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Cultural learnings of real estate(2)

Last month, PERE hosted its inaugural US real estate forum, which showcased the diverse array of strategies and markets currently being pursued by investors. Kazakhstan anyone? By Paul Fruchbom

Before the recent release of Borat: Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan, the wildly popular comedy that lampoons the former Soviet Republic, most Americans had probably never heard of Kazakhstan, the ninth-largest country in the world.

Chris Fiegan, however, is not most Americans.

As the chief financial officer for Equity International, the private equity real estate firm affiliated with Sam Zell, Fiegan has traveled around the world in search of investment opportunities, from the bustling cities of Brazil to the oil-rich capital of Azerbaijan. And as he explained at the 2006 North American Private Equity Real Estate Forum, held last month in New York City, Fiegan recently found himself in another remote corner of the world: Kazakhstan. And he wasn’t there on vacation.

As the pace of capital entering the property markets continues to accelerate, efficiency is increasingly being brought to bear on that most inefficient of asset classes, real estate. And it is being brought to bear in almost every market around the globe.

“There are not enough emerging markets left,” Fiegan said. “They’re going from emerging to emerged overnight, which is part hilarious and part really frightening. The lengths that people will go in search of return,” has increased significantly.

The stated theme of the conference, the first event hosted by Private Equity Real Estate in the US, was “using new markets and methodologies to deliver superior returns.” And if Fiegan’s experience was any indicator, there were few segments of the global marketplace that investors are not willing to consider.

Take, for example, Morgan Stanley, one of the largest and most experienced real estate investors in the world. In a keynote address that kicked off the conference, Jay Mantz, the global co-head of Morgan Stanley Real Estate, described how his firm is pursuing residential platforms in areas such as China, India and Russia, as well as focusing increasingly on areas like Turkey and Brazil.

“A huge emphasis on emerging markets is a must,” Mantz told the crowd.

Barry Sternlicht agreed. During a sprawling, 40-minute one-on-one interview that ranged from his new line of environmentally friendly hotels to the decline of American economic power, the founder of Starwood Capital also offered his thoughts on India, where his firm recently set up shop. Though he provided a laundry list of challenges facing investors, from poverty to poor infrastructure to corruption—“We take people to Knicks games,” he said. “They just pay them.”—Sternlicht is clearly bullish on the country. He recently told Reuters that Starwood will spend up to $500 million in India over the next three years.

Yet even as Sternlicht, Mantz and Zell venture into new markets, some equally vaunted real estate investors are sticking to their bread and butter. In another one-on-one interview, Jeff Kaplan, managing principal of Westbrook Partners, described how his firm was focused almost exclusively on “gateway cities,” including New York, Tokyo, Paris and London—not exactly undiscovered country. Nevertheless, by focusing on these big, liquid markets where it has years of on-the-ground experience, Westbrook believes it can dig deeper, source better and still generate the types of returns that have made it one of the most successful private equity real estate firms in the industry.

“We can’t be all things to all people,” said Kaplan. “We had some experience in emerging markets and we concluded it wasn’t worth the risk.”

Though Westbrook may be an outlier, the amount of capital flowing into the real estate markets is forcing many other investors into the far corners of the world. As private equity real estate firms scour opportunities in Kiev, Kuala Lumpur and, yes, even Kazakhstan, they will no doubt face enormous challenges.

Yet even as the weight of money obscures some of the risk in these emerging markets—something that many speakers at the conference noted—it would be remiss not to mention the potential opportunities that all that money can provide. After all, there are certain ancillary benefits to having billions and billons of dollars sloshing around the globe.

Take hotel guests, for example. During his interview, Sternlicht noted that a well-heeled Russian had recently started a 90-day sojourn in the most expensive suite at the Hotel de Crillon in Paris, a Starwood property. The price: €10,000 per night.

“He’s my new best friend,” Sternlicht said. “I sent him a bottle of champagne—and I asked him if he wanted to buy the hotel.”