Pembroke Real Estate purchased this tower property at 261 City Road in Islington, London, in 2001 as a way to expand and strengthen their holdings.
Whether it’s an American, Asian, or European market, markets go up and markets go down – that is their nature.
So spreading money over several kinds of investment types may help companies achieve growth throughout market cycles and mitigate the effects of market swings.
As the saying goes, “There is one free lunch in investing, and it is diversification.” In other words, free economic gain can result by diversifying in different investments.
Just as investors build diversified portfolios that provide exposure across asset classes and investment styles, companies looking to invest in real estate should consider following a similar approach. And just as investment portfolio managers and analysts focus on searching the globe for investment opportunities so, too, can real estate developers.
Since individual markets are notoriously difficult to predict in the short term, probabilities in investing can be increased by taking a long term-approach and diversifying across markets – including international markets. Different geographical locations will have varying economic and business drivers, business clients and demographics, creating diverse economic climates.
But along with the advantages of investing abroad come myriad challenges – in culture, business and logistics. To be successful, businesses must bridge cultural and language differences, accommodate to various time zones, maintain market intelligence across diverse markets and cultures, understand how to measure returns and risk through local benchmarks, decipher and coordinate different legal and tax regulations, as well as master different bidding strategies.
So what are the key ingredients a U.S.-based real estate developer needs to consider to successfully create a diversified global portfolio?
Making a Long-Term Commitment
As with other diversified investments, building a diversified portfolio of real estate requires a long-term commitment. Companies looking for capital preservation and long-term capital appreciation need to evaluate deals where there may not be immediate cash flows. They need to be able to have a vision for the longer-term future of the property and be able to create this value over a longer period of time. There are two main ways to create value over the long term: 1) have a vision for the property that no one else has or 2) reposition a property that’s in a well-developed location to realize its highest and best use for the site.
Privately held companies operating outside of the capital markets likely have an easier time of investing for the long-term, since its shareholders are typically more patient and don’t have the same quarter-to-quarter performance issues that public shareholders have. They can afford to take a contrarian view and take advantage of investing where other developers cannot or will not. With “patient capital,” they can make decisions that reflect their individual philosophies and suit their own financial objectives.
As an unconventional developer with patient capital and a long-term view, these companies can keep an eye on both the numbers and the less tangible measures of success, seeking out long-term real estate investments that not only earn competitive returns but also increase the value of the site and enhance the community.
One such company is Pembroke Real Estate, the global real estate development and investment arm of Fidelity Investments. Both in the U.S. and abroad, Pembroke invests for the long term. Since it does not have the pressure to deliver premium yield right out of the box, the company can hold on to properties until the time is right to make a move. Therefore, it seeks properties that have redevelopment potential or are tear downs for rebuilding.
Connecting With the Community
A long-range commitment to the communities in which a company develops can help strengthen long-term investments.
A community-oriented approach ensures that building designs respect the history and aesthetic of the surrounding area, as well as encourages input from neighbors and other stakeholders throughout the planning and development process. Whether pioneering an undiscovered area, enhancing a city block or developing an underutilized site, the goal of this approach is to bring vibrancy and value to the community, with the ultimate goal of creating “pieces of communities” not just individual buildings
By evoking a sense of civic pride, and working with both public and private sectors to understand the community and, in some cases, even develop a master plan, can help create consensus – as well as value for both the properties as well as the communities themselves.
As with all its properties, Pembroke is taking this community-centric approach toward the development of London’s 261 City Road. A 65,000-square-foot former office building situated on the northern fringe of the City of London in the Borough of Islington, it is located mid-way between two London tube stops, in a rapidly developing section of Islington.
Pembroke purchased the property in 2001 and has been working with the community and local stakeholders to help bring life and activity to one of London’s most historic canal basins.
It has been working in partnership with local planning authorities and a number of property owners around City Road Basin to develop a strategy for regeneration of this area. The participants also are developing a new master plan, which will establish a framework for assessing new standards for use, height, density and environmental sustainability, and will provide a structure and stimulus for future regeneration.
Just recently, Pembroke secured the permits for much-needed multifamily housing in this area – an example of not only its commitment to the community but also patient capital as well as its long-term approach.
Structuring Around It
Along with determining the best strategy comes the question of the best approach. There are several ways to approach an international real estate strategy. Companies can create a centralized structure, whereby the company runs both the U.S. and international operations for its American headquarters. Or there is the decentralized approach, which places offices in strategic locations abroad.
A centralized structure allows for more streamlined operations, less investment and easier communication. But it also can be insular, slower to react and less flexible, creating an environment and operations that could potentially hinder creativity and growth.
On the other hand, a decentralized approach can allow for more flexibility, greater insider intelligence and quicker response to opportunity. But it, too, can have its drawback, including the challenges of setting up, maintaining and communicating with multiple offices.
While a company’s broader philosophy may translate well worldwide, real estate is still a local business. At Pembroke, we believe there is no substitute to being on the ground, and locate employees in or near all of the markets in which we’re interested.
From acquisition to finished property, companies grounded in the community and the culture can reap benefits. Inside knowledge to help evaluate and secure opportunities as well as insight into design and logistics to bring the project to completion are critical to a successful product.
Having offices in strategic locations can help companies gain access to deals and to a complete understanding of the marketplace, and to help evaluate risk and price. Being on location allows developers to create effective partnerships with well-connected locals who could help them identify interesting opportunities. A local presence could mean expanding staff to include bilingual on-site professionals, who can be critical in working with the local government.
In addition, managing the property through construction and during its occupancy can benefit from an onsite presence. Selecting a bilingual architect, for example, who understands the culture and the traditional designs of the environs, is important to developing a design scheme that can unify two distinct cultures.
By making a long-term commitment to investing globally, companies can help diversify their portfolio, which can prove to benefit not only the company’s bottom line but also the communities in which it invests.
