markets are extremely
attractive, but he warns
that developers must be
wary. “It’s certainly more
work and involves greater
risk,” he says.
When it comes to India,
where Hines set up an
office almost two years ago,
a huge population and hot
economy offer dynamic
growth prospects. But
development in this market
doesn’t come without its
issues. “It’s very challenging
as a foreigner to get your
money into India. It’s very
bureaucratic,” says Baughn.
“The other major barrier is land prices,
which have risen dramatically in the past
two or three years to the point where you
have to wonder whether there isn’t a bit of a
bubble in terms of prices.”
Still, the firm finds the country’s property markets, particularly in the housing
and office sectors, compelling. Hines
formed a joint venture with New Delhi-based DLF Ltd. last August to develop a
15-acre site in Gurgaon. The first phase of
the development is an approximately
860,800-sf, 30-story office tower with
ground-floor retail space. Additional
plans for the site call for high-end shops,
restaurants and entertainment venues, a
hotel and exterior and interior public
spaces. It may also include apartments
and a second office tower. Upon full
build-out, the mixed-use complex will
total an estimated 2. 5 million sf.
Since India is a fairly new destination for
Hines, Baughn doesn’t anticipate to see a
return on investment in the near term.
Besides, establishing a truly bankable operation in a foreign market, he
says, is a long-term play,
involving a commitment to
understanding differences in
customs, language, currency
and taxes. “You have to look
at these countries as a five- to
10-year horizon. It takes a
pretty heavy investment in
terms of personnel on the
front end to get in there and
learn the market, the customs
and begin to do projects,” he
relates. “In many places, you
are competing with very
capable local developers.”
Though Baughn says
Hines generally prefers to
have full control of its projects, the firm will bring in
Through a joint venture with Sonae Sierra Brazil, Cleveland-based
Developers Diversified Realty is constructing a 477,630-sf, three-level regional mall in Manaus, Brazil. The approximately $95.7-million
project is slated for delivery later this year.
the developed economies of the US,
Europe and Japan. In some countries,
such as China and India, annual expansion is 10% or more, well above that of
the US and the rest of the developed
world. This growth has spurred great
demand for office, multifamily, retail and
industrial product.
In the case of Brazil, heightened
demand and lack of inventory have
pushed lease rates across all product types
up 15% to 20%, according to NAI Global.
And for Developers Diversified, an underdeveloped retail sector and a flourishing
middle class are adding up to a wealth of
opportunity. In late 2006, the firm
acquired a 50% joint venture interest in
Sonae Sierra Brazil, a fully integrated retail
real estate company based in Sao Paulo. As
a result, the REIT now owns the second-largest retail portfolio in the country, consisting of nine assets with an aggregate 3. 4
million sf.
As a part of the JV’s growth strategy, it is
developing a 477,630-sf, three-level regional
mall located in Manaus, the country’s
eighth-largest city with more than 1. 1 million residents. Upon completion later this
year, the $95.7-million project will include
eight anchor stores, a movie theater, fitness
center and supermarket.
Oakes relates that there are only about
300 malls in the entire country, most of
which are not up to modern standards.
“The returns achievable on new developments in Brazil are in the low teens,
whereas the cap rates on existing centers
that we see trading are at 7% or less, for the
most part,” says Oakes. “That is a huge
spread between development yields and
stabilized asset cap rates that represents the
value creation available there.”
Hines’ Baughn concurs that the spread
between development yields and stabilized asset cap rates in many emerging
local partners from time to time in order
to benefit from their on-the-ground
expertise.
For many developers, local partners
are the way to go. Developers Diversified,
for one, has used them as an entry point
into several markets. “Having the right
partner means making sure we do business in a fashion that we are comfortable
with, and that our partner has significant
local knowledge,” says Oakes. “This
ensures that we have access to all the
information necessary to make the best
decisions in foreign markets.”
Last spring, Developers Diversified
announced a venture with ECE
Projektmanagement GmbH & Co. KG of
Hamburg, Germany to build new retail
properties in Russia and the Ukraine. The
two firms have committed to invest
approximately $300 million in equity
over five years to fund their venture.
Plans for two developments are currently
in the works, says Oakes, who declined to
provide specifics.
“In Russia, the Communist rule that
existed in the Soviet Union for much of
the last century didn’t believe in consumerism so they weren’t building
regional malls or shopping centers,” he
says. “You wound up with a country that,
overall, is very undersupplied relative to
its population and the current economy,
which is very strong with essentially full
employment.”
Oakes says the JV is only looking at
cities in Russia that have populations of
500,000 to one million and, in some cases,
have no modern retail space. He explains
that some of the greatest imbalances exist
in a number of the second-tier cities,
adding, “It’s still difficult to do business in
Moscow or St. Petersburg.” One caveat,
Since entering China in 2004, ProLogis has been busy at work with
such projects as ProLogis Park Yunpu, a 2.6-million-sf industrial
complex being built in four phases in Guangzhou. Last December,
the company announced further expansion in the country, with new
development starts totaling $100 million.
