Chasing global growth: A look at the most active U.S. developers in hotspots around the world

May.May 01, 2013 07:00 AM

From left: Rob Speyer of Tishman Speyer, Sam Zell of Equity International, Jeff Blau of Related Companies, Joseph Sitt of Thor Equities and Donald Trump of the Trump Organization.

American real estate developers have long gone overseas seeking profitable returns in high-demand markets.

But recently, developers have started investing with more force in some countries — India, Mexico, China, Brazil and the United Arab Emirates, to name a few — which have seen exponential growth in the past few years.

“The risk-adjusted reward is clearly in [developers’] favor,” when it comes to international investment, said Lyman Daniels, the president of CBRE Mexico. “The returns in Mexico [for example], subject to the relative risk, are still quite attractive.”

This month, The Real Deal looked at several key countries to see which U.S. and New York developers have emerged as the most prominent.

India is one of the most expensive (and sought-after) international markets. And there are a slew of American real estate players getting in on the action, including Atlanta-based Portman Holdings, New York’s Tishman Speyer, Donald Trump, Sam Zell’s Equity International and mega-private-equity players like the Blackstone Group.

In November, Portman announced a $300 million “investment and management” role in a high-end residential development — which includes residential towers and row houses — in South Bangalore called the Promont. The project is being developed by Tata Housing, a subsidiary of a Mumbai-based developer.

According to Ambrish Baisiwala, Portman’s CEO, the company owns nearly 400 million square feet of residential real estate in India.

“What we like [in India] is the urbanization and a growing middle class,” Baisiwala told TRD.

Meanwhile, Tishman Speyer, which has had a presence in India since 2006, currently has four new developments in the pipeline there, totaling 7.15 million square feet. Its most significant is a planned 100-acre mixed-use development located in Hyderabad, a city in southern India.

Even Donald Trump has thrown his hat in the Indian real estate market ring.

Indeed, the Trump Organization is developing two 22-story Trump Towers in Pune, India. The luxury condos are scheduled to be completed by 2015.

David Green-Morgan, global capital markets research director for Jones Lang LaSalle, who is based in Singapore, said Pune is “a very fast-growing city.”

He said he would expect condos like Trump’s to fetch over $1 million each.

Green-Morgan also said it’s easiest for developers looking to get a toehold in India to target the retail and office sectors.

On the office front, he said major cities like Mumbai and New Delhi “are just as expensive as you’ll find in other parts of the world,” making them profitable investment opportunities.

In fact, Green-Morgan said those who invest in office buildings can expect returns of 15 to 20 percent in India. Cushman & Wakefield’s 2013 international office report backed that up. It ranked the most expensive office markets in the world and found that New Delhi’s Connaught Place was the fourth-priciest area globally to lease office space at an average of about $135 per square foot (including taxes and other fees). The same study put Manhattan’s priciest office stretch, along Madison and Fifth avenues, at about $129 per square foot (also including taxes and fees).

Perhaps to take advantage of India’s potentially high returns, in 2011, the Blackstone Group acquired a 37 percent interest in the 12.9 million-square-foot Manyata Business Park in North Bangalore in southern India — a newly in-demand market. Blackstone, which did not respond to requests for comment, reportedly paid $200 million for the stake in the three office buildings.

Green-Morgan said Indian developers have an advantage over foreign investors because they have pre-existing relationships with local construction players, making it difficult for outsiders to build residential developments on their own.

Indeed, in 2011, Equity International partnered with New York–based investment company GTI Capital Group (which, according to its website, invests solely in Indian or India-related businesses) to form SAMHI — a privately held hospitality investment company headquartered in Gurgaon, India.

So far, SAMHI has invested in 22 hotels — three of which are completed and 19 that are in the development pipeline, including the Fairfield by Marriott in Bangalore and Four Points by Sheraton hotel in Ahmedabad.

According to a JLL 2013 first-quarter market report, investment activity is “gaining momentum” in India, after growth recently slowed to its lowest rate since 2008. The number of deals completed by foreign investors is expected to grow in 2013, the report said.

Green-Morgan noted that while labor and construction costs are inexpensive, some Indian cities, such as Mumbai, have land costs that are among the highest in the world.

A rendering of hospitality company SAMHI’s planned Fairfield by Marriott hotel in Bangalore, India.

Like India, China has one of the fastest-growing economies in the world, making it attractive for real estate companies looking to make a solid return on their investment.

“The massive urbanization and ever-growing middle class have created an unpredicted demand for property services, which is why developers are flocking to China,” said Randall Hall, an executive managing director in JLL’s Hong Kong office.

Chris Brooke, president and CEO of CBRE China, agreed, explaining that initially American investors were developing office buildings and shopping centers there, but have more recently shifted to mixed-use projects.

Hall pointed to Houston-based Hines Interests as one China’s earliest and biggest U.S. developers. The company, which declined to comment, has developed five properties in Beijing since it opened an office there in 1995, including a 187-room Four Seasons Hotel and the massive 45-acre, mixed-use California Place in Shanghai.

Tishman Speyer is also one of the most active foreign developers in the region.

Outside of North America, its largest holdings are in China, where it owns 14.29 million square feet in Shanghai, Chengdu and Tianjin, at four properties. The largest of those is the under-construction Springs in Jiang Wan New Town, Shanghai — a 66-acre residential, commercial and retail project that will total 9.69 million square feet.

Tishman Speyer is also currently building the 2.58 million-square-foot Lushan residential development in Chengdu. Phase one of the project is set to be complete in 2015.

Hall also pointed to Related, and Michigan-based shopping mall developer Taubman Centers, as other U.S. developers making their mark.

A Related spokeswoman said the company has formed a joint-venture partnership on a forthcoming project, but declined to provide further details.

In addition, Equity International is currently invested in Chinese portfolio company Shanghai Jingrui Properties, a middle- and upper-middle-market homebuilder.

Hall explained that it’s becoming easier for companies to invest in China, especially in the commercial sector, because governmental regulations have been loosened in the last few years.

However, China’s impending real estate “bubble” has received a lot of attention recently, with whole shopping malls and developments reportedly sitting empty.

Still, Hall argued that the economy will bounce back later this year because of recent government actions.

He cited data from consulting firm McKinsey and Co., which found that China will have more than 200 cities with a population of over 1 million people by 2025, making it increasingly attractive for investors.

And Colliers International found that in Shanghai, both residential sales volume and prices increased in 2013’s first quarter. (The average sales price of a new construction house in Shanghai rose 7 percent year-over-year, according to the report.)

For its part, while Portman has long been invested in China, company CEO Baisiwala said the firm has always been cautious with its investment there.

“What’s holding us back right now is Chinese governmental policy,” he said. “Over the last two years, the government has been trying a number of ways to dampen the enthusiasm, particularly with the real estate market.”

Indeed, Beijing officials announced in March that single Chinese residents would only be allowed to purchase one residence in total, while Shanghai simultaneously imposed a capital gains tax designed to limit the amount of product being built.

“We want to be somewhat cautious,” Portman added, “and watch where the policies go.”

While the Brazilian economy has slowed down considerably since 2011 — according to a JLL report, deal volume declined 36 percent to $6.5 billion in 2012 from the year before — the South American country is still attracting U.S. real estate investors.

Market analysts say both the commercial and residential sectors are considered attractive.

On the commercial side, Fábio Maceira, CEO of JLL Brazil, predicts that despite the recent economic slowdown, office rents will grow by 50 percent in the next few years.

And Cushman & Wakefield’s abovementioned office report ranked the Zona Sul area of Rio de Janeiro the third-priciest location for office leasing globally. The report pegged the average cost per square foot for office space at about $163 annually (again, including taxes and other fees).

Sources say an increase in office rents should only attract more American investment interest to Brazil. In fact, Maceira said commercial returns could be as high as 15 percent, even after taking into consideration building costs in Brazil.

And with the 2014 World Cup and 2016 Summer Olympics approaching, the Brazilian government is investing in major infrastructure upgrades that are expected to make real estate more valuable.

“Investment in infrastructure is what will help many of the markets grow,” Maceira said. “Rio has done a very good job on promoting business and marketing themselves as a place to invest.”

So who are the biggest U.S. developers in Brazil right now?

Tishman Speyer, which has been investing in Brazil since 1995, is front and center. It has 21 commercial, residential and mixed-use projects totaling 11.28 million square feet throughout the country. The firm’s most ambitious project — currently in development — may be the massive Mairarê, an 11-tower, 1,188-unit, 1.57 million-square-foot residential project in São Paulo. The final phase of construction began in November.

In addition, Hines, which has developed eight properties since it opened an office there in 1998, is currently developing a residential complex called Interlagos in São Paulo, with 1,250 units in 12 towers.

Meanwhile, in March 2012, New York–based real estate investment firm GTIS Partners closed on $810.2 million in equity commitments to a new fund called GTIS Brazil Real Estate — the largest real estate vehicle focused solely on Brazil, according to news reports.

The company committed approximately $1 billion to investments in Brazil, making it one of the most active American private equity real estate managers there.

In December, GTIS announced plans to further ramp up its investments over the next five years in Brazil with another $1.25 billion.

And while Equity International has been invested in Brazil since 2005, the company is continuing to form new joint ventures. Last year, for instance, it invested in homebuilder Grupo Thá, which focuses on developing middle- and upper-class residential properties in Paraná and Santa Catarina in southern Brazil.

Brian Finerty, who oversees Equity’s South American investments, said unlike most U.S. investors, which focus on real estate in Rio and São Paulo, Equity has seen high returns in the outer regions.

“We invested in some of the other asset categories that aren’t as widely competitive because there’s not as much capital chasing it,” Finerty said.

Finerty compared Brazil in 2005 to Mexico in the late 1990s. Both have youthful populations, growing consumerism, large economies and an emerging middle class.

“It’s a country that had been somewhat closed for some time and had pent-up demand,” Finerty said. “We saw that early on and [that’s why we] invested heavily.”

American investors are taking a page out of Mexican billionaire Carlos Slim’s playbook — and getting more bullish on investing in the country.

While Mexico has attracted U.S. developers for some time — Hines has been investing in Mexico since 1994 and has interests in 21 properties throughout Mexico — market analysts say investors have grown far more aggressive in the last year.

JLL described Mexico as the “growth story” of investment activity in a first-quarter 2013 market report, noting that investment volume more than tripled in 2012 to $4.4 billion after a 2010-2011 low.

Investing in and developing Mexican real estate has become “more in vogue within the last year or so … because so many other places around the world are either in crisis or the returns don’t meet the risk,” said Daniels of CBRE Mexico.
In fact, Finerty said that although Equity International has not invested in Mexico since 2008, it’s currently looking to invest there again.

“If you marry the [real estate] competitiveness with all the great demographics, for us it’s an obvious place to track our investment dollars,” Finerty said.

Daniels noted that investors are seeing returns of at least 250 to 400 basis points or more. He said although construction materials generally cost about the same in Mexico as they do in the U.S., labor costs are significantly lower.

He attributed the recent surge of activity to the stabilization of the political environment. Although Mexico has been in the news in the past few years because of its drug cartels and trafficking problems, Daniels said that those issues are mostly contained to areas around the border, and “the situation in the Mexican economy is strong.”

“All of the macroeconomic indicators have been more positive each day,” he said. “The political environment has become very stabilized. … That leads to greater confidence by investors looking southwards to Mexico.”

As in all of the recently surging countries, macroeconomic conditions, such as an emerging middle class and an increasingly younger population, have also sparked a growing consumer appetite, Daniels said. That has sent investor interest soaring and helped fuel hefty returns.

A report about Mexico City’s office market compiled by CBRE Mexico said in the next three years over 3.12 million square feet of office space will come on the market.

While Slim’s various companies are investing $1.4 billion into a rundown section of Mexico City — with plans to bring housing, office, movie theaters and a museum — most U.S. investors are sticking to more tested locations.

In December, Joe Sitt’s Thor Equities created Thor Urbana Capital — a joint venture with Mexico City–based real estate developer GFa Grupo Immobiliario — to invest in Mexico.

With plans to spend at least $500 million, the new venture’s first project includes developing a full block of high-end retail along the popular tourist strip of Quinta Avenida in Playa del Carmen.

While Thor Equities did not respond to requests for comment, its website notes that it already has three other retail developments in the works in the area.

And like Thor, many entities are forming joint ventures to help break into the Mexican market.

“There are barriers to entry including [lack of] relationships, knowledge and local market best practices,” Daniels explained.

American private equity firms have also increased their activity in the last year or so in Mexico.

For example, in March 2012, Denver-based private equity firm Black Creek Group closed on a nearly $400 million fund that will reportedly invest in retail assets.

United Arab Emirates
Once a safe haven for investors, the United Arab Emirates took a dramatic nosedive during the recession, when construction halted. Only recently have those pre-recession projects come out of mothballs.

That has drawn international investors to Dubai and Abu Dhabi — two areas where American investors see financial potential.

“Abu Dhabi is one of the fastest growing real estate markets in the Middle East region,” Craig Plumb, head of research for the Middle East and North America at JLL, said via email.

“It has benefitted from political stability during the Arab Spring, and from continued government investment in infrastructure and real estate,” he said.

A first-quarter report from JLL noted that the Dubai market is continuing to experience higher levels of residential sales than the global market, which it called an indication that the residential market there is beginning to “overheat.”

Indeed, a 2012 Colliers fourth-quarter report on Dubai showed that while prices are low compared to what real estate players are used to in New York, they are continuing to increase. The average price per square foot for residential property in Dubai was $308 in 2012’s fourth quarter versus $302 in the third quarter. (By comparison, the average price per square foot for a Manhattan apartment was $1,103 in 2013’s first quarter, according to Douglas Elliman.)

The JLL report also noted that a number of new retail projects have been announced in Dubai recently.

In October 2011, Toronto-based Brookfield Asset Management announced that it would start a $1 billion fund in partnership with the Investment Corporation of Dubai. ICD functions as an investment arm of the Dubai government, which holds a stake in more than 30 Dubai companies, including some of the largest real estate companies in the region.

Meanwhile, in December, Gulf Related — a partnership between Related and Gulf Capital, one of the Middle East’s leading alternative asset management firms — purchased four plots of land that it will develop into a 3.1 million-square-foot, mixed-use luxury retail complex called Sowwah Central in Abu Dhabi.

The project, which is expected to open in 2017, will include 350 fashion retailers and two 400,000-square-foot luxury residential and hotel towers. The partnership’s neighboring Galleria — which is already fully leased to luxury retailers such as Louis Vuitton, Cartier, Prada and Gucci — is slated to be done later this year.

Gulf Related also has four commercial towers, including two hotels, on Al Maryah Island.

Ken Himmel, the CEO of Related Urban, told TRD the returns are high for the Sowwah Central project, which he described as high-risk.

He did not specify the exact returns Related expected, but said: “There’s lots of risks we’re not accustomed to in the U.S., so the returns need to be higher.”

Correction: A previous version of this article stated that Brookfield Asset Management launched the Investment Corporation of Dubai. The two firms partnered in the launch of a $1 billion fund.

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