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While U.S. REITs and Funds are Doling Out Hundreds of Millions of Dollars, CalPERS Is Considering Putting in Billions
The California Public Employees’ Retirement System (CalPERS) is contemplating taking a considerable piece of its real estate investment pie and allocating it outside of the United States into emerging international markets such as China and Brazil.

If approved, CalPERS would become one of the largest of a growing number of players to target real estate investments in markets outside of traditional European and Asian developed countries.

It is not the only pension fund doing so by any means. The Pennsylvania State Employees Retirement System has recommended investing up to $400 million in a new Morgan Stanley global real estate fund for which the investment house is currently raising money.

Morgan Stanley is raising $10 billion for its Morgan Stanley Real Estate Fund VII Global. The fund will invest in a broad range of real estate and real estate-related opportunities. Investment themes will include distressed opportunities and development opportunities in emerging and developing markets, as well as corporate and government divestitures. The fund will target China and India, among other emerging markets.

This would be PSERS’ seventh investment in a Morgan Stanley real estate fund.

The investment committee of CalPERS is studying a strategic plan put together by PCA Real Estate Advisors Inc. and Pension Consulting Alliance Inc. The committee is recommending allocating as much as 20% of the fund’s $23.6 billion in real estate investments to emerging markets in the next 10 years. Currently, emerging market investments account for only 3.6% of total real estate allocations.

Real estate makes up about 10% of CalPERS total assets.

On a long-term basis, emerging markets are expected to outperform developed markets due to higher GDP growth, growing middle class demographics, urbanization trends and shifts toward manufacturing and service industries, according to the investment committee.

That expected growth is the primary attraction for investors. A recent study by the World Bank estimates a quintupling of emerging market middle classes from 2000 to 2030. This projected growth would equal as much as three times the current total population of Western Europe.

Furthermore, the investable real estate market, defined as institutional-quality commercial real estate, is consistently smaller in emerging markets, in relation to overall GDP, than in developed markets with long established property markets.

The corollary, according to the World Bank, is that, as the middle classes and their personal incomes grow in the emerging economies, it should lead to disproportionally higher growth in demand for commercial real estate.

The quest for higher growth rates is also leading a handful of REITs to pursue overseas development. Among them, San Francisco-based AMB Property Corp., which made moves into both Brazil and China in the last month.

AMB entered into a strategic alliance with Cyrela Commercial Properties S.A. Empreendimentos e Participacoes (”CCP”), a leading Brazilian real estate company. The venture will focus on the development of distribution facilities in Brazil’s major metropolitan markets.

“This strategic alliance combines AMB’s global experience and customer relationships with CCP’s regional knowledge and development expertise, creating a great opportunity for AMB to expand its global business into Brazil, a country with a vibrant economy, significant global trade activity, and a growing middle class,” said Eugene F. Reilly, president of AMB’s Americas region.

“AMB’s opportunities in Brazil stem from our global customers’ expansion into the country’s major markets which are underserved by a stock of dated facilities lacking modern technical specifications,” said Kim B. Snyder, AMB’s senior vice president, managing director responsible for AMB’s expansion in Brazil.

Brazil’s economy is the ninth-largest in the world, and the largest in Latin America. The joint venture between AMB and CCP will focus initially on investments in infill submarkets of Sao Paulo, the country’s largest city by population and the recognized business hub of Latin America. The venture also anticipates significant investment activity in Rio de Janeiro, the second-most populated city in Brazil.

AMB also hired Ben M. Cornish, 39, as senior vice president, chief operating officer for China, a new position within AMB responsible for the company’s expansion in China. Cornish was most recently president of GMS China, a developer of retail properties throughout China. Previously, he was in charge of China real estate development for Wal-Mart.

AMB’s presence in China totals approximately 2.6 million square feet of operating and under development properties in Shanghai and Beijing, including the company’s recent acquisition of the 306,000-square-foot AMB Beijing Capital Airport Distribution Center 1. The company is also targeting Chengdu and the Pearl River Delta markets for future investment.

Equity International, a Chicago-based investment company focused on real estate-related businesses operating outside of the United States, last month closed a $100 million commitment in AGV Logística, a privately held logistics company based in São Paulo, Brazil. With this investment, Equity International now has four portfolio companies in Brazil.

AGV operates 30 facilities in 11 states across Brazil and its tenant roster includes firms familiar to the U.S.: Bayer, Unilever and Nivea, among others.

The logistics sector in Brazil is characterized by a high level of sustainable growth and demand, and presents significant opportunity as both multinational and domestic companies increasingly seek improved logistics outsourcing alternatives to reduce costs and increase efficiencies, the company said.

The saying used to be, “When the U.S. sneezes, Latin America catches a cold.” In the past, investors have viewed Latin America as a perpetual crisis and a technical bet. Things have changed - definitively and decisively, according to Manuel Balbontin, CEO of Compass Group, a New York-based investment advisor focused on Latin America.

“There is a lot of evidence that emerging market investors are under-weighted when it comes to Latin America,” Balbontin said. “While Asia will clearly continue to be a huge driver of growth in the world, it will be negatively affected by all three economic crises the world is facing - credit crunch, oil shortage and food shortage. Latin America will actually benefit from two of those crises - oil and food — and be less affected by the third. Further, Latin America, specifically Mexico, Peru, Colombia, Chile and Brazil, is now largely investment-grade or near-investment grade. In fact, Latin America is a stability story: Uncertainty has dissipated, and the region has de-coupled from the U.S. economy. There’s an opportunity to invest relatively early in stability.”

However, as the term “emerging” implies, these developing international markets are not quite there yet.

“Emerging markets continued to underperform in 2008, registering a negative 32% return year-to-date,” reported Amos Rogers III, senior portfolio manager, The Tuckerman Group in his second quarter global real estate review. “With real estate markets in their infancy in countries such as Brazil, India, and Russia, there is greater dependency on revenues generated from transactions and sales. Earnings are more cyclical and more exposed to systematic shocks such as economic weakness and rising inflation. However, favorable supply side fundamentals and projections for strong economic growth are likely to provide support for these markets in the near-term.”

Jones Lang LaSalle in its second quarter global real estate review reported that, transaction volumes were also down in Latin America. However, poor product availability was the main factor in falling activity as opposed to the credit crunch or economic concerns.

The opposite was happening in China, where all eyes were turned last month during the Summer Olympics.

South East Asia witnessed the strongest investment volumes across the region with its strong growth profile continuing to draw investors, Jones Lang LaSalle reported. Singapore in particular saw a significant rise in investment with total volumes reaching $4.8 billion (up 20% from a year ago).

In China and Japan, investment volumes grew in U.S. dollars terms, up 3% and 8% respectively in the first half.

According to PCA Real Estate Advisors and Pension Consulting Alliance in their report to CalPERS, the risks associated with investing in emerging markets have been decreasing over time. Market transparency, as well as the structural and legal environments, has improved and governments are doing more to battle corruption.

The successful implementation of any investment strategy that includes emerging markets depends on whether the investor achieves an appropriate level of diversification, supported by manager selection and careful asset allocation by country, the consultants told CalPERS.

Source
Mark Heschmeyer, Costar Group: Source

This entry was posted on Monday, September 8th, 2008 at 3:17 pm and is filed under Commercial Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.