Global Viewpoints

Melbourne’s Retail Market Boosted by Low Vacancy Rates and International Demand

Edited: Jennifer Brenner
Source: CB Richard Ellis

International retailers have put Melbourrne on the radar with interest from groups such as Gap, Abercrombie & Fitch and Zara helping to sustain retail rents in the CBD according to new forecasts from CB Richard Ellis.

Speaking at the firm’s annual Market Outlook breakfast in Melbourne, CBRE associate director, retail investment properties, Mark Wizel said a growing number of international retailers were looking to capitalise on their brand following in Melbourne particularly among the city’s Asian student population and international visitors.

“We expect to see a further emergence of these international retailers in the next six to 12 months and this is helping to sustain rentals in the CBD,” said Wizel.

Low vacancy rates are also underpinning the city retail market, with the CBD retail vacancy rate presently hovering at around 1% - the lowest level on record according to CBRE executive director, global research and consulting, Kevin Stanley.

Speaking at the Outlook breakfast, Stanley said vacancies also remained low along Melbourne’s retail strips at circa 2.5% and in the city’s bulky goods sector, where the vacancy was tracking at less than 1%.

“Occupancy rates remain tight and if there is an increase in retailer demand this will create tension in the market and the opportunity for rents to rise,” noted Stanley.

Looking at the overall outlook for the retail sector, Stanley said 2010 would be a year when the market was “pulled in two directions.”

Three months of above average employment growth had been particularly encouraging, added Stanley, with the market also expected to benefit from improved house prices, a stronger share market and the Australian dollar, which had translated to lower prices for merchandise.

On the downside, Stanley said rising interest rates were forecast to dampen retail spending this year as household budgets became increasingly stretched.

However, retail spending in Victoria was expected to run well above the national average and retail development opportunities were emerging on the back of strong population growth forecasts.

With Melbourne’s population tipped to swell by 786,000 people over the next decade, Stanley believes this could theoretically support 1.1 million square metres of new retail space – the equivalent of nine super regional malls or 110 neighbourhood shopping centres.

“There won’t be the opportunity for this level of level of construction to occur given planning constraints, however what it will mean is that the whole market will get tighter and tighter over time,” Stanley concluded.

On the investment front, Mr Wizel said there was continued strong demand for Melbourne retail assets in the sub $50 million price bracket and opportunistic buying opportunities in the $50 million-plus market, which was expected to attract increased attention this year from syndicates and unlisted funds.

Forest City Gets $34M in JV Partnership for Three Multifamily Properties

Edited: Jennifer Brenner
Source: Forest City Enterprises, Inc.

Cleveland-based Forest City Enterprises, Inc., has formed a joint venture with Bernstein Management Corporation for ownership of three residential multifamily properties, totaling 1,340 rental units, in the Washington, D.C. metropolitan area. Forest City expects to realize proceeds of approximately $34 million from the creation of the joint venture. The transaction equates to a cap rate of 6.5 percent based on 2009 net operating income for the properties.

The three properties – the 549-unit Grand in North Bethesda, Md. the 385-unit Lenox Club in Arlington, Va., and the 406-unit Lenox Park in Silver Springs, Md. – are part of Forest City's portfolio of residential multifamily properties. Each company's joint venture entity will own 50 percent of Forest City's prior stake in the properties. Existing minority partners in the three properties are unaffected by the joint venture transaction. Forest City, through its Residential Management business unit, will continue to lease and manage the three properties on behalf of the joint venture.

"The creation of this joint venture is an important step in our strategy of capturing value and generating liquidity from within our portfolio," said Charles A. Ratner, Forest City president and chief executive officer. "The continuing strength of the multifamily rental market in the Washington, D.C. area, and the quality of these assets, together with early signs of an economic recovery, made this the right time to bring this venture to fruition. We're proud to partner with Bernstein on these fine properties."

Forest City’s new partner, Bernstein Management Corporation, is a private company principally engaged in the acquisition, management and development of commercial and residential properties in the Washington, D.C. metropolitan area.

Forest City is an $11.9 billion NYSE-listed national real estate company that is primarily engaged in the ownership, development, management and acquisition of commercial and residential real estate and land throughout the United States.

EUR154M Price Tag Gets Invesco Five Hotels in Four European Countries from Accor

Edited: Jennifer Brenner
Source: Accor

As part of the ongoing deployment of its "asset right" strategy, Accor has announced an international real estate transaction involving the sale of five hotels (representing more than 1,100 rooms) in four European countries for EUR154 million.

The transaction has been carried out with Invesco Real Estate, a major real estate manager in the United States, Europe and Asia, with assets under management of more than EUR18 billion, of which EUR650 million in European and US hotel properties.

The transaction involves five hotels:

• The Novotel Muenchen City in Munich (307 rooms)
  
• The Novotel Roma la Rustica (149 rooms) and the Mercure
  
• Corso Trieste in Rome (97 rooms)
  
• The Mercure Zabatova in Bratislava, currently under construction (175 rooms)
  
• The Pullman Paris La Defense (384 rooms)

The Novotel and Mercure hotels have been sold under a sale and variable leaseback agreement for EUR74 million, of which EUR17 million for the Mercure Zabatova. They will continue to be operated by Accor under a 15-year variable-rent lease (corresponding to 22% of average annual revenue) that can be renewed at Accor's initiative. Insurance, property taxes and structural maintenance costs will now be at the owner's expense.

The Pullman Paris La Defense has been sold for EUR80 million, including a EUR10-million renovation program at the owner's expense. The hotel will continue to be operated by Accor under a 12-year management contract that can be renewed six times.

Financially, the transaction enables Accor to reduce adjusted net debt by EUR93 million in 2010 and will have a neutral impact on operating profit before tax and non-recurring items.

The transaction confirms Accor's ability to continue actively pursuing its "asset right" strategy, even in a difficult economic environment, with the goal of reducing earnings volatility and sharpening the focus on its core competency - hotel management.

TIAA-CREF to Sell $503M Diversified Loan Portfolio to Newly Formed Starwood Property Trust

Edited: Jennifer Brenner
Source: Starwood Property Trust

Starwood Property Trust, a real estate investment trust focused primarily on originating, investing in, and financing commercial mortgage loans and other commercial real estate-related debt investments, has signed a definitive agreement to acquire a $503 million portfolio of performing commercial mortgages from TIAA-CREF for approximately $510 million, plus accrued interest.

The fixed-rate portfolio consists of 18 senior first mortgage A-notes and 2 junior first mortgage B-notes (collectively, the "Loans") secured by retail and office assets totaling 4.5 million square feet across 10 states. The weighted average debt yield on the portfolio is 17.7% with a weighted average remaining term of 1.7 years and a weighted average coupon of 7.75%. The debt service coverage ratio on the portfolio is approximately 1.8x.

The portfolio is approximately 96% occupied and has expected tenant rollover of 5.7% and 5.2% in 2010 and 2011, respectively. All of the notes in the portfolio were originated prior to 2003 and the owners of the assets are predominantly publicly traded entities and well-known real estate private equity firms.

"This is a very significant investment for our company," commented Barry Sternlicht, CEO of Starwood Property Trust. "With the acquisition of this high quality loan portfolio, Starwood Property Trust will have deployed approximately $800 million of the capital we initially raised in August. The focus of our investments is safety and yield, and this investment's high debt yield and relatively short duration should allow us to reinvest capital as the loans mature or provide a built-in pipeline of originations. Almost 20% of this portfolio will mature within one year and as such these assets are an extremely attractive alternative for cash. They also can be modified, extended or rolled into new term debt and can be levered short term, if necessary. In total this acquisition aligns with our investment strategy and provides meaningful support to reexamine our dividend policy."

The acquisition is expected to close by the end of February 2010, subject to a delayed closing on certain of the Loans.

The portfolio has a targeted levered return of between 11.0% and 13.0%. Starwood is currently in advanced discussions to implement financing in the near term.

Starwood is a newly formed company that is focused primarily on originating, investing in, financing and managing commercial mortgage loans and other commercial real estate-related debt investments. Starwood Property Trust, Inc. is externally managed and advised by SPT Management, LLC, an affiliate of Starwood Capital Group, and intends to elect to be taxed as a real estate investment trust for U.S. federal income tax purposes.

Global Office Report Shows Rent Falling in APAC; Tokyo Still Most Expensive Market

Edited: Jennifer Brenner
Source: Cushman & Wakefield

The world’s leading centres have suffered an unprecedented fall in demand for office space which has contributed to the first aggregated global fall in prime office rents since 2003. Global real estate adviser Cushman & Wakefield, in its new “Office Space Across the World” report, says that 2009 recorded a steep and widespread fall in office demand with every region in the world recording falling prime rents for the first time.

The outlook for 2010 however is more positive. As some major economies return to growth, demand for office space from corporates is likely to once again increase and reduce the supply of space. Rental growth is already being recorded in some of the world’s leading office markets such as the City of London and Oslo CBD, and rents globally are expected to reach their low point by the middle of the year. The second half of 2010 will therefore be one of recovery and cautious optimism from both landlords and occupiers.

The largest prime office rental falls included all of the key cities of Asia Pacific with Singapore, Hong Kong and Tokyo recording falls of -45%, -35% and -21% respectively. Ho Chi Minh City, Vietnam saw the largest regional rental compression with a fall of -53% recorded.

Kyiv, Ukraine and Dublin, Ireland were the biggest fallers in Europe with more than -50% and -38% respectively wiped off the value of prime office rents by year end. Even previously resilient markets were affected including London’s West End which recorded a -25% decline, and Warsaw’s CBD which recorded a -24% decline.

In the Americas, rents overall declined by -7% during 2009. In the USA, Boston, San Francisco, Seattle and New York’s Downturn recorded the biggest falls respectively at -26%, -24%, -23% and -23%. South America was more resilient with rents in Santiago, Chile bucking the trend and actually increasing 28% although the market is small and characterised by a limited supply of Grade A office space. Buenos Aires, Argentina recorded the biggest fall in South America at -14% whilst the region’s largest economy, Brazil, recorded a fall of -8%.

Prime office rents are a key benchmark on which the strength of the world’s office and development sector is measured. The global economic crisis, collapse and contraction of financial institutions and subsequent uncertainty across the wider business world meant demand for new office space fell significantly. Although developers were generally quick to respond to the crisis and postponed the development of new buildings, the supply of office space available to lease still increased as corporates, seeking to reduce costs, vacated or sub-let excess office accommodation.

World’s Most Expensive Office Locations

In the ranking of the world’s most expensive office locations, the three top locations remained constant with Tokyo moving into first place from second with full office occupancy costs (prime rents plus taxes and service charges), costing €1,441 sq m per year/$190 sq.ft per year. London’s West End moved from third to second place with full occupancy costs of €1,220 sq m per year/$161 sq.ft per year and Hong Kong fell from first to third position with full occupancy costs of €1,207 sq m per year/$160sq.ft per year.

The biggest risers in the ranking were Rio de Janeiro, Brazil moving from 23rd to 13th position with only a slight rental decline and appreciation of the Brazilian Real against the Euro, and Seoul, South Korea and Sydney, Australia rising respectively from 27th to 14th and 29th to 15th with prime rental rises.

Not all markets were affected to the same extent by the global downturn with Santiago, Chile recording a 28% increase in office rents as a shortage of prime space and robust demand pushed up prices. Smaller rises were also recorded in cities as diverse as Jakarta, Indonesia, Miami, USA and Cape Town, South Africa where the country’s hosting of the 2010 Football World Cup fuelled short term demand.

Guy Taylor, head of West End office agency, Cushman & Wakefield in London, said: “2009 was undoubtedly a challenging year for office markets in London. We turned the corner in the third quarter, however, as the take-up of space increased and, in the fourth quarter, we saw some major transactions that have boosted the annual take-up to a respectable level. With rents on prime space now showing signs of growth, 2010 will be a time for occupiers to secure good terms before the onset of a shortage of new space drives terms further in landlords' favour. Certainly for the best space in the key West End market, we are already seeing competitive bidding and it is likely that by the end of 2010, that there will be a marked shortage of grade A product in some locations and possibly a number of major pre-let agreements with landlords for buildings either planned or now coming out of the ground.”

John Siu, general manager for Cushman & Wakefield in Hong Kong commented: "Demand for office space in Hong Kong’s key business districts started to pick up towards the end of 2009 and we are beginning to see signs of rental increases. Banking and finance firms are gradually taking up additional office space and rent-conscious corporates are moving into the several newly completed Grade A office buildings in Kowloon East. We see 2010 as a year for tenants to take advantage of the rare current vacancies and significantly discounted rents before the market rebounds to the highs seen in early 2008."

GGP Agrees to $2.625B Proposed Equity Commitment from Brookfield

Edited: Jennifer Brenner
Source: General Growth Properties, Inc.

General Growth Properties, Inc. (“GGP”) announced that it has reached an agreement in principle with Brookfield Asset Management Inc., one of the world’s largest real estate investors and asset managers, to invest in a proposed recapitalization of GGP at a plan value of $15.00 per share and provide par plus accrued interest to unsecured creditors. The $2.625 billion proposed equity commitment from Brookfield is not subject to due diligence or any financing condition and is expected to create a floor value for the purpose of raising additional equity for the company. The plan is subject to definitive documentation, approval of the Bankruptcy Court and higher and better offers pursuant to a bidding process to be approved by the Bankruptcy Court.

The complete term sheet for the proposed plan with Brookfield is available on GGP’s website , click here to read.

According to Brookfield’s announcement, the proposed plan is designed to maximize value for all GGP stakeholders and enable a restructured GGP to emerge from bankruptcy on a standalone basis with a diverse portfolio of high-quality income-producing assets, strong cash flow and a solid balance sheet capitalized principally with long-term non-recourse debt.

Under the terms of the proposed plan:

• GGP’s existing shareholders will receive one share of new GGP common stock with an initial value of $10.00 per share, plus one share of General Growth Opportunities (“GGO”) with an initial value of $5.00 per share, for total consideration of $15.00 per share (see description of GGO below under “Terms of the Brookfield Investment and Proposed Recapitalization”)
  
• Unsecured creditors will receive par plus accrued interest
  
• Brookfield will invest $2.5 billion at $10.00 per share for new GGP common stock and up to $125 million at $5.00 per share for GGO common stock

“This proposed plan offers significant value for all of our stakeholders,” said Adam Metz, CEO of GGP. “It is designed to allow GGP to deliver a minimum of $15.00 per share in value to our existing common shareholders, while providing our unsecured creditors with par plus accrued interest. The Brookfield-sponsored recapitalization -- coupled with the more than $13 billion of restructured debt, our compelling scale as the second-largest regional mall owner, our fortress assets and a business plan that focuses on further deleveraging the balance sheet and building liquidity -- provides a strong financial foundation for the future. In addition, GGP shareholders will be able to participate in the value-creation opportunity presented by this plan.

“We have tremendous respect for Brookfield and its management team. We believe Brookfield will add substantial value to both enterprises over the short and long term through its asset management expertise and access to global institutional capital sources. We look forward to welcoming Brookfield as a significant shareholder in the company following our emergence from Chapter 11,” continued Mr. Metz.

Terms of the Brookfield Investment and Proposed Recapitalization

Under the terms of the proposal, Brookfield will invest $2.5 billion in cash in GGP in exchange for GGP common stock, thereby providing sufficient liquidity to fund GGP’s bankruptcy emergence needs. Brookfield will own approximately 30 percent of GGP and have the right to nominate three directors. This cornerstone investment will provide the flexibility for GGP to pursue additional capital-raising alternatives up to a total of $5.8 billion, including the issuance of new equity, asset sales and limited new debt issuance. Brookfield has agreed to assist GGP in raising the balance of this capital using its relationships with global institutional capital sources.

As part of the restructuring, GGP intends to distribute to GGP shareholders shares in GGO, a new company that will own certain non-core assets, such as all of the company’s master planned communities and landmark developments like South Street Seaport and others. A shareholder must be invested in GGP prior to the recapitalization in order to receive a dividend of GGO. These assets produce little or no current income but have the potential for significant long-term value. GGO plans to raise $250 million through a rights offering at $5.00 per share, with Brookfield backstopping $125 million of such offering.

“We are excited about the opportunities this recapitalization creates for our company and all of our stakeholders,” added Thomas H. Nolan, Jr., president and COO of GGP. “GGP has an extremely strong portfolio of successful properties, while GGO will have a large portfolio of opportunistic assets that have substantial long-term value, as well as certain assets where we believe value can be created through restructuring. By creating two separate companies, we enable both companies to manage their core strengths, take advantage of different market opportunities and appeal to distinct groups of investors with their own investment criteria. Our shareholders will be able to participate in the expected future value creation of both of these companies.”

Bid Protection and Path to Completion

As consideration for acting as “stalking horse” in the company’s process to raise capital, Brookfield will be granted seven-year warrants to purchase 60 million shares of existing GGP common stock at an exercise price of $15.00 per share. The warrants are intended to provide compensation to Brookfield for its financial commitment. Brookfield will not receive any other consideration or bid protection, including any break-up fee, expense reimbursement, commitment fee, underwriting discount or any other fees.

The companies expect to move promptly to execute a definitive agreement and file a motion seeking appropriate Bankruptcy Court approval. GGP will also ask the Bankruptcy Court to approve bidding procedures with respect to the solicitation of proposals superior to Brookfield’s including, but not limited to, the sale of the company.

Until the warrants are approved by the Bankruptcy Court, Pershing Square Capital Management is providing interim protection to Brookfield. If Brookfield’s investment in GGP is not made, and the company completes a transaction with another party at a per share value above $12.75, Pershing Square will be obligated to pay Brookfield 25 percent of its profits from its investment in GGP above $12.75 per share. GGP will not be required to reimburse Pershing Square for any amounts paid pursuant to this agreement.

This agreement follows GGP’s successful restructuring – or agreements to restructure – more than $13 billion of secured mortgage debt and the emergence from bankruptcy of more than 200 subsidiary debtors owning 108 properties.

UBS Investment Bank and Miller Buckfire & Co. LLC served as financial advisors to General Growth Properties, and Weil, Gotshal & Manges LLP acted as legal counsel to the company. Goldman Sachs & Co. and Barclays Capital served as financial advisors to Brookfield, and Willkie Farr & Gallagher LLP acted as legal counsel to Brookfield.

GGP currently has ownership interest in, or management responsibility for, over 200 regional shopping malls in 43 states, as well as ownership in planned community developments and commercial office buildings. The company’s portfolio totals approximately 200 million square feet of retail space and includes over 24,000 retail stores nationwide.

Brookfield Asset Management Inc., focused on property, renewable power and infrastructure assets, has over $100 billion of assets under management.