA-CREF to increase the pace of investments. In the current liquidity squeeze more traditional investors like TIAA-CREF have an edge over recent real estate investors such as developers and private equity groups because its vast resources make it less dependent on debt financing.

This is all interesting and almost contradictory news coming from various market makers. The property markets are churning right now, even if transactions may not be, as strategies evolve.

That activity is a better sign than the stillness we had seen recently.

Silicon Valley Leads Knowledge Competitiveness Index

San Jose, Calif. – home of Silicon Valley – has once again taken the top spot in the World Knowledge Competitiveness Index (WKCI), which measures the knowledge economies of the world’s leading regions and benchmarks the knowledge capacity, capability and sustainability of each region, and the extent to which this knowledge is translated into economic value, and transferred into the wealth of the citizens of each region.

Knowledge economies compete on value and innovation, rather than costs alone. As regions make the transition to knowledge economies, they see increases in the number and proportion of knowledge-based employment – all of which translates directly into demand for office space, as well as housing and retail.

The 2008 edition of the WKCI compares 145 regions across 19 knowledge economy benchmarks. San Jose, with a score of 248.3, continues to lead the WKCI rankings by some distance due to its enormous investment in knowledge-intensive business development, in particular in the fields of high technology, engineering, computers, and microprocessors. Despite the onset of the dot-com crash earlier in the decade, San Jose has remained a clear leader across a number of knowledge employment sectors, as well as ranking amongst the top regions worldwide for investment in education and business R&D, as well as for corresponding economic output indicators such as productivity and earnings.

Remaining in second place in 2008 is the metropolitan area of Boston, a region which thrives on high levels of intellectual and financial capital. Boston, is of course, synonymous with higher education, and is home to eight research universities including Harvard and the Massachusetts Institute of Technology.

Hartford, Conn. moves further up the index to third, with its score boosted by very strong results for both R&D spending and private equity investment, which translate into a very strong productivity score: Hartford ranks as the highest region worldwide by productivity in our rankings. The neighboring Connecticut region of Bridgeport, a new region in this year’s index, enters in an impressive fourth place, while San Francisco slips two places to fifth.

Stockholm is the only European city ranked in the top 10 and it moves up two places to sixth position. The continued improvement of the region’s ranking has been based on gains across a range of indicators – in particular, business R&D spending, biotechnology and chemical sector employment, and higher education spending. Meanwhile, Tokyo is the only Asian city listed in the Index's top 10 and it moves up from twenty-second to ninth position.

Top 10 Knowledge Economies:

1. San Jose-Sunnyvale-Santa Clara, Calif., U.S.
2. Boston-Cambridge-Quincy, Mass., U.S.
3. Hartford, Conn., U.S.
4. Bridgeport-Stamford-Norwalk, Conn., U.S.
5. San Francisco-Oakland-Fremont, Calif., U.S.
6. Stockholm, Sweden
7. Seattle-Tacoma-Bellevue, Wash., U.S.
8. Providence-Fall River-Warwick, R.I., U.S.
9. Tokyo, Japan
10. San Diego-Carlsbad-San Marcos, Calif., U.S.

Economic Indicators Index Declines

Late last week, the Conference Board reported that the Composite Index of Leading Economic Indicators declined 0.7 percent in July, following no change in June and a 0.1 percent decline in May.

"A few months ago, there was some discussion about a second-half recovery," says Ken Goldstein, labor economist at The Conference Board. "If there's a second-half recovery, it'll be the second half of 2009."

Goldstein contends that the recent decline in gas prices isn't enough to overcome all the negative momentum that's been building up through the spring and summer. Building permits, stock prices, and weekly initial claims (inverted) made very large negative contributions to the index this month, more than offsetting positive contributions from the interest rate spread and consumer expectations.

The Coincident Index continues to reflect an economy that's slowed to a crawl, with sustained increases in unemployment, while the Leading Index points to slow growth through the rest of the year, and possibly an economy grinding to a halt. The so-called 'shadow lead' (ratio of Coincident to Lagging series) conveys the same message.

The Conference Board reports that the Coincident Index increased 0.1 percent in July, following no change in June and a 0.2 percent decline in May. The Lagging Index increased 0.4 percent in July, following no change in June and a 0.2 percent decline in May. Meanwhile, the Leading Index declined sharply in July, the second decrease in the index in the past three months.

More on Student Housing

By Melissa Securda

Last week, my blog focused on the student housing market and I presented information showing strong investor sentiment in this sector. The research gathered for the blog showed an increase in student housing demand despite the contracting economy. New information, however, suggests that economic conditions and spiraling college costs might affect the number of students able to afford higher education. 

Contrary to forecasts, the traditional college student population is shrinking, according to the Census Bureau. The number of full-time students attending four-year colleges fell by 337,000 between 2005 and 2006 (the latest data available). This 4 percent decline, to 7.7 million, is unprecedented and occurred although the number of high school graduates is at a record high. The decline also defied projections by the National Center for Education Statistics, which had forecast a rise in full-time enrollment at four-year schools to 8.2 million.

The drop in traditional college enrollment is a sign that the increasingly strapped middle class has reached the tipping point. According to Pew Research Center, 79 percent of Americans say it is harder than it was five years ago for the middle class to maintain its standard of living.

Economic pressures including credit restrictions, job-losses, housing devaluation, and rising oil prices put a strain on the middle class. The rising cost of tuition compounds problems and results in less middle-class students able to afford college. More families are faced with the decision to send their children to less expensive or two-year colleges. 

As a result of an influx of middle class students and job-seekers mastering additional skills, community college enrollment has reached record highs. How will this change housing demand?  What pressure, if any, will this put on investors?

In the short term, current projects in the construction pipeline won’t be enough to over-supply the student housing market. In the long term, developers will need to closely monitor economic and demographic trends to ensure they are building the right type of product in the right location. 

More Bank Failures Expected, Report Says

As more real estate loans turn sour, more banks will fail. That's the prediction of A.M. Best Company, a global full-service credit rating organization that recently released its U.S. Banking Regulatory Review.

A.M. Best's report is pretty amazing, if not downright scary. It says regulators expect bank failures in the near term to increase, partly due to some banks’ concentration in real estate loans and construction and development lending.

The Federal Deposit Insurance Corp. (FDIC) has been called in as receiver for eight banks through August 4, 2008, following the closure of four institutions in 2007. Prior to the recent closings, the FDIC had not been appointed as receiver for a failed bank since 2004.

In July, IndyMac Bank FSB was closed by the Office of Thrift Supervision, representing the nation’s largest ever failure of a thrift institution. The closing of IndyMac Bank FSB, now known as IndyMac Federal Bank FSB, is expected to cost the FDIC’s deposit insurance fund from $4 billion to $8 billion. IndyMac’s failure also will likely reduce the deposit insurance fund’s reserve ratio to less than 1.15%, necessitating a restoration plan for the fund by the FDIC.

The number of institutions on the FDIC’s problem list – 90 as of first quarter 2008 – has risen for six straight quarters after hitting a low of 47 at the end of third quarter 2006. And, the banking industry’s coverage ratio, or ratio of capital and loan loss reserves to problem assets, fell to 89 cents in reserves for every $1 of non-current loans in first quarter 2008, its lowest level since first quarter 1993.

C-Suite Pay Unchanged, Report Says

As public real estate stocks are being hammered in the public markets, the executives at these companies continue to receive roughly the same compensation, according to a report by Chicago-based FPL Associates LP. The report, its sixth annual Top 100 Analysis, is based on the proxy filings of the 100 largest publicly traded real estate companies as measured by equity market capitalization.

This study is the first of its kind within the industry to analyze year-over-year compensation trends for only those executives who have remained employed in the same position between years, in order to provide an accurate trend analysis. Key findings across four executive positions (CEO, COO, CFO, and General Counsel) include:

• Total remuneration was essentially flat (-0.3 percent) across all four positions, in aggregate
• Executive base salaries increased 7.3 percent, on average
• Cash bonuses increased 9.6 percent, on average, over 2006 levels
• Long-term equity award grant value decreased by 3 percent, on average

Performance experienced in 2007 (on which 2008 incentives are predominantly based) was wide ranging, largely dependent on the specific criteria utilized to measure such performance. The FTSE/NAREIT Index was down 15.7 percent, marking the first year in which the industry had negative returns and underperformed broader market indices since 1999. Operationally, however, bottom-line fundamentals were generally strong, as FFO per share growth nearly reached double digits industry wide.

“As compared to prior years, Compensation Committees generally spent a longer period of time deliberating the levels of bonus payments given the disparity in performance measured by shareholder value creation and bottom-line financial/operational results,” notes Jeremy Banoff, Managing Director of FPL Associates.

This year’s analysis marked the first time in which compensation decreased across all four positions, albeit quite modestly at -0.3 percent. However, in further examination of individual positions, 2007 median total remuneration for the CEO position decreased 10%, while median total remuneration rose 4 percent, 13 percent, and 6 percent, for COO, CFO, and General Counsel positions, respectively, over the levels reported for 2006.

San Antonio Attracts Data Centers

San Antonio has become a hotbed for corporate data center developments over the past 24 months with major data center announcements coming from six major companies.

Reasons for San Antonio's explosive data center growth include a safe, central U.S. location, low risk of natural disasters, new reliable infrastructure, excellent connectivity, and inexpensive electricity. At sub $.05 per KWH, San Antonio's electricity costs rank among the lowest of major U.S. cities.

Dallas-based Stream Realty Partners, L.P. recently broke ground on its second Ready-to-Fit (RTF) Data Center building on a 33-acre site in Westover Hills, the premier corporate office park in San Antonio, Texas. The 150,000-square-foot, structurally-enhanced, powered shell data center building will have eight-inch thick concrete walls and a 24-inch thick concrete roof system designed to withstand 175 mph winds. The building is expandable to 350,000 square feet and is pre-approved by the city for all necessary data center improvements.

San Antonio and Stream Realty are on the leading edge of high demand from corporations. In fact, more than 80 percent of North America-based corporations plan to expand their data centers over the next two years, according to a study conducted by research firm Campos Research & Analysis and commissioned by Digital Realty Trust Inc., a San Francisco-based REIT that owns and manages corporate data centers.

The study, which surveyed top executives in a variety of industries, also found that 75 percent of the companies that plan to expand will do so in two or more locations.

The survey also found that security was ranked as the most important factor in selecting a geographic location for data centers. Telecom and accessibility for company personnel were also critical, though taxes, labor pool and real estate costs were less important, according to survey participants.

More than half of the respondents plan to use a partner to implement their expansion plans, and   only 35 percent are planning to implement the expansion themselves.

Latin America's Office Sectors Stay Healthy

Office markets are growing at a healthy pace in Latin America, despite the hawkish outlook in the global financial sector, according to a recent report by Prudential Real Estate Investors (PREI).

Absorption continues to exceed new supply in all major markets, producing lower vacancy rates and higher rents. Vacancy rates have trended lower for nearly three years in all major markets.

Good fundamentals have spurred construction activity across the region. The scarcity of space in traditional areas has led to the development of high-end buildings in new business districts such as Las Condes (Santiago, Chile), Puerto Madero (Buenos Aires, Argentina), Marginal (Sao Paulo, Brazil) and Barra (Rio de Janeiro, Brazil). Another alternative for developers has been to retrofit outdated properties in busy downtowns.

Specifically, Mexico City is undergoing an expansion phase, with construction activity concentrated in the Santa Fe, Reforma and Polanco submarkets. Office vacancy rates have declined below 5 percent, leading to the pre-leasing of buildings under construction, a rare event in that market. Developers also are redeveloping existing stock into high-quality assets, which should add space to the class A and A+ inventory.

In Brazil, economic growth has led to record-high absorption and a steady decline in vacancies. In Sao Paulo, for example, the office vacancy rate is just 7.3 percent, according to PREI. The submarket of Marginal has been responsible for the bulk of the absorption, although there is a great deal of activity in the downtown, due to revitalization efforts by the local government.

A number of new projects are in the works in Buenos Aires. Developers were attracted to the city by the declining vacancy rate (now 4.1 percent) and rising rents. However, in part due to the nation’s political unrest, potential tenants prefer to wait until the projects are up before committing to new space.

Chile’s main office market, Santiago, is thriving with the vacancy rate below 1 percent. The Las Condes submarket, which accounts for most of the class-A stock, continues to be the main recipient of new development. New construction in 2008 may not be able keep up with pent-up demand, although large projects that will transform the dynamics of that market are on schedule to be delivered next year.