Institutional demand for real estate is strongest in the United States, western continental Europe and selected markets in the Far East as investors seek to reduce risk and to invest in markets with similar cultures.
Only the most cash-laden investors are looking beyond their regions for real estate investment opportunities.
European institutions are looking primarily in their own backyards and secondarily to the United States. Investors in the developed countries of Asia are concentrating their efforts on their lesser-developed neighbors because they can generate higher returns closer to home; and North Americans can find ample opportunity within their own borders, although Mexico had the attention of institutional investors before the peso crashed. Look for a trickle of U.S. money to land in Europe.
Left out in the cold are Eastern Europe, most of South America and Africa.
U.S. investors are again attracted to domestic real estate because of the stronger U.S. economy, increasing demand for space and the absence of new construction. Also the less-than-spectacular outlook for stocks and bonds is adding to property's attraction in the United States.
But European institutional money also finds the United States attractive.
The U.S. and Canada
The $95 billion Algemeen Burgerlijk Pensioenfonds of the Netherlands is looking to invest in excess of $500 million in U.S. real estate investment trusts, although not all at once, said Ray Bottorf, chairman of U.S. Alpha Inc., ABP's U.S. real estate subsidiary.
REITs "are a great opportunity now because they are not priced as real estate. They can be bought at a discount," Mr. Bottorf said.
ABP also is looking at investing in Spain and France and soon will begin studying Asian real estate, though no investments in the Pacific Rim are expected this year.
Prudential Corp. PLC, London, one of the world's largest insurance companies (not affiliated with Prudential Life Insurance Co. of America) is shopping for U.S. office and retail portfolios in the $100 million to $500 million range, according to Wendy Luscombe, president of WKL Associates.
WKL is serving as master adviser and owner's representative for Prudential Portfolio Managers, the investment manager for the London-based parent. PPM has hired LaSalle Advisors, Chicago, to acquire and manage U.S. property portfolios. Another manager will be hired soon, said Ms. Luscombe.
Canadian property may provide an opportunity for U.S. investors because the Canadian dollar has depreciated against the U.S. dollar, there are not a lot of Canadian institutions to compete against and some markets, Vancouver in particular, are growing.
"I think you will see people going north," said Joseph Rubin. "We are seeing some rental spikes in offices in Toronto.
"It's not across the board, but in certain situations," he said.
Canadian pension funds have been active in their backyard, particularly in retail.
The $48 billion Ontario Teachers Pension Plan Board last year consolidated its interest in three malls it co-owned with troubled Toronto-based developer Cadillac Fairview Corp., according to Lee Fullerton, a spokeswoman for the fund.
The $28.2 billion Ontario Municipal Employees Retirement System continues to work toward its real estate target of 12.5% of total assets, said Robert Silcox, senior vice president, investments. It now is at 10%, and evenly divided between office and retail.
Both funds more than likely will make property investments in Canada.
Europe
The pitch for Americans to invest in European real estate is again attracting interest. PRICOA Property Investment Management Ltd., London, will offer in February Trans European Property Trust II, a partnership to invest in European properties. The first fund raised and invested $250 million; much of the money came from U.S. pension funds.
"We've already received indication of support of about $75 million from exisiting limited partners," said Richard Plummer, president and chief executive officer of PRICOA.
Trans European II will differ from its predecessor in its percentage of U.K.-based properties, according to Mr. Plummer. The Trans Europpean Property Trust has 40% of its assets invested in the United Kingdom. U.K. exposure will be de-emphasized because the recovery in its property markets is well under way, compared with continental Europe.
TEPT II will have more emphasis on European property markets that are just beginning to recover: "France, possibly Spain and maybe even Germany," said Mr. Plummer.
The Teachers Insurance and Annuity Association-College Retirement Equities Fund, New York, with $133 billion in total assets, also has shown interest in European properties. Daniel Lee, executive vice president of TIAA Investments, confirmed the institution has some of its staff exploring international real estate.
According to the European Real Estate Investment Banking Group at Bankers Trust, London, TIAA-CREF showed interest in the $720 million portfolio of Compagnie Fonciere International. It was sold last year to Unibail, a French real estate investment company.
The U.K. and other European markets won't suffer for lack of attention from their own kind.
Hammerson PLC, a London-based publicly traded property company, sold its Australian portfolio last year and is concentrating its efforts in the United Kingdom and the Continent, said Christopher Smith, corporate affairs director.
The sale of the Australian portfolio was motivated by a senior management decision that the $1.08 billion (U.S.) portfolio was "too far flung," said Mr. Smith.
Before the sale of the Australian portfolio, Hammerson committed about $130 million to the United Kingdom, and recently acquired a portfolio of three office buildings and three shopping centers from PosTel Investment Management Ltd., the investment arm of the British post office and telecom munication industries.
Since then, Hammerson has committed $95 million to $130 million to continental Europe. The company buys central business district office and retail properties, and it likes France and Germany, although it recently bought a shopping center in Spain, said Mr. Smith.
Canada will get some attention from the company as well, according to Mr. Smith. Hammerson senior executives have decided to reduce its Canadian office holdings and increase its exposure to retail.
"The Canadian economy has been stronger over the last 18 months," said Mr. Smith. "Rents have been moving ahead more strongly."
Far Eastern investors also are finding Europe attractive, with money from Hong Kong leading the way.
"There is no doubt some flight money is starting to get airborne," said Mr. Plummer, referring to Hong Kong investors. "Europe to a lot of outside investors represents a region of stability, balance and professionalism."
Asia
But the bulk of Asian real estate finance money is staying within that region.
"Taiwanese, Japanese and Hong Kong (investor) groups are taking the lead and are spearheading the growth in the Indonesian and Malaysian markets," said Jack Rodman, managing partner and director of Pacific Rim activities for Kenneth Leventhal & Co., Los Angeles.
About five years ago, the Japanese began to shift their real estate investment focus from the overbuilt United States to their neighbors, said Mr. Rodman.
Japan's construction companies already had relationships with its neighbors, established through the infrastructure projects they worked on, said Mr. Rodman. They also were "less than satisfied" with their U.S. investments, culminating in sales of $3 billion in 1993, the first year sales had outpaced purchases.
Figures for 1994 aren't available - Mr. Rodman forecasts between $3 billion and $5 billion - but sales again will exceed purchases. This year will bring more of the same.
But China's and most of the Far East's real estate markets - some still embryonic - are unlikely to attract Western financiers for some time.
Western investors like stable political and legal systems and open economies, said Carla Giannini, principal with The Yarmouth Group, New York. "Those factors are few and far between," Ms. Giannini said. Exiting the investment also is a problem, she said.
"There are commercial investment opportunities there, but you have to be willing to get in on the development end of the cycle and that means you have to go in with good local partners."
"Southeast Asia has only become acceptable for Western institutions for property in the last three to five years," said Tony Edgley, partner with Jones Lang Wootton, London. "Prior to that, it was the wild west frontier, excluding Hong Kong and Singapore.
"It was uncharted waters with very little data and professionalism on the ground to tap into," said Mr. Edgley.
One strategy a U.S. real estate investor interested in the Far East might consider is to follow the lead of U.S. multinationals, according to Ms. Giannini. "Malaysia, Indonesia and the Philippines is a good market for that," she said.
In the Far East, development activity is strongest in China and is focused on traditional Western-style office buildings, shopping centers and mixed-use buildings, said Mr. Rodman.
Construction finance is being provided by China's development bank, the World Bank and the World Monetary Fund, said Mr. Rodman. The equity is coming primarily from investors in richer Asian coutries.
Affiliates of U.S. developers Trammell Crow Co., Dallas, and the Portman Co., Atlanta, have formed joint ventures with Chinese counterparts for construction projects, Mr. Rodman said.
India presents the single biggest opportunity for hotel development in the Pacific Rim, said Mr. Rodman. The country is a vacation destination for Malasyian and Indonesian tourists, and there has been no new hotel construction in four years.
Vietnam's infrastructure needs and the outsiders that will provide the expertise will be the impetus for hotel development there, according to Mr. Rodman.
"People are now looking at Vietnam to provide three-star business class hotels," he said.
Not all Westerners are unwilling to make a bet on the Far East.
The South East Asian Property Co., a joint venture of The Prudenial Insurance Co. of America and Jones Lang Wootton first announced five years ago, is close to closing, according to Mr. Edgley.
With $200 million, the fund is two-thirds toward its goal of raising $300 million, and another $50 million "is in the wings," said Mr. Edgley.
The investors are two Australian institutions, a U.S. institution, and one each from Singapore, The Netherlands and the Middle East.
Seven years after the money is invested, the intent is to take the company public, said Mr. Edgley.
Latin America
Mexico was Latin America's most popular real estate market before its financial crisis, and Mari Canton of Bankers Trust in New York believes the long-term fundamentals are still there.
As vice president in charge of real estate for Latin American merchant banking, Ms. Canton said pension funds, insurance companies, banks and credit companies showed interest in deals the bank handled in 1994.
Last year, U.S. institutional investors closed on three real estate finance deals and a net lease deal in Mexico, said Ms. Canton.
Two other shopping center construction finance deals - one for $150 million, the other for $120 million - had attracted a lot of interest before Bankers Trust was able to bring them to market.
Then the peso crashed.
"The long-term fundamentals are still there, and you can get in cheap." said Ms. Canton.
Chile, one of Latin America's stongest economies, is a difficult place for foreign real estate investors.
The country has a well-developed pension and insurance industry with plenty of money to keep the market funded, said Ms. Canton.
"It's a competitive environment by virtue of the fact of that deep market," said Ms. Canton.
Foreign investors in Chile are also subject to "encaje." According to Ms. Canton, "encaje" requires a foreign lender to set aside 30% of the amount of a loan in a non-interest bearing account with the central bank. There are less onerous restrictions - but restrictions nonetheless - on the equity side.
Brazil is another strong economy and there are development opportunites, said Ms. Canton. But the country also has a well-developed pension and insurance company industry to compete with foreigners.
Argentina increasingly is attracting foreign interest because its private property companies are contemplating going public, and 90% of leases are paid in dollars, said Ms. Canton.
