PRINT THIS STORY:

CHANGE TEXT SIZE:

TRANSPARENCY LURES INVESTORS, NATIONS LEARN

BY DONNA MITCHELL

International financial and real estate markets are notoriously difficult for U.S. developers to navigate. But as the industry embraces a global platform, developers are finding more tools to help gauge the potential of overseas ventures.

“Business and technology has helped shrink the world,” said John L. Bucksbaum, SCSM, chairman and CEO of General Growth Properties. The globalization of the industry has made understanding foreign markets more important than ever for U.S.-based developers, he adds. After careful consideration, General Growth is investing more than $33 million in Latin American shopping centers this year, the firm’s first international venture in its 50-year history.

Three or four years ago, that would have been a maverick move. Most American developers that investigated overseas investments deemed the process too much of a headache, says Clive Bull, vice president of real estate structured finance at JPMorgan Partners. Many nations scared U.S. dollars away because they lacked the legal systems, accounting practices and regulatory conditions familiar to U.S. companies.

After all, vaguely worded planning and permitting regulations or lease agreements can add up to big problems, sources say. “Developers are prime targets for corruption,” said Joel Kurtzman, chairman of the Boston-based Kurtzman Group, a research firm that prepares a yearly “opacity index,” which analyzes the political/economic transparency levels of foreign markets. “They have large projects with many different suppliers and subdevelopers, and they require many, many permits to conduct business. Each one of those interactions is an opportunity for someone to stick their hand in the pocket of the developer.”

But that perception is quickly changing. Today General Growth, Kimco Realty Trust, The Mills Corp., Simon Property Group and Taubman Centers are all funneling millions into international retail properties and learning to play each country’s business practices to the best advantage. And many countries are making this easier to do.

Egypt is just beginning to get a handle on property rights through such basics as acknowledging land ownership by individuals and establishing borders for them, says Kurtzman. Dubai, United Arab Emirates, too, is trying to make itself an attractive place for multinational companies to do business by modernizing its legal, banking, accounting and regulatory systems, and by strengthening land-ownership rights.

The Kurtzman opacity index measures the extent to which a given country’s business environment is marred by corruption, poor government and business practices, and economic problems. For the retail real estate development business, opacity involves planning and permitting regulations, lease agreements and, of course, property rights.

Each country is assigned an opacity reading between zero and 70, with zero representing clarity and 70 indicating anything but. The index says Finland is a good place for a U.S.-based company to invest because of its excellent regulatory system and lack of corruption. Investment in Indonesia, however, could involve for that same company some 8.54 percent more in costs than it might at home because of subpar business practices there.

Europe is serving as something of a training station for American developers going abroad, with Mills investing at least $422.1 million in Spain, Italy and Scotland, and Simon putting at least $214 million into a joint venture with Rinascente Group to invest in Italian shopping centers. The Continent seems a safe place to start, because European values and government are the most similar to the U.S. The index ranks four European countries — Denmark, Finland, Sweden and the United Kingdom — among the five most transparent financial markets in the world.

European governments continue to make progress in simplifying their planning and zoning regulations, says Gary Hutchings, head of Cushman & Wakefield Healey & Baker’s European research group. Planning and zoning authority is being decentralized to the provincial and local levels, which helps eliminate the confusion and delay that hinders many projects.

Italy, No. 34 on the index, is a trendsetter. Until the late 1990s, developers in Italy needed a planning permit from the central government as well as a use permit from the local authorities. But in 1998 the government decentralized the permit process by passing the Bersani Law. Developments that span between 2,690 square feet (250 square meters) and 26,900 square feet now require local approval only, with no central government involvement. Larger projects require the additional approval of just the provincial and regional authorities. These changes simplified and facilitated Italy’s real estate development processes considerably, sources say.

Afterward, Italy imposed an 18-month moratorium on new shopping center development, especially large-scale ones, to allow the country’s 20 regions to tailor the national framework to their needs.

Though Italy’s new land laws are not the only factor behind its favorable index ranking, they do indicate that the country is becoming a better place to do business, says Kurtzman.

Latin America might be physically closer to the United States than Europe, but it is far behind both when it comes to transparency.

One of the main problems in such markets as Brazil and Costa Rica is the legal system. Kurtzman says both nations suffer from corruption and poor processes for due recourse on broken agreements. Brazil is 28th on the index, and Costa Rica is not ranked at all.

That did not stop General Growth Properties from venturing into those countries, however. In August General Growth formed a partnership called GGP/NIG Brazil with Nacional Iguatemi Group to invest $33 million in two regional malls and a property management company. The firm is also working with two companies in Costa Rica to develop a retail and entertainment center.

The company endured a cumbersome process in finding a suitable attorney for its entrance into the Brazilian market, says Alexander Berman, General Growth’s head of international business. General Growth even changed law firms in its search for a lawyer with an understanding of that market’s particular real estate risks. “We ended up with a Brazilian who practiced for a period of time in the U.S. and went back to Brazil,” said Berman.

General Growth learned several critical lessons about lease contracts in Brazil. For one, shopping center tenants there usually pay cash (called key money) to the developer at the lease’s inception, which is supposed to be kept in a separate account, and which gives the tenant more leverage in lease negotiations. Also, foreign investors must register their investments in the country if they want to repatriate those revenues to the U.S.

The index ranks Chile (No. 17) as the most transparent nation in Latin America.

Overall, transparency depends on the partner one chooses for international ventures, says Bucksbaum. “I wouldn’t have made a move without the complete comfort with an operating partner in each country,” he said. “That is first and foremost.”

Some U.S. investors may see Asia as the market with the greatest potential, but they also say they view it as one of the most intimidating business environments. Even the globe-trotting Westfield Group is keeping its distance from China.

“As a company, we would wait 25 years,” before investing in that country, said Peter Lowy, managing director The Westfield Group, at a Lehman Bros. conference in New York City last month.

Nevertheless, Chinese population and incomes are soaring. Several Hong Kong REIT offerings in the works promise big returns and are drawing the attention of large investment managers around the globe, including New York City’s ING Clarion, sources say.

But the Chinese property market’s clarity depends on one’s perspective. Big returns notwithstanding, U.S. investors should approach with caution, says Kurtzman, who remains concerned about inadequate recourse for mortgage lenders and landlords under the Chinese legal system.

But some experienced investors and operators, such as Singapore-based Capitaland and Wal-Mart Stores, say the rules are fair and diligently enforced.

Investors considering China want to be more than just passive stockholders; they want eventually to hold and manage the properties, too, Capitaland executives say. Capitaland, which owns 10 shopping centers in Singapore, now manages Shanghai Raffles City, a mixed-use center in Shanghai, China. The firm says it expects the field of foreign investors to crowd up in coming years.

“There are European and U.S. investors now looking in China, particularly in the last six months,” said Pua Sek Guan, CEO of CapitaMall Trust Management, a unit of Capitaland. Those investors should be aware of the potential headaches that await them in such markets as China, where property rights are tenuous, says Kurtzman.

The Chinese government owns all the land, which can make the development situation very opaque. If something goes wrong, only favored companies can get action from the Chinese government, which tends to turn a blind eye to such companies’ flaws, Kurtzman says.

Taubman and Gale International (an arm of Florham Park, N.J.-based developer The Gale Co.), co-developers of a mixed-use center in South Korea, say this corner of Asia has sophisticated systems, so the chances of underhanded play are slim. (South Korea is midway on the index.)

The two formed a partnership with South Korean steel giant Posco to build New Songdo City, a business and residential hub on 1,500 acres in the city of Incheon. Virtually everything the developers do undergoes scrutiny, says John Hynes, Gale International’s president and CEO.

“When we meet with government officials, we always meet in groups,” said Hynes. “We submit status reports and progress reports to officials as a measure of good faith. We find those same reports find their way to the media. It is pretty much an open book.”

In the end, Kurtzman says, clarity is as much the responsibility of U.S. companies as of the countries where they want to do business. By entering foreign markets armed with knowledge of local business conditions and with a contingency plan, they can make their investments pay off and thus encourage further clarity and investment.

© 2008 ICSC. All rights reserved. | Terms and Conditions | Privacy Policy | Contact ICSC | ICSC Home |