globalproperty

insight

f t . c o m / G P I

issue 1 spring 2014

Indian summerInvestors are looking tomove into the south Asianmarkets as Bangalore booms

Brand buildingA company headquarters ismuch more than just an officeblock for many occupiers

ForeignmissionEmbassies are beingtransformed into housing andmixed-use developments

spring 2014

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contents

Special reports editormichael SkapinkerHead of editorial contentHugo GreenhalghProduction editorGeorge KyriakosArt directorSheila JackPicture editorsmichael crabtree, Andy mearsCopy editorsJerry Andrews, Helen BarrettSub-editorsPhillip Parrish, Liz DurnoGlobal sales directorDominic GoodHead of content activationAlexis JarmanContent activationmanagermike DuffyGlobal associate director,commercial propertyLyn thompsonAdvertising productionDaniel Lesar

contributors

Kate Allen is the ft’s propertycorrespondentJoe Barnes and India Ross are ftresearchersPeter Barbalov is a design partnerat farrellsAndrew Baxter is the ft’s seniorwriter, special reportsMustafa Bilek is president ofmEBE, the Russian constructionand development companyAndrea Felsted is the ft’s seniorretail correspondentEdwin Heathcote is the ft’sarchitecture correspondentAmyKazmin is the ft’s South AsiacorrespondentChris Newlands is editor of ftfm,the ft’s fund management sectionAnjli Raval is the ft’s US propertycorrespondentJudeWebber is the ft’s mexicocorrespondent

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05

1.true storeys

the Seagram Building in

New York – see page 14

2.high life

the Paseo castelar

development in mexico

city – see page 34

3.tech hub

the Infosys campus in

Bangalore – see page 22

openers06forewordthe first issue of ftGlobal Property Insight

08breaking groundLondon’s penchant for bigcommercial towers reflects aglobal trend for architecture aslogo, says Edwin Heathcote

10introductionPlanners, architects and developersacross the world are promotingmixed-use projects, particularly ifthey include cultural buildings

14featurethe changing roster of owners andtenants of New York’s SeagramBuilding is a microcosm of postwarUS economic and design history

investors20columnchris Newlands has seen carshowrooms go from beingindicators of wealth to soundinvestments in their own right

22indiaBangalore’s technologybusiness parks are becoming anincreasingly popular holding forforeign private equity firms

26supermarketschanging consumer habits areforcing supermarket operators torethink their property portfolios butinvestors’ appetites remain strong

30statisticsA return of confidence has seensignificant growth in real estatecapital flows

occupiers32on the movemustafa Bilek on the challenges ofmoving offices in moscow

34mexico cityHow Aston martin tracked down asite for its first showroom in mexico

40brand buildingcorporate headquarters whosedesign is a brand statement in itselfare very fashionable but also pricey

developers44columnPopulation growth more thaneconomic development is drivingproperty markets, says Kate Allen

46interviewRic clark on why he is takingNew York-based office developerBrookfield Property Group into newsectors and territories

52embassiesGovernments increasingly arecashing in on the prime capital citylocations of their embassies

56designflexibility of design is crucial to thesuccess or failure of buildings

topping out58sir david chipperfie ldShaping the city

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07

foreword michael skapinker

you to provide a place for staff tolock up their bikes?

this magazine is targeted atinvestors too, whether in buildings,property companies or funds.Where in the world are the mainopportunities? Which markets lookoverheated?

our intended audience alsoincludes developers – and weunderstand that commercialproperty does not stand onits own. today’s propertydevelopments often have aresidential or leisure side to them.We will look at the best of thesemixed developments, as well asthe interactions with national andcity governments required tomake them happen.

We will be examining theinformation technology side of

property too; any new buildinghas to be able to cope not onlywith today’s computers, tabletsand mobile phones, but withtomorrow’s devices too.

We want to welcome allour readers – everyone who isinterested in architecture, citiesand a better urban environment.that means everyone who works,has worked or plans to. Propertymatters affect us all.

Michael Skapinker is an assistanteditor of the Financial Times andeditor of FT Special Reports

building blocksAny companywith internationalambitions wants a base in NewYork, London, Dubai, Hong Kongor Shanghai (or both), tokyo and,possibly, San francisco, frankfurt,Singapore or Sydney.

Yet deciding where to buy orlease can be expensive, bafflingeven frightening. Even the mostexperienced chief executivesprobably make only a handfulof big property decisions. It isimportant to get them right.

But these decisions can alsobe exciting. A new office canshow what the company standsfor. It can provide employeeswith an invigorating (or at leastcost-efficient) workplace. If thoseambitions – and the budget –stretch far enough, there may bea chance to move into premisesdesigned by a star architect.

these are some of the issueswe plan to cover in our new seriesof financial times magazines, ftGlobal Property Insight.

the ft and the preoccupationsof the global commercial propertymarket are, in our view, a perfectmatch. Like the best internationalproperty developments, ourreporting strives to be global,hard-headed and stylish.

Who is ft Global PropertyInsight aimed at? Its intendedaudience is the chief executiveor chief financial officer who isthinking about investing in aheadquarters or foreign subsidiarybuilding. What parts of the city offerlow rents and a safe environment?What are the local transportsystems like? Is it possible to cycleto work and do local laws oblige

Towering presencethe buildings a

company occupies are

one of the most visible

ways it can show what

it stands for

Chief executives probablymake only a handful of big

property decisions

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scale. the new generation of skyscrapershas been conceived as objects ratherthan engaged architecture. the ArtDeco towers of New York were dividedinto base, shaft and crown, each verticalstratum of the city the recipient of its ownvisual language. the base addressed thestreet, the crown the skyline and almostendlessly extrudable shaft the mid-levels.the object appears complete only from adistance or in a model.

It is, of course, not a problem confinedto London. Paris’s once cosmopolitanand socially mixed centre has becomea ghetto of extreme wealth very similarto London’s. this in turn, however, hasforced the once derided La Défense toreconsider its architecture and a slow,careful reimagining of the public spacesand the commercial architecture thatdefines them is becoming, for the firsttime, a genuinely engaging urban realm.

meanwhile reports that thecommercial property market in the UnitedArab Emirates is recovering (thanks, inpart, to investment caused by tensionselsewhere in the region), might strikedelight into underemployed westernarchitects but it also demonstratesthat there is life yet in other models ofdevelopment – in ways of defining newcentres upon a virtual tabula rasa.

the skyscraper in the desert nevermade any real sense – it is instead asymbolic gesture in which architecturerepresents a yet-to-be-fulfilled futureof prosperity. the skyscraper is, asDutch architect Rem Koolhaas onceproclaimed, an inherently utopianproject. Its continuing dominanceof a commercial discourse might bedetracting from problems on the streets,from the way in which they city worksat ground level but, as the constructionof the kilometre-high Kingdom towerin Saudi Arabia shows, it remains adeveloper’s dream and towers are goingnowhere except up.

Edwin Heathcote is the FT’s architectureand design critic

A recent report by the think-tank NewLondon Architecture revealed that thereare 200 planning applications pendingfor towers of 20 storeys or more inLondon. It is an astonishing figure for acity still seen as essentially low rise – atleast in comparison with its US or Asiancompetitors – and it tells a story of a citythat is going through a fundamentalchange. A city’s towers are the symbolsof its idols. A few centuries ago, the UKcapital was a city of spires. But London’s200 new towers are something different.Virtually every one contains “luxury”apartments. this new residential upsurgein London is echoed across the Atlanticin New York – as property in both citiesbecomes a global reserve currency. NewYork, once the city of the commercialskyscraper, has become the city ofthe condo tower and the penthouse.But where does that leave commercialarchitecture?

the answer, rather counterintuitively,is almost exactly where it was a centuryor more ago. In New York, the Downtowntrend was firmly residential with the onceunthinkable phenomenon of historicWall Street buildings being converted toapartments as the financial sector movedto midtown. Yet when the developers ofthe World trade center site, SilversteinProperties and the Port Authority,began to rebuild they bucked the trend,going not for the mixed-use urbanismof contemporary orthodoxy but ratherfor a purely commercial scheme, acluster of super-tall office towers by acluster of “starchitects”: fumihiko maki,Richard Rogers, Norman foster andothers. the effect is to preserve thispart of Downtown as a place of work.But what is less visible is what happensunderground. Apart from the massive(and, at $4bn, strikingly expensive)transport interchange, below ground thesite will host a huge subterranean retailcentre spreading up into the lower floorsof the towers.

this is similar to what has beenhappening in the city of London.Here too, star architects are buildingbig commercial towers increasingly

spires to towers

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dominated by retail at their bases. Evenas much of big finance shifts eastwardsto canary Wharf, the city has succeededin repelling residential development, inconstant fear of residents rejecting newer,bigger commercial developments andhas managed to keep itself commercial.Yet it is doing that by expanding upwardsin a manner that has caused concern. thecity planners’ professed desire to “cluster”towers has been smashed by a numberof huge buildings that lie distinctlyoutside the designated zones. the Shardin Southwark and the Walkie talkie infenchurch Street (designed by RenzoPiano and Rafael Viñoly respectively) havedestroyed any idea of a coherent skyline.

the suspicion is that big namearchitects are being brought in to flatterplanners and local authorities with theirpresence yet the results are very far fromarchitectural masterpieces. Instead theyreflect a globalising trend of architectureas logo; simplistic shapes that exist todraw attention to themselves rather thanas constituents in an urban landscape.London is in danger of becoming closerin its skyline to Doha than to New York,which, as a grid, allows for almost infiniteextrusion of the rectangular block in itsstructural DNA.

Sir David chipperfield makes the pointon page 58 that part of the problem is

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breaking ground edwin heathcote

1.attention seeker

the 37-storey Walkie

talkie in London

designed by Rafael

Viñoly bursts upwards

and outwards

2.1930s charm

New York’s chrysler

Building is a classic

example of Art Deco

architecture

London is in danger ofbecoming closer in its skyline

to Doha than to New York

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culture clubs

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10

introduction

1.

and the extraordinary Saadiyat Island complex,featuring buildings by Norman Foster, Gehry andJean Nouvel provides the front for a massivecommercial investment, a commercial quarter,which it is hoped will benefit from the prestige ofthe emergence of a new cultural quarter.

Nearby Doha is progressing with animpressive rebuilding of the entire centre of thecity. The 31-ha Msheireb project encompasses agroup of refined commercial buildings conceivedat a scale very different from the more familiarGulf towers and designed to begin to refer to thecomplex patterns and grain of the historic city, awalkable quarter in a city in which no one walks.The district is being built up around an elegantshaded central square designed by London-based architect Michel Mossessian.

The Msheireb also represents a retreat fromthe idea of the ubiquitous commercial businessdistrict. It is a deliberately and determinedlymixed-use development, an attempt to replicatethe success of historic city centres. For nearlytwo decades, this became a new urbanorthodoxy: the notion that the most engagingand enduring cities take their energy from themix of uses characteristic of established citycentres. Developers have been keen to blendresidential, retail and commercial propertiesin the newest blockbuster developments andthose uses often also include cultural buildings.Some of the world’s most impressive schemesare either centred around or at least featurecultural institutions in an effort to add gravitas toupmarket developments but also to anchor themin a sense of place and cultural identity.

The architecturally sophisticated developmentof the Tjuvholmen area of the Oslo docks hasbeen anchored by the Renzo Piano-designedAstrup Fearnley Museum. The former industrialend of Mexico City’s otherwise upmarket Polanco

But then sometime in the 1960s, somethinghappened. Commercial architecture becamebanal. Perhaps in pursuit of a purism inspired bythe minimalist Mies, or perhaps just because ofa dumbing down of architectural culture, the realinnovations – aesthetic, urban, constructional– started to emerge in the cultural sphere. Thebuildings that defined the late 20th and early 21stcenturies were the arts blockbusters, from theSydney Opera House and the Centre Pompidouin Paris to London’s Tate Modern; and from FrankGehry’s Guggenheim Museum in Bilbao and WaltDisney Concert Hall in Los Angeles to IM Pei’sMuseum of Islamic Art in Doha.

The question, then, is can commercialdevelopers and architects regain the prestigethey once had? There are signs they are trying.Zaha Hadid’s Galaxy Soho shopping centrein Beijing brought the kind of design usuallyonly countenanced by cultural institutions tothe shopping centre, and the same architectand developer’s Wangjing Soho office andretail complex (under construction in Beijing)amplifies the message. Gehry has also beenemployed to build big towers in New York andnow Berlin, while London’s skyline has beenradically altered by a clique of “starchitects”,

whereas two decades ago the City’s architecturewas dominated by a handful of relatively little-known commercial specialists.

Commercial developers now look to thecultural sector’s success in “placemaking” – usingarchitecture to establish an identity. This trend hasbeen particularly powerful in those cities aimingto make an impact fast. Architecture – particularlythe kind of branded, sculptural designs of thebig names – has proved to be an effective wayof establishing a site in the local, national andinternational context, long before it is even built.

From Singapore and Kuala Lumpur to Dohaand Shenzhen, the fast-changing skylinesattempting to identify themselves as emergingglobal cities are turning to big-name architectsand dramatic designs in an effort to locatethemselves within the international imagination.

This approach might not have always beenidentified with success. Dubai’s insane rush to buildits booming desert skyline became the subjectof a perennial critique in the pre-crash days, yetnow it is bouncing back, its skyline establishedand its odd mix of tourism and business makingit an established, even trusted hub.

Dubai’s neighbour, Abu Dhabi, is being, as ever,more restrained. Its blockbusters remain cultural

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11

1.Grand designs

Galaxy Soho in Beijing,

bringing the design values

of a cultural institution to a

shopping centre

2.Big-name project

The Wanjing Soho office and

retail complex in Beijing by

the in-demand ‘starchitect’

Zaha Hadid

3.Shifting picture

The ICC Tower in Hong

Kong’s West Kowloon, which

aims to overtake Hong Kong

Island as a business centre

Formost of the 20th century it would have been possible to say that the world’s mostimpressive buildings and its most advanced architecture were purely commercial.At the end of the 19th century and the beginning of the 20th, they were locatedaround the US – Louis Sullivan’s Wainwright Building in St Louis, Cass Gilbert’sWoolworth Building in New York and Frank LloydWright’s Larkin Building in Buffalo.Each of these represented real architectural innovations, from the first atriums to thefirst recognisable skyscrapers. Then the focus shifted east to the seductive Art Decotowers of Chicago and New York, and the wonderful Rockefeller Center. Even afterthe warmany of themost innovative structures were purely commercial – Mies vander Rohe’s Seagram Building (see page 14) and Giò Ponti’s Pirelli Tower in Milan.

by edwin heathcote

2. 3.

traditional models. The City of London remainsfearful of the impact of residential development,concerned that residents will impinge on itsability to continually transform itself throughconstruction. The result is that metastasising,spiky skyline that the Square Mile is barely able tocontain and which is now spreading to the EastEnd and south of the river.

Arguably the world’s most chargedconstruction site, New York’s World TradeCenter, has also seen a determined rejection ofthe mixed-use model. Despite an extraordinaryexodus of the big financial powerhousesfrom their traditional base in Wall Street andDowntown to Midtown, the site’s developers, thePort Authority and Larry Silverstein, decided tomaintain the site as a business district. The trendDowntown (even, remarkably, in Wall Street),has been for the solid, historic buildings to betransformed into condos for the bankers whoonce worked there. Silverstein’s decision to keepthe WTC as a business district might have meant

district has been turned into a huge retail centreand that too is bracketed by two major culturalbuildings, the Soumaya Museum (designed byFernando Romero and housing the art collectionof Carlos Slim) and the Jumex Museum, anexquisite Sir David Chipperfield-designedgallery that opened last year and houses thecontemporary art collection of the eponymousjuice company.

By far the most significant of these schemesis Hong Kong’s West Kowloon development. Thispiece of reclaimed land is one of the world’s mostradical current developments and its intentionis nothing less than a shift of the historic centreof business gravity from the traditional colonialnexus of Hong Kong island to the traditionallyChinese Kowloon mainland side. The move P

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is already well under way with the elegantKPF-designed 118-storey ICC (InternationalCommerce Centre) Tower that sits on top ofthe Terry Farrell-designed Kowloon Station,with its fast airport connections attracting bigcorporations and financial institutions from theother side of the harbour. The West KowloonCultural District promises to transform thisstill rather lifeless business district (albeit onewith the most magnificent views) using themachinery of culture to create place and identity.The confirmed buildings include a museumdesigned by Herzog & de Meuron (architects ofTate Modern) and a huge array of theatres andconcert halls.

Intriguingly, though, the world’s biggestbusiness hubs are cleaving stubbornly to their

introduction

Hong Kong’s West Kowloon development is one ofthe most radical projects and intends to shift thecentre of business from the traditional colonial

nexus of Hong Kong island to the Chinese mainland

Downtown was guaranteed a future as a financialcentre – although it seems that the clientsattracted to the new blockbuster buildings tendtowards the media, law and technology sectors.

The WTC site is also a blend of the emergingtrends in city centre development. Whereas theTwin Towers attempted to obliterate everythingthat stood before them, the new design makesreal efforts to reintegrate the site into the city,restoring routes and weaving roads back in. It alsomakes use of the big-name architects: RichardRogers and Foster have buildings on the site,Santiago Calatrava is building the $4bn transporthub and Fumihiko Maki’s 4 World Trade Centeris an outstandingly elegant tower. Finally, it is adevelopment with ambitions to claw culture backto the centre of the city with ambitious plans for atheatre by Gehry.

The extraordinary profile and visibility of thissite may mean that its success – or its failure – willdetermine the model of city centre commercialarchitecture for years to come.

Human scaleThe Msheireb project

in Doha

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The changing roster of owners and tenantsat 375 Park Avenue, Manhattan – better

known as the Seagram Building –is a microcosm of postwar US economic

and design history, writes Anjli RavalPhotographs by Pascal Perich

lifestoreys

Glass towerFrom the Eagle Pencil

Company to Wells Fargo,

the Seagram Building’s

tenants have been

a who’s who of corporate

America

A 1919wall hanging created by Pablo Picasso is atthe centre of the latest battle over the historic versus themodern at the Seagram Building in Manhattan.

The dusky mauve and ochre Le Tricorne stage curtainwas created for a Russian ballet production and has hungin the Park Avenue office tower’s Four Seasons restaurantfor more than half a century. But the building’s currentowner, RFR Holding, wants it out.

Aby Rosen, the New York property titan and artcollector who co-owns the office tower, has referred to thepiece as a rug and a carpet in conversations with the NewYork Landmarks Conservancy. The preservation grouphad requested an order – which was granted – temporarilypreventing RFR from moving the work, saying shifting theaged piece would destroy it.

Although the property group has said the curtain hadto go because of a damaged wall, the NYLC and othersbelieve Rosen – whose tastes run to artists such as DamienHirst and Jeff Koons – wants to use the space to showcasehighlights of his vast trove of postwar gems.

“The curtain was specifically bought for the space. It is agift to the city and there it should remain forever,” says PegBreen, NYLC president.

The juxtaposition of the old and new has featured in thenarrative of the Seagram Building throughout its life, from itsdesign and ownership to its tenant make-up and artworks.

The Four Seasons restaurant at the base of the building– a go-to lunchtime spot for tycoons and celebrities(regulars include Martha Stewart, Ralph Lauren andHenry Kissinger) – has maintained the same landmarked

– or listed – interiors since it opened in the late 1950s.Meanwhile, the revamped office space on the upper floorscould rival that of a start-up technology company.

No one understands this convergence better thanPhyllis Lambert, daughter of Canadian business magnateSamuel Bronfman, who was the owner of the SeagramCompany’s liquor empire. The company had outgrownits rented space in the Chrysler Building amid a boomingpostwar spirits business and wanted to build a space of itsown. But Lambert was horrified at her father’s original plansfor a showy metal and glass edifice.

In a letter pleading to her father in 1954, the then27-year-old Lambert, wrote bluntly: “No, No, No, No, No.”She believed the project would look vulgar and took issuewith his characterisation of the building as “Renaissancemodernised”. She urged him to construct a tower that didnot reference any previous era. “If you are going to makesomething, you build the most wonderful and best thingyou can at the time,” Lambert, now 87, tells the FinancialTimes.

The vivacious young lady – who went on to establishthe Canadian Centre for Architecture – was commissionedto help oversee the design and construction of the newtower. In her 2013 book, Building Seagram, she writes abouther role as the young director of planning. After weeks ofconsultations with architects across the country she settledon the 68-year-old German émigré visionary Ludwig Miesvan der Rohe. “Everyone was talking about him,” she saysof the younger architects she had spoken to. “It becameclear that I had to choose Mies himself.”

1.Rich tapestry

Picasso’s under-threat

Le Tricorne stage curtain

2.Modern masterpiece

The Seagram Building during its

construction

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spotl ight seagram building

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A virtually unlimited budgetenabled architect Mies van der

Rohe to use sumptuous materials

2.

The tower was granted landmark status in 1989 afterturning 30 years old, in recognition of its enduring designand architectural prowess.

A virtually unlimited budget enabled van der Rohe,alongside American architect Philip Johnson, then hisacolyte, to use sumptuous materials. The 38-storey towerfaces Park Avenue across a broad plaza of pink Vermontgranite, bordered on either side by reflecting pools andledges of verde antique marble. The tower itself is a steel-framed structure wrapped in a curtain wall of pink-greyglass to complement the bronze spandrels, mullions andI-beams that modulate the exterior surface. Walls and liftbanks are lined with travertine panels.

The building took only 18 months to design, another 18months to construct and at a cost of $36m, it was at thetime the most expensive skyscraper ever built.

Seagram took up the first six floors of office space whilethe Eagle Pencil Company, watchmaker United States TimeCorporation, typewriter maker olivetti, the Public RelationsSociety of America and television producer Goodson-Todman Productions were among other tenants.

The time over which the building was constructedproved to be a golden period for Seagram, which occupieda dominant position in the US drinks sector. Although thebuilding remains an icon of corporate power, its completionin 1958 signalled the peak of the company’s fortunes.

Seagram’s market share began to drop in the followingdecade and, in the years after, the company pushednew lines of business, including forays into chemicalsand entertainment. Seagram was sold to French media

18

spotl ight seagram building

The juxtaposition of the old and newhas featured in the narrative of

the Seagram Building throughout its life

company Vivendi in 2000 and, two years later, the drinksbusiness on which it was founded was disposed of.

In 1979, the skyscraper was sold for $85m to pensionfund Teachers Insurance and Annuity Association – CollegeRetirement Equities Fund. In the years leading up to thesale, a recession had enveloped the US and the banks thatmarketed New York’s debt were convinced the city was onthe brink of bankruptcy.

“It was a difficult period to own and acquire new realestate, given the high interest rates and capital constraints,”says Nicholas Stolatis, senior director at TIAA-CREF’s globalreal estate arm, but “we welcomed the chance to acquiresuch an iconic property”.

Even though TIAA-CREF owned the building, theBronfman family remained caretakers and ensured propermaintenance was carried out, including the oiling of thebronze exterior of the building. “This added enormouscomplexity to everyday upkeep – a challenge we metduring our entire period of ownership,” says Stolatis.

Joel Ehrenkranz, whose law firm has been in thebuilding for more than 40 years, says its location, qualityand stature explain its rents of up to $200 a square foot.“other buildings advertise their views of Central Park,but at Seagram you have a rather fabulous view of thecity buildings because the plaza sets it back.” AlthoughSeagram, and later Vivendi, continued to occupy thespace in some fashion until the mid-2000s, the sale meantTIAA-CREF – and later RFR – was no longer allowed touse “Seagram Building” in its marketing. Even so, 375 ParkAvenue was the jewel in the crown of TIAA-CREF’s $40bnproperty and mortgage portfolio.

one factor prompting the sale of the tower to RFR in2000 for $375m were the millions of dollars needed torefurbish the property in the coming years, said peoplefamiliar with the matter. TIAA-CREF, however, says:“We don’t fall in love with our real estate assets. Weconsidered ourselves stewards of an endearing property,

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and following an exceptionally long holding period we soldwhen it made sense.”

Rosen and business partner Michael Fuchs – also theowners of Lever House, a modernist building further upPark Avenue – secured the deal with two investors duringa frenzied Manhattan property market. Those who hadbought buildings cheaply during the recession of the earlyto mid-1990s were reaping the benefits of price and rentrises as the economy recovered.

Three-quarters of the roster of prestigious tenants –ExxonMobil and DaimlerChrysler among them – werepaying rents below market rates and had leases set toexpire within five years. Development rights of the buildingalso spurred an intense bidding war.

“The building is almost my business card. If you ownSeagram, suddenly it equates to a certain type of ownerwho cares about owning a New York landmark,” saysRosen. “You are the custodian of the building and aremaintaining it for a future generation. I wanted one on bothsides of the street.” Under RFR’s ownership the buildinghas undergone refurbishment, including modernisationof its lifts, electrics, heating and cooling systems, and thereplacement of landmarked luminescent ceilings.

But the road to this point has not been easy: RFR washampered by the most recent financial crisis, which putpressure on the New York office property sector; Rosenbecame embroiled in a dispute with Seagram investorsHarry Lis and Peter Brant that resulted in them beingbought out; and the company had to undertake a $1bnrefinancing of the property after finding no takers for astake in it when other large sales in the city had also cometo nothing. Even so, the building’s co-owner believes he isholding on to “a piece of history” that he seeks to showcasethrough public art installations – the building’s rotatingsculpture programme has included Jeff Koons’ “BalloonDog” and Dan Colen’s “Cracks in the Clouds”.

“Aby has tried to bring in tenants with a similar

1.Power lunching

The Four Seasons restaurant, a

favourite with the rich and famous

2.Rooms with a view

The building’s set-back aspect is

said to enhance the vista

3.Host with the most

Julian Niccolini, co-owner of

the Four Seasons

4.Financial hub

The offices of EnTrust, which has

been a tenant since 2010

5.Raising the bar

“Dolphin Taz Trashcan” by Jeff

Koons in the building’s lobby

2. 3.

5.

4.

appreciation for art and architecture,” says GreggHymowitz, co-founder of EnTrust Capital. Theinvestment group moved into the building in 2010,joining corporations such as banking group Wells Fargo,energy giant ConocoPhillips, hedge fund Third Point andtelecommunications company Verizon.

But the building’s oldest and most enduring fixturesremain under pressure; alongside the Picasso curtain,the owners of the Four Seasons are tussling over a steeprent rise. Julian Niccolini co-owns the Four Seasons’ leasealongside business partner Alex von Bidder and theBronfman family.

Having presided over the city’s lunchtime gold standardfor 37 years, he remains positive. “The Four Seasons is anintegral part of the building,” he says. “our lease is with RFRand our future lease will be with them. We have been theresince the beginning.”P

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the retail price index and, as a result,manufacturers and car dealers arecomfortable with agreeing inflation-linked leases. This also reassuresinvestors on their tenants’ ability toservice these agreements.”

His optimism – and that of otherinvestment professionals – comesdespite car showrooms being underattack from the web.

According to research by consultantsFrost & Sullivan, global online car sales willincrease eightfold between 2011 and 2025to almost $4.5bn to account for almostone in every five new car purchases.

Audi, Nissan, Jaguar, Land-Rover,Mini and Mercedes-Benz have all openeddigital stores, while Ford, PeugeotCitroën, Fiat and Renault have launchedwebsites for customers to buy cars fromthem directly.

At the same time, bricks and mortardealerships are becoming expensive.Margins for dealers on new car sales inEurope are typically less than 1 per centof the price of the vehicle.

But Patel is unperturbed. The carindustry has been ahead of the curvein successfully combining a “bricks andclicks” approach, he says. “As a resultshowrooms are here to stay. Theirwebsites have become sufficientlysophisticated for customers to do a lotof their homework online but they stillwant to visit the showroom for a physicalinspection and a test drive.”

He adds that research from CordeaSavills shows that since 1990 the best-performing sectors during periods ofhigher inflation are regional offices andalternatives including car showroomsbut also budget hotels and gyms.

Patel may have a point and, althoughsustained price increases seem a longway off for the time being (cue the badcar jokes), a look under the bonnet atcar showrooms might avert a head-oncollision with inflation.

Chris Newlands is the editor of FTfm,the FT’s fund management section

Car showrooms have long beenindicators of financial health. For anyjournalist worth their salt, a simple call tothe sales staff of a luxury car showroomduring bonus season would quicklyreveal how those banks in Canary Wharfor Wall Street had performed over thepast 12 months, and just how generouslythey had lined the pockets of their staff.

News of a spike or a fall in the numberof sports cars being taken for a spin werequickly reported back to page editorsand dissected for the expectant reader.Indeed, in a recent edition of the FT, itwas proclaimed that the feel-good factorin the City of London had returned, thatthe biggest banks were hiring again, dealpipelines were filling up, and bonuseswere on the rise. And just so there couldbe no doubt, the article was punctuated

by the news that Britain had overtakenGermany to become Ferrari’s largestEuropean market.

The result is that car showroomsare proving to be a sound investmentthemselves rather than just indicators ofwealth elsewhere, and the message beingdriven home to investors by propertyfund managers is that car showroomsnot only provide shiny sports cars but

showroom shine

photos:r

osie

hallam;r

euters

an attractive investment choice. Theargument behind this, however, ismore Volvo-esque in its reasoning thanFerrari-like: namely that car showroomsoffer a good hedge against inflation.With central banks around the worldfighting against disinflationary pressuresand every effort being made to avoidprice falls, the wise owls at the propertyinvestment companies suggest the onlyway is up for prices, and that now is theright time for investors to inflation-prooftheir commercial property investmentsin anticipation.

Many fund managers, includingPimco, the world’s largest bond house,argue the opposite and that inflation willremain low this year. Property managershave other ideas, however.

As a result, says Kiran Patel,

chief investment officer at CordeaSavills, the international property fundmanager, “we’re particularly attractedto inflation-linked alternatives such ascar showrooms”, which in the UK areoffering yields of between 5 per cent and6 per cent while 10-year index-linked giltsoffer “a meagre negative 0.15 per cent”.

Patel adds: “Historically, the motorindustry has performed in line with

F T . C o M / G P I

20

investors chris newlands

Ferrari feelingProperty managers are

attracted to inflation-

linked alternatives such

as car showrooms

The wise owls at propertyinvestment companies

suggest the only way is up

PHOTO:GETTY

Such has been the success of Bangalore’stechnology business parks that foreign

private equity firms are rapidlyexpanding their property portfolios inthe Indian city, writes Amy Kazmin

bangaloreexpress

tech temple The ‘Washing

Machine’ building on the Infosys

campus in Bangalore

photo:B

loomBerG

The quintessential image of India’s economicemergence was captured by Thomas Friedman in hispopular 2005 book about globalisation, The World is Flat.Friedman starts with a visit to the 43-acre headquartersof Infosys, one of India’s premier information technologyoutsourcing companies, based in the southern city ofBangalore.

He travels down a rutted road crowded with motorcycles,rickshaws and beasts of burden, and arrives in what hecalls “a different world”. He describes the ultra-modernInfosys campus, with its massive glass-and-steel buildings,housing more than 20,000 workers, and the super-sizedvideo-conference facilities for interacting with the company’sclients and partners from across the globe. He also notesamenities such as a large swimming pool, a putting green, ahealth club and numerous restaurants.

Almost a decade later, the Infosys headquarters, inBangalore’s Electronic City, has not lost its ability to amazeand delight visitors, especially those from other parts ofIndia who must deal with the country’s rickety publicinfrastructure and the dilapidated office buildings of its urbancentres. But the campus is typical of the scale and calibre ofcommercial property that has been developed in Bangalore,a city that has doubled in size over the past decade.

Once dubbed a “pensioners’ paradise” for its temperateclimate, Bangalore today has 100m sq ft of commercialoffice space, more than any other Indian city. Its vastultramodern business parks provide tracts of space tohouse tens of thousands of office workers in one place. Theparks are buoyed by extensive infrastructure, such as back-

up power and water systems, needed to ensure globalcompanies can keep running 24 hours a day withoutinterruption, in a country notorious for power cuts andother infrastructural deficiencies.

It is no surprise that many of India’s leading ITcompanies, such as Wipro, are based there, but Bangaloreis also the destination of choice for the Indian operationsof global companies such as Goldman Sachs, Hewlett-Packard, Cisco and Tesco. Now, as well as luring prestigioustenants, the city’s business parks are also attracting theattention of private equity firms, which have been takingstakes in completed, leased commercial property assets.

Over the past two years, Blackstone, the US-basedprivate equity group, has invested about $800m to buildup an Indian property portfolio of 28m sq ft. Of those funds,half have been invested in Bangalore commercial buildings,with its partner Embassy Property Developments, based inthe city. The two companies are completing a $325m dealto take control of Vrindavan Tech Village, a 104-acre specialeconomic zone with 2.1m sq ft of leased office space and75 acres of undeveloped land.

Blackstone is not alone. Qatar’s sovereign wealth fund,the Qatar Investment Authority, has invested nearly Rs18bn($289m) in a special-purpose vehicle set up by RMZ,southern India’s largest commercial property developer.Property companies owned by Singapore’s governmentare also looking for potential acquisitions, and some Indianplayers have begun to follow suit.

According to Cushman & Wakefield, the propertyservices company, private equity investment in Indianproperty rose 25 per cent to Rs47bn in the first nine monthsof 2013, though much of that was driven by the Qatar deal.

Of the Rs30bn invested in Indian property in the thirdquarter of 2013, Bangalore was the top destination, withRs18.8bn of investment, while India’s national capital region,Delhi (and its satellite city Gurgaon), and Mumbai came a

1.Glass facade

A building in the Wipro

campus in Bangalore

2.Balancing act

A pedestrian walks past

a construction site near

corporate offices in Gurgaon

on the outskirts of New Delhi24

F T . C O M / G P I

investors india

‘One of the challenges inIndia has been an exit routefor property developers’

1.

2.

25

F T . C O M / G P I

‘Demandmay have dropped offmodestlyin the office market, but supply has

dropped sharply, given the lack of capital’

distant second and third, attracting Rs3.8bn and Rs3.6bnrespectively.

Private equity funds’ interest in Indian office spaceis good news for cash-strapped property developers,many of which urgently need new capital to fund futuredevelopments. “This is very encouraging,” says AnshumanMagazine, managing director of CBRE, the propertyservices company, in south Asia. “One of the challenges inIndia has been an exit route for property developers. Thiswill encourage more investment, as now they know there isa market. It brings more liquidity into the market.”

The new interest in Indian office space as an investibleasset class comes despite an overall economic slowdown.India’s gross domestic product growth fell to a decade low of5 per cent in the 2012-13 financial year, down from a peak of9.6 per cent in 2006-07, and there are few convincing signsof a pick-up. Growth in GDP between April and June 2013,typically the slowest quarter, fell to just 4.4 per cent, thenrecovered slightly to 4.8 per cent in the subsequent quarter.

Bangalore’s overall vacancy rate for commercialproperty is about 14 per cent, and rents are relatively low –from Rs30 per square foot in the 1990s-era Electronic Cityto Rs50-Rs52 per sq ft in newer complexes along the outerring road to Rs120 per sq ft for top-grade office space in thecentral business district.

But with demand picking up from western companies,and development of new properties slowing due to thedifficulties of acquiring large parcels of land and securingfinance, industry players believe rents are set to rise overtime. In some of the more desirable new locations or “micro-markets”, vacancy rates have already fallen to just 5 per cent.

Tuhin Parikh, who heads Blackstone’s Indian propertyoperations, says the private equity firm is confident thatoffice rents in Bangalore will increase over time, given both

the city’s inherent long-term demand for space and thesharply rising costs of construction. “We think rents overtime will go up,” he says. “Demand may have dropped offmodestly in the office market, but supply has droppedsharply, given the lack of capital.

“Given what has happened to land prices, constructioncosts and cost of debt, it is expensive to replicate theseassets. [Compared with] what you built them for five or sixyears ago, it costs double to build them today.”

At the peak of India’s growth cycle, Bangalore saw atake-up of around 11m sq ft of office space a year, but thathas now fallen to around 7.5m sq ft a year.

But Ram Chandnani, head of south India operationsfor CBRE, says Bangalore’s property market is churning,as companies such as Cognizant, Accenture and Hewlett-Packard, with employees scattered across multiple facilities,move into dedicated, purpose-built office parks. “Existingoccupiers want to consolidate their operations, and mostof it is built to suit transactions – corporate occupiers pre-arrange a deal with a developer,” he says. Such moves arefreeing up older space for a new wave of occupiers.

Bangalore is not the only Indian city that offers ultra-modern office space. Gurgaon, near Delhi, and Mumbai’sBandra Kurla Complex also have large tracts of landavailable. But Bangalore remains particularly attractive forcompanies, just as it is a magnet for young knowledgeworkers from all over the country.

photos:B

loomBerG;a

fp/Getty

PHOTO:GETTY

chain reactions

Changing consumer habits are forcing supermarket operatorsto rethink their property portfolios, but investors’ appetites

remain strong, reports Andrea Felsted

Market forces Shoppers have beencutting back on weekly visits to

larger stores and instead buying more

at smaller outlets

When Loblaw, the Canadian supermarket chain, spunoff its property assets into a separate company last July, itunderlined the potential of supermarket assets to propertyinvestors. The sector has undergone fundamental changesin developed markets, with Walmart in the US, Tesco in theUK and Carrefour and Metro in continental Europe amongoperators under pressure from a combination of factors.

“There are a lot of changes in the supermarket sectorgenerally. But the constant is the investor appetite,” saysMichael Rodda, head of European retail investment atproperty consultancy Cushman & Wakefield.

Across developed markets, cash-strapped shoppershave been moving away from the traditional big weeklyshop. According to J Sainsbury, the UK supermarketchain, consumers for the past couple of years have beenbuying one less thing in their weekly shop, then picking itup on a top-up shop during the week. This is promptingsupermarket chains that traditionally have been associatedwith large superstores to open smaller outlets.

Meanwhile, other alternatives to big stores are springingup in developed markets. Aldi and Lidl, the German so-called “hard discounters”, are expanding around the world,as their no-frills offerings gain favour among more affluentconsumers.

At the same time, online grocery shopping is gatheringpace across the developed world. The UK has the mostadvanced online grocery market in the world, accountingfor about 5 per cent of total grocery sales, according toOC&C, the consultancy. In the US, the figure is about 1 percent, but retailers there are doing their best to catch up,with online giant Amazon expanding its AmazonFreshgrocery business. At the other end of the spectrum aplethora of speciality food sites are springing up in the US,such as Goldbely and Mouth.com.

Against this backdrop, supermarket assets remainattractive to investors on both sides of the Atlantic. Themain reason is that despite the turbulence since theeconomic crisis, people still need to buy food.

“It is not a controversial sector to be investing in,” saysJohn White, a director of Osprey Equity Partners, theinvestment company.

“Whatever else happens, people have to eat. Moreimportantly, food retailers have been very adept atadapting to changing customer habits and have beenquick to roll out multi-channel formats.”

Osprey, which invests in supermarket assets on behalfof private investors, also notes that in the UK, supermarketsare typically let on 25-year leases, commonly linked tothe retail price index. In continental Europe, leases tendto be much shorter, often as a result of less restrictiveplanning regimes. And despite the challenges in the globalgrocery market, supermarket operators still have verystrong balance sheets and profitability. The stable cashflows generated by supermarket leases are well suited toinstitutional investors seeking income to meet pensionliabilities, property experts say.

The size of new supermarkets being built is shrinking,reflecting the changing dynamics of the market. But SimonLee, a director at Osprey, notes that even for bigger stores,for the right location, the big supermarket chains are stillprepared to take space.

“Although there has been a lot of press about bigfood stores being out of favour, we still see – for the rightlocations – supermarket operators taking good-sizedstores,” he says.

“Partly this is because operator profit margins are oftenhigher at traditional-format stores than from conveniencestores and online home deliveries. But it is also due to thefact that the physical stores form a large part of the onlineplatform – both as a point from which goods are deliveredto the home and also as ‘click-and-collect’ sites from whichonline orders are collected by customers.

“Large car parks and prominent locations make foodstores natural click-and-collect destinations. In addition,where retailers do not have representation in existingstores, special click-and-collect points are emerging.”

Rodda says appetite among investors for supermarketassets across continental Europe remains strong, as longas leases are reasonably long and the supermarkets takingthe leases have solid balance sheets.

“There is appetite across the board, from central Europeto Iberia,” he says. “There is appetite for both single-letsupermarkets, which will be sold to a single high-net-worthindividual, and large portfolios being sold to big insurancecompanies and specialist sale-and-leaseback investors.”

The one area of concern, Rodda says, is in bighypermarkets in continental Europe where up to one-thirdof the store is devoted to non-food items, such as clothingand hardware. These have been hit hard by the economicdownturn and by the rise of online retailers.

1.Market space

Spar’s industrial-themed

supermarket at the heart of a

wealthy district in Budapest

2.Czech out

A Lidl discount store in Prague,

Czech Republic

3.Shelf life

Walmart subsidiary Sam’s Club

in Elyria, Ohio, US

4. and 5.Trolley time

Branches of Tesco supermarkets

in the UK

2.

1.

28

F T . C O M / G P I

investors supermarkets

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F T . C O M / G P I

Despite the challenges in the global grocerymarket, supermarket operators still have

strong balance sheets and profitability

But Lee says the changing shape of the supermarketsector may create further opportunities for investors.So-called “dark stores”, in effect stores without customersfrom which online grocery orders are fulfilled, could makeattractive investments, as could convenience shops, if theywere parcelled up into portfolios of stores.

“Dark stores should have many of the samecharacteristics as traditional food stores: long leases, letto companies with strong balance sheets and a highland value at the end of their life,” he says. “The smallindividual lot sizes of convenience stores provide additionalgranularity and liquidity to a wider portfolio. We arecertainly exploring these assets at the moment.”

As the market develops, one of the attractions ofLoblaw’s property assets is that the group operates acrossa range of store formats. In December 2012, the grocer,which is controlled by the Weston family, announced plansto hive off the majority of its property assets into a realestate investment trust. Loblaw then floated a 20 per centstake last July, retaining the controlling 80 per cent. SuchReits are popular in the US, providing private investors witha tax-efficient way to buy and sell properties.

Supermarkets typically make money through theirproperty assets through sale-and-leaseback deals, wherebythey sell off property to an investor, usually an institution,and then rent it back.

But Loblaw’s approach offers an alternative to thetraditional sale-and-leaseback route, which some investorsbelieve delivers insufficient value to shareholders. Theysuggest the company’s model offers interesting lessons forgrocers around the world.

Loblaw’s strategy is prompting some activist investorsto question whether the model could be applied elsewhere,particularly in the UK, where Tesco, Sainsbury andWm Morrison have large property portfolios.

But not everyone is in favour of such an approach.Jaime Vazquez, an analyst at JPMorgan Cazenove,notes that Carrefour, the French supermarket group,abandoned plans to spin off part of its property divisionthree years ago.

As the debate continues about how the world’sleading grocers divide their property assets andoperating companies, the next test of investor appetite forsupermarket assets will come when Morrison announcesa review of its property portfolio in March. Institutionalinvestors are expected to show keen interest in any storesthat are sold off as part of a sale-and-leaseback deal,although Morrison is expected to remain overwhelminglyfreehold.

Chris Keen, a director in the retail team at propertyconsultancy CBRE, says Tesco and Sainsbury have beenselling and then leasing back properties, which meansinstitutional investors already have plenty of these in theirportfolios. “There is a bit of scarcity value [to Morrison].If Morrison does a sale-and-leaseback there will be hugedemand,” he says.

10 largestmarkets

US UK Japan China

$214.6bn

$41.7bn$38.2bn

$25.1bn $22

global sector share net buyers and sellers

Americas Eur

$3.24bnSingapore

$12bnChina

$25bnAustralia

$22bn $1.57

asia-paci ic outperformers, 2013

New annual transactional records wereset in many markets including

Five years of consistent growth inglobal investment marketssaw volumes reach$563bn in 2013

global 2013 volumes

$563bnTotal

Emea

Americas

Asia-Paci ic

$241bn

$127bn$195bn

Cross-border deals

Domestic deals

88% 12% 6568% 32%76% 24% 47%53%Germany

69% 31%

$67.8bn

Bought Bought

Offices

48%

25%15%

8%5%

Retail

Industrial

Hotels

Other

F T . C O M / G P I

30

statistics global capital f lows

investors buy into recoveryA return of confidence has seen significant growth in the volumeof real estate global capital flows that is set to continue in 2014

South Africa

15

France Australia Canada Singapore Sweden

Source: Jones Lang LaSalle

largest recipients of cross-border investment

africa’s commercial real estate stock(Million m2)

Sub-Saharan AfricaNorth Africa

24

1 0.5

21

Offices

Shopping centres

22.4bn $21.9bn$18.1bn

$11.6bn$10.3bn

2014(Forecast)

2013

full-year forecast, 2014s and sellers

Europe Asia-Paci ic Middle East Global

1.57bn $6.88bn $9.69bn $13.95bn

As risk appetite

improves, investors

are looking at

opportunities outside

the office and retail

space, with more

deals done in hotels,

industrial, logistics and

mixed-use schemes.

For the irst time in

many years, volumes

across prime and

secondary cities are

moving higher

together. Stock in

major cities continues

to be highly sought

after as well as quality

assets in smaller

regional locations.

Investment into

Europe once again

was heavily

in luenced by lows of

money from other

parts of the world. In

2013, US and Middle

Eastern groups picked

up their pace of

investment.

Money from China

more than doubled in

2013, while traditional

sources of capital

from the US, Germany

and the Middle East

continued to

dominate the

cross-border

investment markets.

65% 35% 68% 32% 91% 9% 88% 12% 80% 20%

ParisChicago

Los Angeles

Seattle

Sydney

London

$600bn-$650bn

$563bn

1

4 New York2Washington DC7

8

Shanghai65San Francisco 10

9 3

Bought Bought BoughtSold

F T . C O M / G P I

31

GRAPHIC

:RUSSELLBIR

KETT

One Khimki Plaza — and are currentlyin the final fit-out stage before our 200staff relocate in May. The building islocated in Khimki, a dynamic and rapidlygrowing international business districtjust northwest of the city, with excellentaccessibility to both international andRussian business markets (7 km toSheremetyevo International Airport,20 km to central Moscow).

Not only is this building our first “ownhome”, but it is also our first commercialreal estate development project. It isa 19-storey office topped by a helipad.The building offers immediate access torange of services, including: chauffeuredlimos, valet parking, charging unitsfor electric and hybrid cars, a five-starconcierge, canteen and café, beautysalon, florist and newspaper stands andbank machines.

Unusually for Moscow, it is alsoconstructed in accordance withLEED (Leadership in Energy andEnvironmental Design) Gold international“green” certification requirements. Wewanted this building to be one of thegreenest in Russia. All the businesscomplex systems are designed toprovide an ideal comfortable officeenvironment: total sound and thermalinsulation, “smart” heating, cooling andventilation systems.

A complimentary MEBE shuttle bustransfers staff between the complex andRechnoy Vokzal metro station and bysidestepping the general congestionof Moscow traffic, some of our staffare cutting 15 hours off their weeklycommute.

MEBE One Khimki Plaza is our firstexperience of major development – asopposed to construction – and thefirst high-grade office building to gracethe area of Leningradsky. With newinfrastructure earmarked, on the backof nearby fast-growing Sheremetyevoairport, we hope it will be the first ofmany developments in the area.

Whatever happens, we will have hadthe satisfaction of being able to moveinto an office built with our very ownhands.

Mustafa Bilek is president of MEBE, aRussian construction and developmentcompany

Over the past seven years, two officemoves have had a radical effect on theculture and ultimately the developmentof MEBE.

In 2007, we made the first significantmove when we took an entire floorin the business centre of the historicStanislavsky Factory in Moscow, whichincludes the restored theatre whereAnton Chekhov’s The Cherry Orchardwas first performed.

As the main contractor on theresidential part of this redevelopment, itwas beneficial for our team to occupy abuilding on a project with which we wereso closely tied to, as well as to obtainfirst-hand experience of the benefits of amixed-use development.

Until that point, MEBE had beenlocated in a small administrative buildingon Krasina Street, near the Belorusskayametro station. We were quicklyoutgrowing the offices in terms of space,but had also realised that, the office didnot reflect the ambitions we had for thecompany.

With Stanislavsky, we were able to fitout the building according to how we

all our ownworkintended to use it and, as the ultimatetenant of the space, our team was ableto gain valuable insight from the “client”perspective. If we made a misjudgment,we had to live with it. That makes youlearn quickly about how to improve.

Obviously, having a relationshipwith the building owner influenced ourdecision, but one of the most importantreasons for choosing our office wastransport links. The Stanislavsky buildingis well located within walking distance offour metro stations and the Garden Ringroad that encircles central Moscow.

We need the best people and it isalways easier to attract them to an areathat is easy to get to.

On to the second move. I am a civilengineer and since the very beginningof MEBE, I always dreamt of constructingand owning my own office. I wanteda building that could be built to myspecifications and be a great place forour team; somewhere that was elegantbut also comfortable and cosy.

When we began, this was just adream. But in early 2013, we startedbuilding our own headquarters — MEBE

F T . C O M / G P I

32

occupiers on the move

Built to specMEBE One Khimki

Plaza is the first

high-grade office

building in Moscow’s

Leningradsky district

PHOTO:GETTY

When Aston Martin was looking for a sitefor its first Mexican showroom, it settledon a well-established area, though certain

compromises were necessary,writes Jude Webber

lap ofluxury

High societyAston Martin’s new

home, the Paseo Castelar

development, opposite,

is in the Polanco district,

a social and business

destination for the

wealthy customers of

luxury brands

1.

2.

36

f t . C o M / G P I

occupiers mexico city

If James Bond lived inMexico City, wherewould hecall home? finding a suitably suave address – a place atonce impeccably classy yet effortlessly discreet – was themission for the Mexican entrepreneurs who last monthopened a dealership for Aston Martin, maker of the spy’sfavourite cars. Its sheer size means Mexico City has noshortage of property options, but finding the right place toshowcase half a dozen luxury British sportscars was tricky.

though many multinationals plump for the gleaminglymodern Santa fe, a sea of skyscrapers on the westernfringes of the city, the area is bedevilled by nightmarishtraffic and is more a work destination than a chic place tosee and be seen. Meanwhile, some banks, lawyers and thelike see the city centre as de rigeur: they prefer the eleganttowers along the Paseo de la Reforma boulevard, such asthe torre Diana, which, when it is finished in 2015, will bethe capital’s tallest building.

In the end, the lure of Mexico City’s equivalent of RodeoDrive won out, and the Aston Martin team zeroed in onthe Presidente Masaryk boulevard in the neighbourhoodof Polanco, close to the centre and the western residentialneighbourhoods. the street is one big shop windowfor global luxury brands in a district that is a social andbusiness destination for the wealthy customers most likelyto splurge on a handmade car they can not only customise

at will but, as Martin Josephi, the dealer principal, says, caneven carry their wife and children to church.

the neighbourhood had the cachet Aston Martin wasseeking, but finding the right spot in an area where pricesare rocketing and space is shrinking proved a considerablechallenge. Here the principals involved in the move – andthe building itself – give their thoughts about how it went.

Martin Josephi, AstonMartinMexico dealer principal:We didn’t want to be somewhere where our customerswould have to drive specially to get to our showroom.We wanted it to be somewhere they already went to. Wefound a space that matches the brand very well. I can’tspeak about specific numbers, but the rent is considerable,especially given the large space – the showroom is 4,500sq ft (418 sq m). the obvious advantage is that it’s so closeto Masaryk, so you have to pay for that. the contractorswe hired to fit out the showroom were very serious aboutdelivery dates and costs and since Aston Martin requiredus to import everything and to stick to an agreed design aspart of their corporate identity, we had a clear idea of costs.

Manuel Saínz, AstonMartinMexico sales director:I don’t think we could have found a better place. When Isaw it, my eyes lit up. Lots of the big fish in Mexico City

1. and 2.Wheels of fortune

the space chosen for

Aston Martin’s showroom matches

the brand, being close to the

Presidente Masaryk boulevard,

Mexico City’s Rodeo Drive

3.The high life

the mixed-used Paseo Castelar

development contains

17 apartments, ranging from

250 sq m up to 300 sq m in size

3.

37

frequent Polanco, but we realised we didn’t need to be onMasaryk and to be seen by everyone. Lots of people enterMasaryk via Goldsmith because it’s more private and safer.It is an area where there are a lot of pedestrians, and thatcan be good. But that could also attract a lot of people whojust want to come in and look but are never going to buy.that invades the privacy of customers who do want to buyand just wastes the staff’s time. So there are pros and cons.

Iván Chávez, AstonMartinMexicomarketingmanager:We thought initially of Palmas and Lomas – two upscaleneighbourhoods – and even entertained the idea of Santafe or Interlomas to the west, which have seen vast growth.they are very nice, but we also run the Lamborghinidealership, which is on a main avenue towards the south ofthe city and we realised it would take us all day to go fromone to the other, so we chose Polanco.

We were looking for space, but there wasn’t muchavailable. Martin [Josephi], Manuel [Saínz] and I would goout at weekends and just drive around. We wanted that[Presidente Masaryk] zone because it is a luxury cluster. Wesaw a lot of places; some were too big, and in others wewould have had to rip everything out and start again, sothat would have been a huge investment.

When we found this space, on Goldsmith, half a blockfrom Masaryk, we were worried it wasn’t on Masaryk itselfwhere all the big names are. But that would have meantcompromising too much on space, and this is more privateanyway. It was a toss-up between having a very niceshowroom 15m from Masaryk or one on Masaryk that wasbig enough to fit two cars. And we still have Berger, Jaeger-LeCoultre, Louis Vuitton and Cartier nearby.

Isaac Hans, architect and developer:We have donelots of projects in different parts of the city, but Polanco isspecial for me personally. In the case of the Paseo Castelardevelopment, where Aston Martin is located, I lived my firstyears of married life in a little house on that property; now

38

f t . C o M / G P I

occupiers mexico city

1.

2.

‘Polanco is the navel of this city.It’s practically what the Zócalo [main

square] used to be to the city’

1.Status symbols

the developer was keen to

welcome an exclusive brand to give

the building cachet

2.Efficient design

the building provides very useable

business spaces free of obstructing

walls or columns

3.The plots thicken

Scarcity of space in the

Polanco district is driving property

prices up rapidly

2.

3.

39

my office is there. Back then, Polanco was much calmerand less cosmopolitan than it is now. But now, I don’t wantto leave – Polanco is the navel of this city. It’s practicallywhat the Zócalo [main square] used to be to the city.

In Paseo Castelar, we wanted to do a mixed, high-endproject. We have 14 apartments, ranging from 250 sq m to300 sq m in size, a gym and all other amenities, plus officesthat are very efficient spaces with no walls or columnsgetting in the way. there are four shops: Aston Martin, abike shop, a flooring shop and a cookery shop.

Josephi:Everything is top notch – the travertine is fromItaly, the cabinets from Germany, the lighting from the UK.We have the Barcelona chair by Mies van der Rohe. In thepast, we have had the dealerships for ferrari, Maserati andAlfa Romeo, and now Lamborghini, so we are experts inimporting cars, but not all these other things. We had somedelays. take the toilets from the UK: every toilet broughtinto the country has to be approved by the Mexicanauthorities. You need to give them five samples of the toiletand they test and then destroy them. We didn’t make bigstructural changes – we just added offices, a toilet, a storagespace, a kitchenette and stairs to the mezzanine. We had tochange the glass front into doors to get cars inside. We willbe able to fit six cars inside and one in the courtyard.

Hans:Polanco prices are very hot right now, because therejust aren’t enough plots of land available. I’m not sure nowhow much I paid for the land for Paseo Castelar, but nowpeople can be paying $5,000-$6,000 per sq m for lots.What we don’t know yet is whether these prices are theceiling or whether they will rise to $10,000.

Josephi:Renting the building was nerve-racking. there isa lengthy tender process to be selected as an Aston Martindealer – it took about a year in all. We had to make a downpayment to ensure the site would be reserved for us. Butwe had the good fortune that the landlord wanted us there.

Saínz: It is a great location. We just have to hope it doesn’tfill up with traffic. It is an area where a lot of women goshopping – and women’s influence on their husbands isvery important in sales like this.

Chávez:there are disadvantages to Polanco: the trafficcan be crazy, but then there is no part of town that wouldbe commercially viable that doesn’t have traffic. We willexpand our existing Lamborghini workshop to house theAston Martin one, and we can pick up clients’ cars for freewhen they need servicing or repairs, and deliver themback, saving the owners the hassle.

Hans: I wanted an exclusive brand in the building. AstonMartin gives the building cachet and brings the buildingthe status it deserves. It is magnificent for both sides.

PHOTO:v

iew

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Tures/uig

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Corporate headquarters whose designmakes a statement about their occupiers’

values are the height of architecturalfashion but also come at a premium,

writes Andrew Baxter

livingthe brand

High flyersBritish Airways’

Waterside headquarters,

London

Occupying a prime corner location on theAvenuedes Champs-Elysées, Louis Vuitton’s Paris flagship store ispink and elegant, its terraced upper floors enhancing anaesthetic effect that says wealth, luxury and opulence toanyone passing by.

On fashionable Rue du Faubourg Saint Honoré nearby,the headquarters of rival luxury brand Hermès is lessstriking than the Louis Vuitton building, yet it combinesdignity and a sense of tradition with a certain Gallicquirkiness. A statue of a white horse and flag-bearing rider,harking back to the brand’s equestrian roots, seems aboutto jump from the parapet.

At this rarefied end of the retailing market, propertyhas become part of a company’s advertising and image-building, says Carlo Barel di Sant’Albano, executive chairmanof Cushman & Wakefield, the commercial propertycompany: “On main streets round the world, these retailerswant absolutely the right location, and they will say, ‘I onlywant that corner and, when it comes up, you get it for me.’”

Luxury goods companies are not alone in usingbuildings to reflect and reinforce their brands and businessproposition. From Microsoft’s headquarters in Redmondon the US northwest coast to IBM in Armonk, New Yorkstate, and Infosys and Wipro in Bangalore, India, technologycompanies have built expansive headquarters “campuses”,often set in woodland or with landscaped lawns.

Not only do these university-style buildings imply theiroccupants are smart people, they are also emphasisingthe companies’ size and strength. That was particularlyimportant in the late 1990s and early 2000s for the Indianinformation technology outsourcers as they progressivelytook on more challenging work from western corporateclients – visiting senior executives could be reassured bytheir partner’s physical presence.

Big law firms also want their offices to say somethingabout themselves. In a curious reversal of old and newworlds, City of London “magic circle” firms like to asserttheir brand via spacious marble and glass foyers, whilesome Wall Street counterparts have a penchant formahogany-panelled interiors.

So what happens when these brand-consciouscompanies decide they need to relocate their head office,maybe because their current building is too small or,as often happens, they want one new centre to houseemployees currently in several disparate facilities?

It is an opportunity to make a fresh statement about thegroup, but there are risks in moving from a city centre to the

42

F T . C O M / G P I

occupiers brand buildings

1.Fun palace

A refurbished 15th-century palazzo

makes an inspiring setting for

Gucci’s design team, but it is the

Rome location that counts more

than the building’s Renaissance

frescoes. The Italian luxury goods

maker moved its design office from

its historic base in Florence to the

Eternal City in 2009 because Rome

is bigger, more international and

has better transport links. Gucci

was one of the first European

companies to build a “statement”

modern HQ in the suburbs – in

the 1960s it moved its base from

central Florence, where expansion

is difficult, to the outskirts

2.Making a point

Inside the Infosys campus in the

Electronic City of Bangalore

3.Luxury on show

Louis Vuitton’s flagship store

on the Champs-Élysées in Paris

4.into the valley

The Googleplex, Mountain View,

California

suburbs. Will the brand and the business suffer through amove to a cheaper but less-fancied district, in particular if itbecomes harder to retain and attract talent?

Singapore-based Mark Lampard, Asia Pacific managingdirector of corporate solutions at Colliers International,another commercial property company, had exactly thisconversation in February with a tenant at Two ifc, one of thepriciest rental locations in Hong Kong’s Central district.

“They were saying, ‘Do we as an organisation need to bein this iconic building with its easy access to the train andairport? If we decide to move to Kowloon [a much cheaperarea] on the other side of Victoria Harbour, wouldn’t wehave to create something really special to keep staffenthusiastic and feeling the organisation still wants them?’”

According to property consultants, the key to makingthe most of a big relocation and avoiding the pitfalls is forcompanies to do their homework. Google’s plans for a newUK headquarters costing as much as £650m are a casein point. The building, which is unlikely to be ready untilat least 2017, will be close to King’s Cross rail terminus incentral London, an area once notorious for its drug-takingand prostitutes. But the district has already undergonean enormous amount of regeneration, so there is little orno reputational risk for the search engine giant, says GuyDouetil, Emea corporate solutions managing director atColliers International.

He adds: “Google would not have made this decision if ithad thought there was a risk of all its people walking out thedoor.” In any case, he says, the company already operates ina much more competitive jobs market than central London– its home base is in Silicon Valley, California – so it knows athing or two about attracting and retaining talent.

Indeed, the Googleplex in Mountain View embodies thecompany’s unusual approach to stimulating its workers’creativity and incentivising them not to move elsewherein the Valley. The Android statues shaped like KitKatbars and other sweets, “nap pods”, sports facilities andrecreational workshops are all aimed at amusing, divertingand relaxing them.

In much the same way, workers at the new King’sCross site will be “living the brand, literally”, according

‘Retailers want the right location andsay, “I only want that corner and,

when it comes up, you get it for me”’

1. 2. 3. 4.

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to Peter Walshe, global BrandZdirector at Millward Brown, thebrand consultancy. BrandZ is a hugecustomer database that forms part ofthe WPP unit’s annual ranking of theworld’s top 100 brands, published inthe Financial Times. “Google’s staff arethe innovators – they are incrediblyimportant in driving the brandforward,” he says.

Of course, few end-users wouldever need to visit HQs such as the Googleplex, but new,bespoke buildings do create an ideal opportunity to targetbrand messages specifically at employees, via external orinternal features. British Airways’ 16-year-old headquartersnext door to London’s Heathrow airport is a good example.Its huge glazed internal atrium was built with six themedsections, each planted with trees to represent one of thecontinents the airline covers. This emphasises BA’s globalremit while enhancing the working environment.

In central London, meanwhile, rents have been risingin the past two or three years, particularly in emerginglocations such as King’s Cross and Southwark, says DanBayley, managing director for central London at BNPParibas Real Estate, the property consultants. “Yet theorganisations that have often been driving that are onesthat have cheaper locations out of town.”

These companies – often fast-growing web businessessuch as Amazon and Twitter – will be aiming to attract“global citizens” who want to live and work in central London,he says. The same “suburban to urban” trend is evidentin San Francisco and New York, notes George Roberts, apartner in Cushman & Wakefield’s London markets team.

But smaller media and technologies companies wantto make a statement about themselves too. “Shoreditch[just north of the City of London] is a very popular areafor them,” says Bayley. “When they say they want to be upthere, you know exactly what sort of building they will want– exposed brickwork, timber floors… so it’s partly the internalspace that matters, but also the building’s exterior image.”

However, for all the growing worldwide interest overthe past decade in combining disparate offices into one“statement” building with a better working environment, acouple of caveats need to be made.

First, apart from the few business sectors whoseproperty costs are an operational pinprick compared withthe money they can make, relocations almost alwayshave to make sense in tangible financial terms as well asenhancing the brand and business intangibly.

The new base may have a higher rent than the averageon all the old ones, says Bayley, but it could also be smaller.“New buildings are more efficient so you can fit morepeople in, but there are bound to be some roles thatbecome redundant,” he adds. As a result, the relocationcould be more or less cost-neutral.

Second, some companies see no reason to use theirhead offices for brand-building. Coca-Cola is fifth in the latestMillward Brown brands ranking, yet you could walk past its

Atlanta HQ without giving it a second glance – remove thelogos from the roofline and it could be a bank back office inNew Jersey.

Japanese companies such as carmaker Nissan andsupermarket groups such as Tesco in the UK take a similarapproach, says Walshe. “They have very modest buildings invery modest areas,” he says. Their head offices may not beso pleasant to work in, but none are customer-facing. So why,these companies would argue, should they be part of brand-building that focuses on products and points of sale, backedup with marketing, advertising, the web and social media?

There is another point. “It’s about not overspending, sothe company can’t be accused of corporate indulgence,”says Walshe. “It’s the opposite of the show-off vanity bit.”

That might give backers of the more grandioserelocation schemes pause for thought. Early last year oneof the architects hired to design Google’s new UK HQ toldthe FT it would “articulate a conversation between the worldwithin and the city beyond”.

Yet so far the project has seemed more like a dialogue ofthe deaf: Google reportedly threw out the original designs– which included a roof-top running track and garden –late last year and said it wanted to challenge itself, andpresumably the architects, to “do something even better”.

‘It’s about not overspending,so the company can’t be accused

of corporate indulgence’

INVESTORSDEVELOPERSMANAGERS

OUTLET COLLECTION AT NIAGARANiagara-on-the-Lake, Canada

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ASCENTSan José, California, United States

Opening May 15, 2014

ivanhoecambridge.com

World-class real estate.Shopping Centres | Office | Residential

With:

On FT.comIt seemed like a good ideawhen advertising andmediaagencyOgilvy UKmoveditsmain businesses fromcentral London to CanaryWharf in 1992. Yet, says thecurrent chairman: “Therewas a period, probably inthe first four or five years,when it could have killed theagency.” Next year, followinga four-year search for a newhome, Ogilvy ismoving backto central London.

Find out why atwww.ft.com/gpi

seen in investment bankers’ officestomorrow.

The digital economy is alsoincreasing interest in warehousing anddistribution. As shoppers around theworld move online, the way in whichgoods are sold and distributed is beingtransformed. Retailers need big-boxlogistics, warehousing and distributionwith “tech specs” to match. Accordingto a survey by the Urban LandInstitute, a UK-based property researchorganisation, developers in the US andAsia-Pacific rate industrial as havingthe best development prospects thisyear. Europe has been a little slower toembrace online shopping, but demand isgrowing there too.

Developers are keeping a keen eyeon the situation: traditional distributionmethods do not work in built-upresidential urban areas. An articulatedlorry is ideal for restocking an out-of-town hypermarket but is hardlysuitable for inner-city deliveries. Instead,distribution specialists are acquiringperipheral sites on city fringes, wherelorry-loads of goods can be split up intosmaller van-loads and transported lessobtrusively to smaller local shops.

Ultimately, the divisions betweendifferent types of property are becomingobsolete. Commercial developers aremoving into residential, rather than, fornow, the other way round.

Companies that previously only hadto think about their corporate clients arenow marketing directly to the consumermarket – a massive shift and a strategicchallenge.

Commercial developers could mitigatethe risk by partnering with residentialspecialists, but they must choose carefully.A volume housebuilder’s approach of“build, sell and get out quick” might notresult in the sustainable neighbourhoodswith which a developer’s brand wants tobe associated.

Kate Allen is the FT’s propertycorrespondent

More than half of the planet’spopulation now lives in cities, up fromone-third 50 years ago, according to theUN. Over the next 40 years that figure isexpected to rise to more than two-thirds.This is changing how we live, work – andshop, and has implications for all types ofproperty developers.

In retail, it really is all about location.Population growth is becoming amore important driver of developmentdecisions than economic performance.For example, Klépierre, a French developerof shopping centres across Europe, haslooked at cities’ population growth todecide where to expand and where tosell holdings. It believes, for example,that southern France, particularly nearToulouse, is attractive despite the woesof the wider French economy.

For office developers, the blendingof leisure with work is driving home theimportance of a central location. For thepast few decades, offices have relocatedfrom city centres to non-prime areas,where costs were cheaper and car-basedcommuting was king. But in recent years,occupiers have been drawn back into

people power

photos:B

loomBerg;c

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By

central areas. Staff want to shop and goto bars and restaurants after work. Forprime office developers, the importantquestion is where opportunities forvalue growth lie. That means identifyinggeographically well-positioned areas thathave so far missed out on star status.

A good example is Farringdon inLondon. For decades it has been arun-down and overlooked area, lyingbetween the West End and the City.The opening in 2018 of Crossrail, theeast-west cross-city rail line, shouldreinvigorate the area, with Farringdonstation set to become one of the UK’sbusiest transport hubs. Developers havealready started snapping up tired oldbuildings in the area.

The confluence of work and playmeans the type of space occupiers

want is also changing. The working styleof technology, media and telecomscompanies is shaping other occupiers’demands, not least because bankingand financial companies are increasinglyhaving to compete with tech upstartsto attract and retain talent. What Googleadopts for its staff today will often be

F T . C O m / G P I

44

developers kate al len

Back in townDevelopers increasingly

are catering to the

desire of office workers

to be close to city

centre amenities

What Google adopts for itsstaff today will often be seen in

bankers’ offices tomorrow

From his New York base Brookfield Property Groupchief executive Ric Clark is pushing ahead with

diversification from offices into the retail, industrialand residential sectors as well as emerging markets,

reports Anjli Raval. Photographs by Pascal Perich

manhattantransfers

global outlook Ric Clark has

been expanding Brookfield’s

portfolio to include retail

properties in Brazil and

China, for example

Ric Clark, head of the global property arm of Canada’sBrookfield Asset Management, shuns the flamboyantpersona adopted by property tycoons such as DonaldTrump. “Sitting down with you to give an interview like this isnot a natural thing,” says the softly spoken chief executive.

Brookfield Property Group is undergoing atransformation, from an entity largely focused on officebuildings in New York, London, Sydney and Toronto to onethat is also a major owner and operator of global shoppingcentres, industrial warehouses and apartments.

This strategy, which goes against a typical investorpreference for focus, is being keenly watched by propertysector analysts, and all eyes are on the 55-year-oldpublicity-shy Clark.

Measured in his responses, Clark makes his case. “Ourstrategy comes from a healthy respect for the cyclicalnature of real estate and financial markets,” he says.

“We have learned over time that in order to delivermore consistent and reliable returns it is good to have theflexibility to allocate capital to geographies where there arebetter risk-adjusted returns or to [different] sectors.”

Brookfield Property Group consolidated and spun offmost of its commercial property assets last year undera new company based in New York called BrookfieldProperty Partners.

The aim was to wrap together investments in retailcompanies General Growth Properties and Rouse Properties– which remain traded on the NYSE – warehouse operatorIndustrial Developments International and Fairfield, theapartment platform. By the summer it is expected that thepublicly traded Brookfield Office Properties will be privatisedand also brought under the same umbrella.

Office properties will make up around two-thirds ofassets of the soon-to-be $51bn entity. But the companyis aggressively expanding across all sectors throughacquisitions. It is also targeting growth in Europe and

emerging markets such as India, China and Brazil.“We have been spending a lot of time on both

developed and emerging markets,” says Clark. “We areseeing opportunities and we think there will be moretransaction flow for us [in the future].”

A “third-generation real estate guy”, Clark grew uplargely in Pennsylvania and St Louis in the shadow ofhis grandfather and father, who were both residentialdevelopers.

Clark’s first job after university – where he paid his wayas a labourer and handyman – was with Olympia & York,the international property developer behind the CanaryWharf project in London and the World Financial Center,now known as Brookfield Place, in New York City.

From 1984, Clark took on a number of executive postswith Olympia & York and then its successor after bankruptcy,Brookfield Properties. Previously president of subsidiaryBrookfield Office Properties’ commercial operations, he rosethrough the ranks to his current position.

Like other senior executives Clark is well versed in theinvestment philosophy of its parent company, which has$175bn in assets under management, from property torenewable power, infrastructure and private equity.

“For anything we do, we have access to all the firm’semployees to help us,” says Clark, noting the complicatedrestructuring of General Growth Properties, which buckledunder a mountain of debt and filed for bankruptcy in 2009.Brookfield has roughly a 30 per cent stake in the company.

Brookfield Property Group buys assets directly or viacontrolling interests in businesses with a combination ofequity capital and debt financing, often in conjunctionwith BAM’s property funds or by partnering with sovereignwealth funds or other large investors.

The Bermuda-based Brookfield Property Partners is aproperty-operating company for tax reasons but competeshead-to-head with leading property investors such as

Measured toneRic Clark may not adopt the

flamboyant persona of a Donald

Trump but is steeped in the

property business, being a

‘third-generation real estate guy’

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interview b ro o k f i e l d

‘Our strategy comes from ahealthy respect for the cyclical

nature of real estate andfinancial markets’

Blackstone Group. At the same time it seeks to rival US realestate investment trusts, including Simon Property Group,Boston Properties, Prologis and Avalon Bay, that havetraditionally been go-to options for equity investors in high-quality retail, office, industrial and apartment properties.

Brookfield’s approach, like Clark’s own personal style,is more aligned to a tight-lipped investment group asopposed to a rambunctious property company.

“We don’t need to read our names in the paper,” saysClark, whose coolly analytical approach is at odds withthe blustering risk-taking developers who often dominateindustry headlines. When asked about his presence on theNew York real estate party circuit, he says: “I try to do aslittle of that as possible.”

Clark is unhesitating when talking about businessstrategy but terse when speaking about himself. Howwould he describe his management style? “I have no style.”To provoke a response I ask if he gets angry. “Not often.”What does he do for fun? “I hike and ski when I have time.”

He is most comfortable when he is on message.Brookfield is a “good company, with good assets anda strong balance sheet” and he speaks about the“collaborative, collegial, friendly” work environment.

People who know Clark say aspects of his personalityresemble those of his mentor Bruce Flatt, chief executiveof Brookfield Asset Management. Known as the “[Warren]Buffett of Canada”, Flatt has a reputation for being modest,smart and a strong leader who has elevated the Brookfieldplatform to the status of a global heavyweight helped by ahandpicked cluster of well-scrubbed executives like Clark.

“Ric and other executives at BAM are very corporate.They are skilful asset managers who put down the shadesand do the math. They are not visionary deal makerswho have big egos. That is not how they operate,” saysJames Sullivan, analyst at Cowen and Company, theinvestment bank.

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interview b ro o k f i e l d

2.

3.

‘Absorption of office space is increasingin most markets and we are seeing rental

rates increase and occupancies go up’

Even so, Brookfield Property Group has become one ofthe largest corporate landlords in North America by squarefootage. Although the company and its parent escapedwithout significant debt dramas during the credit crisis, itwas not completely untouched.

The office property sector has been hampered bycost-conscious corporations, stung by the global financialcrisis, downsizing and searching for cheaper office space.Brookfield Place has, in particular, drawn some negativepress.

“The sector has been the last to recover from this lasteconomic downturn,” says Clark but adds: “The officesector has begun its recovery. Absorption of office space isincreasing in most markets and we are seeing rental ratesincrease, occupancies go up and vacancies go down.”

But it was on the 8m sq ft World Financial Centerproject that Clark truly cut his teeth. The fallout of theSeptember 11 terrorist attacks, he says, was “probably themost difficult thing I went through in my career”.

“We owned five properties immediately adjacent to theWorld Trade Center that had pretty meaningful damage,”says Clark, who lives a short walk away in Tribeca. “Theproperties were open – you could walk in and out – and thenext thing you know, you are thinking about security andhow you position your properties differently in this kind ofenvironment.”

Manhattan’s barren west side is the next frontier forBrookfield. It has embarked on a $4.5bn project of office,residential and hotel properties.

But it is not going to be an easy sell. While thecompany has won over Canadian investors with its talk ofdiversification, those in the US have yet to be convinced.Brookfield Property Partners’ shares on the New York StockExchange, which at the time of writing have declined by21 per cent from the initial listing price of $25 per unit,now trade at about a 20 per cent discount to Brookfield’spublished net asset value. This compares unfavourablywith the average US real estate investment trust, whichcurrently trades at parity with NAV, according to estimatesby Green Street Advisors, the property analysts.

Clark talks of harnessing the pool of capital, operatingprowess and expertise of the BAM parent company to

1.

‘We will lose more money thananyone if we make an investment

that is not good’

51

F T . C O M / G P I

enable the property business to make opportunisticpurchases. It remains to be seen whether his steady-as-you-go approach will be enough to convince investors thatBrookfield is more than just a safe pair of hands, but also aproperty group that is able to successfully compete on aworld stage amid hungrier, more focused rivals.

Another concern is the company’s externalmanagement structure. Most public property companiesare internally managed to align the interests ofmanagement and shareholders. But sector analystshave questioned whether Brookfield Property Partnersis incentivised to pursue growth to maximise fees forBAM – its sponsor, which has a 90 per cent interest in thecompany – rather than for shareholder value.

Clark says the consequences of chasing growth toboost fees for BAM “will erode the very substantial equityinvestment we have in here, so we will lose more moneythan anyone if we make an investment that is not good”.He emphasises that investors were bullish about the newcompany largely because of BAM’s ties.

In spite of analysts raising a red flag, the companyis ploughing on and is at the centre of mergers andacquisitions chatter. Recent investments have included astake in Shanghai-based property developer Shui On Land.While retail is preferred in China and Brazil, office propertiesare being targeted in India.

After acquiring the EZW Gazeley industrial platformand Hammerson office portfolio in the past 18 months,Clark says the company is poised for more activity inEurope. Meanwhile, in the US, following the acquisitions ofIndustrial Developments International and Verde Realty,two industrial property companies, Brookfield is expectingto invest in the sector again.

Few doubt Clarke’s diligence at managing a businessthat he says “is not quite as complicated as it might seem”.But while he is “excited” about what lies ahead he mayneed to be more persuasive to get others to buy into thestory of Brookfield’s expanding empire.

1.Eyes wide open

Ric Clark surveys a model of

the developing skyline

of Manhattan

2.New ground

The New York World Trade Center

west concourse, opened in

October 2013

3.Commuter link

A new pedestrian walkway to

PATH station at New York’s

World Trade Center

4.Up Down Under

Brookfield Place Tower, Perth,

Australia, which houses mining

company BHP Billiton

2.

3.

4.

photos:B

looMBErg

A spate of embassy property sales inLondon reflects a growing trend aroundthe world of cash-strapped governments

looking to realise lucrative assets,reports Kate Allen

missions onthe move

Flying the nest A gilded

eagle statue is unboxed for a

groundbreaking ceremony at

the construction site for the

new US embassy in

Nine Elms, south London,

ahead of the embassy’s move

in 2017 from Mayfair

PH

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Russian oligarchs and Chinese billionaires are amongthose who have benefited from London’s rocketingproperty prices. And with prices in the super-prime areasof Kensington, Mayfair and Belgravia at an all-time high,governments around the world are realising they are sittingon significant property assets: their embassies.

Often located in architecturally imposing periodbuildings, embassies are particularly attractive forconversion to housing. London’s long history as aglobal diplomatic centre means many of the biggestopportunities for developers lie in the most opportune –and expensive – parts of central London.

Research by Savills, the estate agents, suggestsembassy properties across the city are worth as much as£1.4bn in total.

“Embassies move rarely and their locations are usuallya function of historic legacy,” explains Charles Dugdale,a residential development partner at Knight Frank, theproperty consultancy. “As a byproduct of their oftenprestigious locations, there is a significant commercialincentive to relocate to a lower-value area.”

A study conducted last year by estate agents Wetherellfound that a wave of sales of embassy and otherdiplomatic buildings could create hundreds of new homesin London’s most expensive neighbourhoods. Around20 properties were up for sale in the first six months of2013 alone, the firm found, the largest number being inKensington followed by Mayfair, Marylebone and HollandPark. Grosvenor Square, Kensington Palace Gardens andPortland Place were particularly popular addresses.

Peter Wetherell, the firm’s managing director, says theexpiry of long-term “peppercorn” rents granted by centralLondon landlords, such as the Crown Estate and theGrosvenor Estate, was responsible.

“These highly advantageous leases have either expiredor are coming to an end, and some of the diplomaticmissions are, therefore, seeking new premises that will bemore cost-effective to run, rather than paying commercialprices on their current properties,” he says.

The flagship move has been the sale of the US embassyin Grosvenor Square, one of London’s most desirableaddresses, to Qatari Diar, the Middle Eastern sovereignwealth fund, and developer Chelsfield in 2009 for anundisclosed sum. They plan to convert the Grade II-listedmodernist building, completed in 1960, into a mixed-usedevelopment, although details have yet to be announced.The US, meanwhile, is using the proceeds to fund its movesouth of the Thames, set for 2017, as part of the dramatictransformation of the previously run-down Nine Elms area.

Since that transaction, several more London embassieshave cashed in on the city’s booming housing market.The former Kazakhstan embassy at Thurloe Square, SouthKensington, is being converted by developer Northacreinto luxury homes, with finance from Abu Dhabi CapitalManagement. The Dutch embassy is moving from its HydePark Gate home, which has been bought by Irish developerBallymore, also to Nine Elms. China is also consideringshifting its diplomats to Nine Elms, which would free up itsPortland Place property.

And last autumn, Lodha, the Indian property company,bought the Canadian High Commission, formerly at 1Grosvenor Square, Mayfair, seen as potentially one ofLondon’smost exclusive addresses (see box), for £306m.

Properties that can be redeveloped will be mostattractive to Asian buyers, who like modern homes withhigh-tech services, according to Henry Pryor, who acts as

a buying agent for high-end London house purchasers.Meanwhile, converted properties appeal more to buyersfrom the Americas, he says. “As embassies relocate, it isinteresting to see the value of what was, in diplomaticterms, a piece of Canadian or American soil jump as theybecome London real estate at London prices.”

The great embassy sell-off taps into a wider trenddriving London property markets: the move fromcommercial to residential. The UK government changedthe planning rules last May to make it easier to convertoffice buildings into homes. While this has been opposedby local politicians in Westminster – where manyembassies are based – the flood of property conversionscontinues unabated.

As a result, while the UK capital is by far the largestmarket for embassy acquisitions, the trend is spreadingaround the world. Lodha, for example, purchased its firstdiplomatic property in 2012 when it acquired WashingtonHouse, the US consulate building in Mumbai.

Meanwhile, the French government has been cuttingback on its diplomatic properties in recent years, selling itsembassy building in Dublin last year. It has also reportedlysold an apartment in Berlin, the consular residence in HongKong and a plot in Kuwait City. And the Greek consul’sresidence in London was sold off last year.

In addition, the requirements of the diplomatic corpsare also shifting, making embassies, particularly those inhistoric buildings, obsolete.

“Embassies in the modern age now need to be efficientoffices, rather than converted mansions,” says DominicGrace, head of Savills’ London residential developmentteam.

“Older buildings also tend to be more difficult to makesecure – an increasingly important factor. Also, the longreach of most democracies’ fiscal beancounting nowextends globally, so only countries that are awash withsovereign wealth can justify ‘trophy’ embassies, whichoften have millions of value tied up in them that could bebetter spent back home.”

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developers embassies

Canada cashes in on Indian appetiteAs an entry into the London propertymarket, it was a dramaticmove. The firstUK acquisition by Lodha, the Indian property developer, was the Canadian HighCommission at 1 Grosvenor Square, last November. The £306mpurchase drewadmiring gasps from themarket and rapidly came to symbolise the strong appetiteamong developers for diplomatic property, driven by the great scope that embassybuildings offer for redevelopment.

The pricewas around 30 per cent higher than the property had been expected tosell for and asmany as 80 bidders competed to acquire it, according to peoplewithknowledge of thematter.

The attraction formost bidders was primarily the opportunity to convert theembassy into residential property. It “has the potential to be the best address inLondon”, according to Charles Dugdale of Knight Frank, who advised Lodha onthe purchase.

‘As a by-product of embassies’often prestigious locations, there is asignificant commercial incentive to

relocate to a lower-value area’

1.Breaking new ground

The new US embassy takes shape

in Nine Elms, south London

2.American dream

The design for the new US

embassy in London

3.Pastures old

Kazakhstan’s former embassy in

South Kensington, London

4.On the move?

The Chinese embassy,

Portland Place, London

5.Relocating

The Dutch embassy in London’s

Hyde Park Gate

6.In Indian hands

The former Canadian High

Commission in Mayfair, London

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56

developers design

1.

open-plan work spaces are one way to beflexible, but they are not a new trend; theHerman miller factory, built in Bath in the 1970sfor the furniture manufacturer and designedby farrell Grimshaw Partnership, shows earlyexploration of this style. It pioneered the needfor space that occupants could adapt to as theirneeds changed.

Jump forward 40 years, and such flexibility

built-in flexibility

is accepted as an ingenious solution. Recentchanges to planning policy, which have meantoffice space can be converted to residentialspaces without planning permission, will notwork if buildings are not flexible. Architects arenot only designing buildings for the immediateclient but also for future occupants. the mostsuccessful commercial buildings have alwaysbeen those that take into account the changingnature of the workplace.

our office is in an old 1930s aeroworksfactory, which has seen many refurbishmentsand currently houses offices as well asresidential accommodation – a great example ofhow buildings can adapt over time if the designis flexible from the start.

With technology, information and research,we can create environments that promotehealth and wellbeing. Poor design will meanbuildings will require more adjustmentsand refurbishments in the future when theychange use. they will have a shorter life spanand possibly will be demolished, which iseconomically and environmentally unsustainablefor today’s businesses and their successors.

Peter Barbalov is a design partner with Farrells,the architect planning firm

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57

1. Stacked upBuildings are not designed

just for the immediate client

but also for future occupants

2. and 4.Working on every level

the Home office

government building,

central London, by farrells,

1998-2005

3.Adaptable space

the Herman miller

furniture factory in Bath, now

listed, completed in 1976

5.Sustainable thinking14 Pier Walk, an office

development on the

Greenwich peninsula,

London, by farrells,

2006-08

Design is pivotal to the success or failure of an office, and new business modelsoften mean a radically different approach is called for. Such shifts have broughtemployers the chance to be more flexible. New technology means workers nolonger need to be tied to one place. Some designers create co-working spacesto accommodate the needs of freelancers and entrepreneurs. These changesmean designers must rethink the requirements for commercial property –the standard model will no longer do.

2. 3.

5.4. p

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hASlAm

The third issue is scale. If there is onething we have learnt from the historic cityit is that there needs to be a human scale.Our historic cities were shaped by thetechnical, social and economic limitationsof the time. Now that those limitationshave been removed we can buildanything. So the question is whetherwe impose limitations on the scale ofdevelopment – and hinder investment –or veer towards a free-market approachand let these things happen.

As architects, the things we tend tolike the most, that affect us the most, arethe smaller things. In Berlin I look out ofmy apartment on to a scene of buildingsof four or five storeys, with people inthe streets, a small courtyard and acafé. But when you move to a differentscale the things that link us to the cityare removed. Take London’s Shard: it isquite beautiful in many ways, but I can’trelate to it – there is always a distance.Architecture has become something thathappens to us. Yet we always want to bea part of it, sitting in a town square or acafé – that dimension is very difficult.

In Zurich, proposed projects are putinto a scale model of the city and there isa high level of discussion. London seemsto have abandoned that idea. Instead,there is an anxiety or loss of confidencethat results in polarised positions, withdevelopers and architects on one sideand everyone else on the other.

Unless we become better atarticulating a shared notion of what ourcities should look like we will remain stuck.

We have de-professionalised theplanning process in the UK. Investment atthe level London has needs better planningmachinery. We need city architects orplanning officers with power. I am surePeter Rees, City of London planningofficer, would say he has done that andassured a quality of building in the City,but what about the rest of the country?

Planners should be able to speak withauthority, have time and be treated withrespect. We need, together, to picturewhat the city should look like.

As told to Edwin HeathcoteThe narrative of contemporarycommercial architecture features anumber of stories that intersect. For astart, there is the demise of the publicsector as developer. We now dependalmost exclusively on private investment.

The question is, what gives shapeto a city? How should it look? The ideaof town planning now seems ratherold-fashioned and romantic. In the UK itappears only as a controlling mechanism.

In Germany, for instance, FrankGehry is to build a tower on Berlin’sAlexanderplatz. Therehas been a huge publicreaction. It is actually avery reasonable tower, butBerlin has been shockedby the idea that the futureappearance of the city isbeing determined not by cityplanners but by developers.

Berlin does not havethe same huge investmentmomentum as London,so there is more time todiscuss what things looklike. In London there ishuge investment, but theplanners are overworkedand there is too little time todiscuss the implications. Onthe continent, though, theysee it another way and canonly dream of the scale ofinvestment in London. Ofcourse, you want investment,but how do you do it? Do youwant it restricted or directed?How do you evaluate andassess development? By the

shaping the city

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vOnKruse

amount that gets built or by the quality ofwhat you leave?

There are three issues facingdevelopment. The first is aesthetic and,perhaps surprisingly for an architect, thatis probably the easiest. The second is thesocial dimension. In London, as valuesrise you get a cleansing of buildingtypology and social mix. The centre ofthe city becomes a wealthy ghetto. Thelife of the city depends on diversity, butdo you accept this cleansing just as partof development or do you say you needto adopt mechanisms to deal with it?

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58

topping out sir david chipper f ie ld

1.new interpretationThe Neues museum

in Berlin

2.World-class space

mexico City’s

Jumex museum

We have de-professionalisedplanning in the UK. We need city

architects with power

sir david Chipperfield is one of Britain’s most successful and respectedarchitectural exports. His sensitive rebuilding of Berlin’s neuesmuseumwas widely acclaimed and his recent Jumexmuseum inmexico City andextension to the saint Louis Art museum are among the world’s finestcontemporary gallery spaces. He has also designedmajor commercialdevelopments across the world that are equally refined and elegant, andrecently completed his new office and apartment in Berlin

2.

1.

globalproperty

insight

f t . c o m / G P I

Coming in JuneThe second edition of FT GPI will be

published to mark the opening day of theLondon Real Estate Forum. The FT is theexclusive media partner of the forum,which will be held in the UK capital on

June 11-12.

photo:t

obia

sGerber/laif/camera

press