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LaSalle’s Jacques Gordon tours the globe

11/06/2012 | By Allen Kenney

Published July/August 2012

Name: Jacques Gordon

Title: Head of Research and Strategy, Global LaSalle Investment Management

Experience: Gordon leads LaSalle’s Research and Strategy team, analyzing capital markets, economies and property around the world. He serves on the firm’s Management Committee, the Investment Committees for Asia and North America. Before LaSalle, Gordon was director of research at Baring Advisors. He taught portfolio management at New York University and was a research economist at the Urban Institute. He currently teaches international real estate at the Kellogg School of Management.
In 2000, he received the Graaskamp Award from the Pension Real Estate Association for his contribution to institutional investment research and strategy. He has a PhD from the Massachusetts Institute of Technology, an MSc from the London School of Economics and a BA from the University of Pennsylvania.

Jacques Gordon has made a career out of learning the pitfalls and peccadillos of investing in commercial real estate in both the near and far reaches of the globe. The global head of research and strategy for LaSalle Investment Management has studied the ins and outs of markets from Brazil to Beijing. Need to know what it’s like working on a real estate deal in Denmark? Gordon’s your guy.

Among other insights shared in a recent interview with REIT magazine, Gordon discussed trends in transparency in overseas markets.

REIT: There are pretty clear differences in any global industry as you travel from place to place – language, culture, regulations, and the like. If you had to pick one fundamental challenge that is universal to all commercial real estate companies around the world, though, what would it be?
Jacques Gordon: The fundamental challenge that crosses all of these different countries is managing the balance sheet—being careful about taking on excessive debt and being thoughtful about the ways debt markets can change. While the global financial crisis forced companies in the U.S., Australia and Europe to address their balance sheets, firms in other countries will also face this challenge from time to time.
REIT: Differing levels of market transparency can cause major headaches for U.S. investors looking abroad. Do you think the global marketplace is addressing their desires for more openness in the real estate industry?

Gordon: Actually, it’s not just U.S. investors looking for this. The desire for more transparency is universal among investors.

The trend toward openness actually took a step back, unfortunately, during the global financial crisis. However, our research, in the 2012 edition of the JLL Transparency Index, has shown that we’re now back in the mode of increased transparency, particularly as it relates to financial markets.

Of course, we still read headlines about another transparency issue—corruption that is endemic in many countries. I think there has been improvement in that regard in the developing world, but my sense is that improvements there are harder to see, because the cases that occurred several years ago are getting attention now.

REIT: For about a year now, the shadow hanging over the global economy has been the distress in Europe, which has even led to discussion of a possible break-up of the eurozone. That certainly has a big headline effect, but what does it mean for investors who are evaluating opportunities in Europe?

Gordon: It means that if you can keep your head while others are losing theirs, you can buy some great real estate and invest very well for the long run.

It’s clear that the eurozone is under a lot of scrutiny right now. The political, financial and social factors all lead one to question how well it can function going forward. The troika of the European Union, International Monetary Fund and European Central Bank are all working to help shore up liquidity and make sure that the financial system keeps working while the politicians agree to cooperate on various policy changes. So far, I think that’s working, but there will need to be more of it.

While that noise is going on, you do want to be very aware that there is this headline risk that will lead to bond market volatility. That will have an effect on real estate yields. We expect that will continue for some time until new ways of dealing with the solvency and structural issues are addressed.

As that volatility shows up in the bond market and the real estate market, there can be some very interesting opportunities to buy on the dip.

REIT: What about investment capital coming from Europe?

Gordon: European institutional and retail investors have a long tradition of investing in property, they have a long tradition of doing so internationally, and they have a long tradition of investing in REIT shares. That has always been a major part of what European investors have done outside of their own region.

Major European investors are risk-averse right now. They’re looking to stay closer to home and stay closer to developed markets. They’re focusing more on income-oriented strategies. I think the U.S.  looks pretty good to them.

REIT: We’ve long been told about the allure of the BRIC nations—Brazil, Russia, India and China. How attractive are these large developing markets right now relative to the more established regions, such as North America?

Gordon: I think they’re still very attractive. These countries still have a terrific growth story ahead of them.

Most portfolios are built for long time horizons and steady income. The developing nations bring a different risk-return mix. They enable investors to get pure play access to growth in a targeted way. Also, foreign direct investment by corporations has gotten back on track after the financial crisis, and this is capital that will help these developing markets grow.

At the end of the day, the BRIC nations will end up being a relatively small part of international (ex-domestic) real estate portfolios for some time, somewhere in the range of 5 percent to 15 percent for most.

REIT: Maybe I just don’t have a proper appreciation for history, but it seems as though the BRIC countries have been called “developing” for a while now. At what point can we consider them “established,” at least in terms of their commercial real estate markets?

Gordon: In real estate terms, I think the thing to watch is the level of economic activity taking place inside a country. It isn’t until you get into the range of per-capita GDP between $10,000 and $15,000 that you find more economic activity taking place inside a building than outside. Western China, for example, is still much more rural-based, while Eastern China has built urban skylines.

As a real estate investor, you have to be patient and understand that in these countries, a lot of economic activity will eventually happen in an urban area and in a building. Right now, in many parts of the BRIC countries, the economy is still transitioning to a more urbanized setting.

"The desire for more transparency is universal among investors."

REIT: Looking ahead, what do you see being the major theme in the commercial real estate market worldwide in the next decade?

Gordon: The big change over that timeframe will be that the demographic-driven aging of the developed world will be 10 years on.

In the G7 economies, there will have to be accommodations made for the aging of society. That can show up in very subtle ways that may be surprising to us. It’s not just aging, but also better health care, better nutrition. So, there’s a longevity component. People will be living longer at the same time that their fertility rates are dropping. That means there will be a different age structure in society. Shopping patterns will change. Health care will continue to change.

Those shifts will impact countries that have viable real estate investment options for an aging society. The way that real estate will feel the effects of those changes is something to be watched and anticipated carefully.

 

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