Activity Internationalisation in the Real Estate Market: Some Evidence on the Internationalisation of the Real Estate Involvements of Listed Firms

Éamonn D’ArcySchool of Real Estate and Planning, University of Reading

Stephen LeeCass Business School, City University

Introduction

Real estate in common with many other business sectors has experienced significant levels of internationalisation in its market activities over the last decade. Real Estate Services, Investors Groups, Funds, Users

Listed real estate firms - evidence so far available of their activity internationalisation suggests that it has more been limited and highly sector specific as compared to other groups of market actors

Introduction

This research sets out to systematically examine the internationalisation of the real estate involvements of this group as a means of identifying the key drivers of this process in the listed real estate universe

Focus in presentation on the potential drivers of internationalisation and the stylised facts of the activity internationalisation of a range of key listed firms

Explaining Internationalisation

Transfer of intangible assets or capital across national boundaries Push

Market Saturation, New Entry New Technologies

Pull Client Following, Competitor Following Market Seeking Opportunities

Performance differences, timing, diversification

Explaining Internationalisation

Barriers Formal

Regulation Foreign ownership restrictions Controls on information and capital flows

Informal Language and culture Local Real Estate Cultures

Implications in terms of significant information costs and requirements (transactions costs)

Explaining Internationalisation

The OLI Paradigm Ownership Advantages – Characteristics of Intangible Assets

– reputation- clients- exploit proprietary methodologies (Know-how) – Capital – growth/return possibilities

Locational Advantages – Which markets present opportunities – tradability of the activity concerned – host country market environment

Internalisation Advantages – What mode to use – direct, partnership, indirect

Investment/Development Activities

Return OpportunitiesSmall home market sizeDifferences in economic performanceRelative capital scarcity

Emerging marketsDemographicsMarket timing

Post – bubble, crash, re-pricing

Investment/Development Activities

Diversification International correlations Modern portfolio theory

The rationale behind international diversification is simply an extension of basic portfolio theory

Most assets are heavily influenced by their domestic economy

In an international setting fewer common factors, and greater divergence leads to lower correlations and thus enhanced diversification opportunities

Given that real estate is an non-exchange traded asset and more tied to underlying economic driving forces are there additional international diversification opportunities ?

Investment/Development Activities

Ownership Advantages Intangible assets

Proprietary methodologies (Know-how) Access to debt – ability to raise capital

Locational Advantages Proximity Market Structure Similarities Increased accessibility of viable investment markets

Information, liquidity, transparency Internalisation Advantages

Direct Potential acquisition possibilities

Barriers

Transactions costs Information costs and requirements

Regulation Political Risk, Economic Risk Currency risk and hedging requirements

Additional risk that currency movements add to the asset Transaction Exposure Translation Exposure Economic Exposure

Barriers Liquidity Issues – market size

Real estate is a relatively small investment market and the limited number of ‘liquid’ investment markets further exacerbates impacts resulting in a concentration of investment in the larger more liquid markets

Limits to diversification potential Common economic driving forces Many of the key office investment markets are major financial services

centres: Common tenants – linked to capital markets Common investors – linked to capital markets - Competition

The potential implication is limited economic diversification Local Real Estate Culture

Institutional differences in the structure of real estate markets Considerable differences in ‘the rules of the game’

Table 1 Activity Internationalisation of Selected European Listed Firms (Top 5 by Country)

Country REIT Sectors International Sectors and Countries

Belgium Cofinimmo Healthcare, Leisure, Office

Yes HealthcareFrance

Befimmo SCA Office Yes (Minor) OfficeLuxembourg

Warehouses De Pauw Commercial, Industrial, Office, Parking, Others

Yes Warehouse5 European Countries

Wereldhave Belgium Office, Retail Yes Office and Retail 5 European Countries and US

Intervest Offices Industrial No

France Unibail-Rodamco Office, Retail Yes Retail 12 European Countries

Klépierre Industrial Office, Retail

Yes Retail12 European Countries

ICADE Industrial Office, Retail, Residential

Yes (Minor) Office,GermanyStudent HousingSpain

Gecina Healthcare,Hotel, Logistic Office, Residential,

Yes (Minor) Office,Spain

Foncière des Régions Logistic Office Others, Parking, Residential

Yes Office, RetailItaly(Acquisition of Share in Major Italian Property Company)

Table 1 Activity Internationalisation of Selected European Listed Firms (Top 5 by Country)

Netherlands Corio NV Industrial Office Retail

Yes Retail 4 European Counties Office/Industrial France Germany

Wereldhave NV Industrial Office, Retail Residential

Yes Office and Retail 5 European Countries + US

Eurocommercial Properties NV

Industrial, Office, Retail

Yes RetailFrance, Italy Sweden

Vastned Retail NV 589 Others

Retail, Others Yes Retail4 European Countries Office Industrial Belgium Germany

Nieuwe Steen Investments Funds NV 434 Industrial

Office, Retail Residential

Yes Office Retail Switzerland

UK Land Securities Group PLC

Office, Retail No

British Land Co PLC

Industrial, Leisure,OfficeRetail

Yes (Very Minor) 1 Retail JV,Spain

Liberty International PLC

Office Residential Retail

Yes Office and Retail US (California)

Hammerson Plc Office, Retail Yes RetailFrance (Paris)

Segro Industrial, Logistic, Office

Yes Ind/Log9 European Countries

Table 2 Activity Internationalisation of Selected Non-European Listed Firms (Top 5 by Country)

Country REIT Sectors International Sectors and Countries

Australia Westfield Group Retail Yes RetailNZ US UK

Stockland Hotel,Industrial, Office, Retail Residential,Retirement Housing

Yes Mixed Portfolio AcquisitionUK

GPT Group Hotel, Industrial, Office, Retail, Retirement Housing,

Yes Senior Housing US

Dexus Property Group

Industrial, Office, Parking, Retail

Yes Office and Retail NZ Industrial NZ US Canada France Germany

CFS Retail Property Trust

Retail No

Hong Kong The Link REIT Parking Retail

No

Champion REIT Office, Parking, Retail

No

Regal Real Estate Investment Trust

Hotel No (but China Strategy)

GZI Real Estate Investment Trust

Commercial, Office, Retail

Yes Office, RetailChina

Sunlight Real Estate Investment Trust

Office, Retail, No

Table 2 Activity Internationalisation of Selected Non-European Listed Firms (Top 5 by Country)

US Simon Property Group Inc

Retail Yes Retail51 European Centers, 8 Pr Outlet Japan 1 Mex 1 Korea

Public Storage Industrial Yes Industrial7 European Countries

Annaly Capital Management Inc

Mortgage REIT N/A

Vornado Realty Trust Office, Residential, Retail

No (Porto Rico ?)

Boston Properties Inc Hotel, Office, Retail

No

Key Observations

Firm Size Sector Specialists – Retail and Industrial

Ownership Advantage Client Following (?)

Proximity Small Home Market Size Return Opportunities Accident rather Design

Going Forward

Why Sector Specialists are International? Considerable expansion of data set Investigation of Return Opportunities and

Performance Timing of Activity Internationalisation