As the real estate investing market in the U.S. shows signs of topping off, countries in the throes of restructuring, such as Germany, Italy and Spain, are drawing new interest from real estate investors, mostly private equity funds associated with major U.S. investment banks. New opportunities are also cropping up abroad in the securitization of international real estate assets, as U.S. commercial mortgage-backed issuance slid a steep 20% in the year’s first half.
“The perception is that there is more opportunity abroad,” said John Zehner, head of J.P. Morgan’s global investments real estate group, which has doubled in size over the course of the year. Zehner, who is based in London, views the corporate selling of non-core real estate assets by western European countries as a “big trend that will change the face of the real estate industry.” In that vein, Donaldson, Lufkin and Jenrette just last week established a formal global real estate finance group that holds some $10 billion in assets.
With very different real estate cycles waxing and waning around the globe, growth in international real estate transactions is expected to accelerate over the next five to 10 years. Non-U.S. CMBS, which totaled a paltry $600 million in 1998, has already mushroomed to roughly $7.1 billion for the first six months of 2000-not far below the $9 billion logged for all of 1999.
Roger Lehman, director of mortgage research at Merrill Lynch & Co., expects the CMBS market to continue to grow across Europe, Asia and Canada. “As the market develops in one country, the idea is exported to other areas,” Lehman said.
Private equity groups are snatching up divestitures in the evolving European market. They are also picking off distressed assets in Asian countries like Japan and Korea, and selectively culling cheap real estate from the mature U.K. market, which is littered with public property companies trading at big discounts. The next big attraction: Latin America.
The Continent beckons
Countries like Italy, Spain, Germany and France offer the greatest real estate opportunity, as they are in the very early stages of restructuring, according to Stuart Rothenberg, global co-chief operating officer of Goldman’s real estate principal investment area. Its Whitehall Street fund, which also invests in distressed and recovering markets, has so far completed 65% of its real state investing outside the U.S.
“Europe is fundamentally a very attractive market from a core real estate standpoint,” Rothenberg said. “It’s a real recovery market.”
For now everyone is vying for Italy, the country that showed the highest property returns in the second quarter, with a gain of 31% year-on-year, according to Salomon Smith Barney’s world property index. “Italy is a great focus right now, because it’s still in its early stages of restructuring,” explained J.P. Morgan’s Zehner. The diversified property and investment management, Beni Stabili SPA, which was shed by finance group San Paulo ISI in late 1999, already shows a 60% increase in its share price year-to-date. ENI, the Italian energy group, which put its real estate group up for sale, is being wooed by so many suitors that it still reportedly hasn’t been able to whittle down their number. In March the purchase offers started to roll in from Goldman’s Whitehall and Donaldson, Lufkin & Jenrette, among others.
Even Germany’s national mindset in regard to offering up its real estate is changing, out of necessity. “Real estate in Germany has been regarded as the family jewels you store away,” said Zehner. The country’s property performance, which currently ranks at the bottom of 23 countries, based on Salomon’s index with a negative 20% return, needs capital from outsiders. Recent tax law changes that go into effect in 2002 will help the country open up. Companies will be able to sell subsidiaries without paying capital gains taxes.
Japan’s potential
The scale of Japanese nonperforming assets continues to hold out good real estate potential for principal and CMBS investing. Opportunity fund investors continue to expect the pace of distressed asset sales to pick up. “There’s been a dribble, and we suspect there will be more,” said Zehner.
Despite fiscal reforms in Japan, there haven’t been enough to make huge inroads into its real estate status quo. Cultural values remain roadblocks. “Embarrassed by their problem real estate loans and assets, the Japanese try not to disclose it,” observed Zehner.
Instead of embracing eager U.S. investors, the Japanese are developing their own Japanese Real Estate Investment Trust as a way to funnel public capital markets into real estate.
There are sporadic flurries of activity on the real estate front in Japan, as evidenced by last week’s securitization of $286.5 million in failed real estate loans by Morgan Stanley Dean Witter, but it isn’t likely to spawn follow-on real estate deals. Indeed, it is only the second-ever distressed real estate securitization of its kind.