By Al Barbarino
When a group of financial and real estate industry heavyweights convened last week (Thursday) to discuss the globalization of REITs, there was little sparring.
Speaking at NYU Schack Institute of Real Estate’s 17th Annual REIT Symposium, industry bigwigs, including Steven B. Tanger, president and CEO of Tanger Factory Outlet Centers; William L. Mack, founder of Area Property Partners; and Samuel Zell, billionaire investor and chairman of Equity Group Investments, warned against the dangers of globalization.
“I’m not convinced that bigger is better,” Tanger told a group of industry professionals at the Upper East Side’s The Pierre Hotel. “We believe that better is better.”
The remark underscored a consensus among panelists throughout the afternoon about the pitfalls of breaking into new markets without the expertise to do so. That bigger for the sake of being bigger — is a big mistake.
Top REITs have made efforts to globalize. But the results have been mixed at best, panelists said. Breaking into overseas markets is tricky business, amid added frictional and regulatory costs and diverse tax structures. Without a dependable regional partner, the terrain is treacherous.
Focused REITs that excel in one product and region have long outperformed REITs that try to do everything, the latter tending to sell under net asset value, whereas specialized REITs tend to sell above, some said.
“I don’t think it is time for REITs to venture out into five different product lines in 15 different countries,” Mack said, adding that these types of REITs are often poorly understood. “The REIT marketplace seems to want to understand and simplify what REITS are doing.”
Successful globalized REITs do exist, said Richard Lieb, head of North American Corporate Advisory at investment banking firm Greenhill & Co. He pointed specifically to The Westfield Group, which operates one of the world’s largest shopping centre portfolios, with 111 regional shopping centers across Australia, New Zealand, the United States, the United Kingdom and Brazil, valued at $61 billion.
“It’s possible to do it,” he said. But, he added, “It should never have to do with diversification. It has to do with expertise… and bringing a product to a market that simply wasn’t there.”
While panelists agreed that breaking into the right markets (equipped with a reliable regional partner, a unique product, and expertise) could make strategic sense, at least two speakers conveyed their intentions to avoid globalization, and in some cases even to scale back their efforts oversees.
Tanger, the first outlet mall developer to be listed on the New York Stock Exchange as a publicly traded REIT in 1993, has a portfolio of 39 outlet shopping centers in the U.S. (as well as Canada), totaling approximately 11.8 million square feet.
“Going overseas would be a mistake,” Tanger said.
In 2005, Alexandria Real Estate Equities, a REIT focused on the life science industry, started moving its “tentacles” into China and India, as the countries’ medical industries grew, said Joel S. Marcus, the company’s Chairman and CEO.
Marcus said he had spent 10 years in Asia prior to the new venture. But today, less than 10 percent of the REIT’s capital is in oversees developments or investments, and Marcus has “tried to hedge that down over time.”
“I wasn’t naïve when it comes to the time and effort it takes to the time and effort that it takes to gear up and create a franchise there,” Marcus said. But, he added, “We find that here in the U.S., particularly in our major markets, we have more orders than we can fill.”
Zell topped off the afternoon by bolstering the undertones among panelists that globalization certainly isn’t all bad, while admitting that his success with globalization had been a mixed bag.
In the case of Equity Office, a portfolio that today encompasses approximately 70 million square feet of Class A office space throughout the U.S., “we believed bigger was better,” Zell said.
But his company was never able to achieve the same success as Equity Residential, the residential arm and REIT that operates more than 550 apartment communities across the U.S.
“We created massive liquidity, but what we couldn’t prove was the ability to create a network,” Zell said about Equity Office. “We couldn’t prove that we could in fact benefit from our scale.”
He went on: “The answer is, bigger just for the sake of bigness is obviously not the answer. Bigger for the sake of maintaining and creating liquidity I think is critical. And bigger is better if you can figure out how to execute and take advantage of your scale.”