andrew baum and david hartzell, global property investment, 2011 international real estate...

Andrew Baum and David Hartzell, Global Property Investment, 2011

International real estate investment: 1


1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

0

5

10

15

20

25

30

35

40

45

50

Office ownership in the City of London by non-UK owners

Germany USA Japan W Europe Middle East International Other

Perc

enta

ge (%

)

Source: Henley Business School, University of Reading

Cross-border investing has boomed


Norwegian fund buys £448m stake in Regent Street

• 4 November 2010 | By Kat Baker • The Crown Estate is to join forces with the managers of the

Norwegian Government Pension Fund Global in a new £1.8bn Regent Street partnership.

• The Norwegian pension fund will spend £448m to take a 25% stake in Regent’s Street in a deal representing a yield of around 4.5%.

• The deal marks the first time the Crown Estate has sold a stake in a standing investment and highlights the continued strong appetite from overseas investors for central London property.


The case for international

• Diversification• Higher returns

• Lack of local product• Regulation

• Global benchmarks


Diversification? Returns

Source: IPD indices, NCREIF

2001 2002 2003 2004 2005 2006 2007 2008 2009Australia 10.7 9.81 12.2 14 15.7 19.2 18.3 -0.26 -2.15Canada 9.25 8.81 8.33 12.9 18.7 18.3 15.8 3.69 -0.32Ireland 8.08 2.35 12.4 11.4 24.4 27.2 9.85 -34.5 -23.3UK 6.79 9.64 10.9 18.3 19.1 18.1 -3.42 -22.1 3.51US 7.28 6.74 8.99 14.5 20.1 16.6 15.8 -6.46 -16.9


Diversification? Correlations

Correlations between UK all property returns and other global market sectors 2001-2009Source: IPD indices, NCREIF

Australia Canada Ireland UK USAustralia 1 0.94 0.94 0.61 0.96Canada 0.94 1 0.88 0.56 0.95Ireland 0.94 0.88 1 0.82 0.91UK 0.61 0.56 0.82 1 0.59US 0.96 0.95 0.91 0.59 1


Limitations

• Smoothing• Historic data• Specific risk and sampling error: is the index replicable?• Leverage• Illiquidity• Taxes and fees• Currency


Returns: global real estate, 2005Ca

nada

Den

mar

k

Fran

ce

Ger

man

y

Irel

and

Italy

Net

herl

ands

Nor

way

Port

ugal

Spai

n

Sth.

Afr

ica

Swed

en

Switz

erla

nd UK

USA

Aust

ralia

0

5

10

15

20

25

30

35

Source: IPD, NCREIF

30.1%

0.5%

13.4%

Market

Retu

rn,

%


The case against international

• Can you diversify?• Implementation challenges

• Formal barriers– Taxation, fees and costs

• Informal barriers– Currency!


Formal barriers

• Exchange controls• Limits on foreign ownership• Taxation of foreign owners


Tax

• Pension funds pay no tax at home• Withholding (income, not capital) taxes often applied on income

internationally• Income may be taxed but capital gains may not be • Various structures can mitigate tax

– Using debt to wash out income– Using tax treaties– Using vehicles domiciled in favourable tax regimes (Lux)

• Dividends and loan note interest taxed differently from rent


Tax: case

• UK investment manager; captive insurance fund• France performance prospects attractive• Dutch pension funds likely co-investors, attractive fees• Tax treaties France-Netherlands, UK-Netherlands • Tax penalties for overseas investors in France• 18.5% transfer tax on buildings – 1.75% on companies• Income tax relief on interest in France• Lower taxation of loan interest in Netherlands


The French property fund

French Co French Co

100%

Netherlands

France

ABC French Property Fund BV InvestorsEquity & loans

Dutch BV 1

BV 2 BV 2 BV 2

French CoExternal debt

c. 65%

100% 100% 100%

100% 100% 100%


Case: the French property fund

• Fund is controlled by Dutch nationals in Netherlands• ABC fund owns BV to allow sale of portfolio without collapsing fund• Tax treaty Netherlands - France means no tax paid by Dutch tax free

entities• Tax treaty Netherlands - UK means no tax paid in Netherlands by UK

life fund


Case: the French property fund

• Investors provide loans to top co to reduce tax on income received• Dutch BVs own French prop cos to widen net of possible tax-favoured

buyers• Companies own French buildings to avoid transfer tax of 18.5% on sale

– 1.75% company transfer tax • French prop cos use debt to reduce French income tax on dividends

paid up


Informal barriers

• Currency risk• Political risk • Information asymmetry• Limits on exit

• Equity• Debt


Conclusions

Formal barriers Informal barriers

Ability to invest Willingness to invest

Restriction to capital accounts Legal and title riskLegal barriers Political riskTaxes and costs Economic stability

Currency riskLiquidity riskCultural barriersGeographical barriers


Currency: risk

2002 2003 2004 2005 2006 2007Euro -1.4 -0.9 8.0 23.6 9.3 5.2GBP 16.1 19.1 16.4 7.5 7.3 14.7USD 5.0 7.1 8.6 20.1 22.0 16.6JPY 5.2 7.5 11.3 23.4 23.3 9.3Local 7.1 7.8 11.4 15.5 14.9 11.5

Source: IPD global index returns, 2002-7

Property market returns averaged 11% in local currency; but averaged 7% to an unhedged Eurobloc investor, and 13% to a UK or US investor

andrew baum and david hartzell, global property investment, 2011 international real estate...

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