REITs Are Increasing
Foreign Investments

U.S. real-estate firms are pushing further overseas.

In the latest deal, Mills Corp., an Arlington, Va.-based retail real-estate investment trust, is expected to announce that it and a joint-venture partner have agreed to acquire a 715,000-square-foot shopping center in Glasgow, Scotland, for about $524.2 million.

The agreement comes amid a broader move by U.S. REITs and other real-estate firms to establish or expand their presence in Europe, Asia, and Latin America, despite the weaker dollar. Some of the push is driven by a belief that overseas markets offer more opportunities and higher investment returns than U.S. markets. And part of it is real-estate companies' effort to become more global to serve the space needs of their multinational tenants.

Investment Spree

Among the recent deals: AMB Property Corp., a San Francisco-based industrial REIT, announced plans to develop a 254,000-square-foot logistics center in Singapore, the sixth development it has launched abroad in 2004 -- with five of them in Asia. AMB also has made three acquisitions in Asia, Europe and Mexico, making 2004 the company's most-active year abroad since it began investing overseas two years ago.

In August, Chicago-based retail-mall REIT General Growth Properties Inc. announced investments in two separate joint ventures: one in Brazil that will own interests in two regional malls and a property-management company; and one in Costa Rica to construct and manage a regional mall. The company hopes the investments, its first-ever internationally, will offer its current U.S. retailer tenants opportunities as they expand globally.

Late in 2003, Simon Property Group, an Indianapolis-based retail REIT, entered a joint venture with a leading retail company in Italy that plans to own, manage and develop malls in that country. In 2004, the company bought another REIT that owns outlet malls in Japan.

Mills Corp.'s Madrid Xanadu (above) and St. Enoch Centre in Scotland.

Meanwhile, some of the opportunity funds, real-estate companies, pension funds and REITs that have been investing abroad for awhile are accelerating their activity or expanding into new property types or other countries in Europe, and into China, with its booming economy. These include New York-based Blackstone Group and Houston-based Hines.

Last week, ProLogis, a Denver-based industrial REIT that was one of the earliest REITs to invest abroad with its moves into Europe and Japan, announced a joint-venture agreement with a Chinese company to develop a logistics park in Shanghai. That deal came a few months after ProLogis acquired an industrial park there.

'Most Promising Prospects'

Real-estate companies are setting their sights abroad as strong demand over the past few years for U.S. commercial real estate, prompted by low interest rates, has pushed prices higher and lowered investment returns.

"What investors are saying is yields in the U.S. have been bid down so low that the more speculative markets elsewhere have the most promising prospects," says Robert White Jr., president of Real Capital Analytics Inc., a New York-based real-estate research firm.

Gregory Whyte, a REIT analyst with Morgan Stanley, sees risks for some U.S. REITs jumping on the bandwagon. "There are some management teams that will do it for the right reasons and some will do it for me-too reasons," he says. "Management teams have to think about the risks of going abroad and the returns they could get to compensate for those risks."

Indeed, U.S. investors pursuing opportunities abroad may face rough waters. "Their commitment to overseas investing may be tested as many economies are slated to grow only slowly," says Dennis Yeskey, national director of Deloitte & Touche USA LLP's real-estate capital markets practice. Gross-domestic-product growth in France, the U.K. and Spain is expected to range from 2% to 2.8% in 2004 -- stronger growth than the year before, but still slower than in the U.S.

There also is the currency risk associated with a weaker dollar. Many of the U.S. investors hedge either by borrowing in foreign currencies or investing with joint-venture partners, which minimizes the amount of equity they put at risk.

Mills' Moves

In the Mills deal in Scotland, wholly-owned affiliates of the company and Ivanhoe Cambridge, a Montreal-based shopping-center owner and developer, are expected to acquire St. Enoch Centre from Deka Immobilien Investment GmbH, a Germany-based property investor.

Mills' acquisition comes on the heels of the company winning the right to develop the site of the former Mercati Generali in Rome into a retail, entertainment and cultural center, and its opening in November of the first enclosed regional shopping mall built in Canada in 14 years. It serves as further evidence of the company's commitment to expanding its retail and entertainment "destinations" beyond the U.S. Last year, Mills developed the 1.4 million-square-foot Madrid Xanadu mall in Spain, which analysts generally regard as a success.

For most of the U.S. REITs that have gone abroad, "it still is too new to really reach a firm conclusion," says Mike Kirby, principal with Green Street Advisors Inc., a real-estate research firm based in Newport Beach, Calif. But, he says, in the cases where report cards can be given, such as ProLogis and Mills, "there are more good grades than bad grades."

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