CapitalMalls Asia Establishes $1 Billion Fund to Invest in Chinese Retail Sector

Asian shopping mall developer CapitalMalls Asia Ltd. has set up CapitaMalls China Development Fund III – a $1 billion private-equity fund that will invest in Chinese retail properties, according to Fox Business. The fund has a life of eight years. Its initial assets include CapitaMall Tianfu, CapitaMall Meilicheng in Chengdu, and Luwan shopping mall and office tower in Shanghai. CapitaMalls Asia holds a 50% stake in the fund.

Commerzbank to Transfer CRE Financing Business

Commerzbank, Germany’s second largest lender will transfer its commercial real estate and ship financing business to a restructuring unit aimed at winding down non-core assets, according to The Wall Street Journal. The two portfolios constitute a total volume of $215 billion.

The bank cited uncertain markets, the heightened sovereign debt crisis and increasing capital and liquidity requirements, particularly for long-term financing under the Basel III regime for the decision. Commerzbank will continue to provide real-estate financing to retail and corporate clients. The bank’s retail fund business, CommerzReal, will be integrated into the core bank’s Private Customers segment.

The German government holds a 25 percent stake in Commerzbank.

Burger King Expands in China

Miami-based Burger King will open 1,000 restaurants in China over the next five to seven years, according to The Miami Herald. The expansion is a joint venture with the Kurdoglu family, which runs 450 Burger King restaurants in Turkey and Cartesian Capital Group. There are currently 63 Burger King restaurants in China compared with over 1,400 McDonald’s restaurants in the country.

Burger King is also opening hundreds of new locations in Brazil and Russia. The article notes that in the past year 80 percent of Burger King’s new stores opened in Europe, the Middle East and Africa.

Burger King was taken private by 3G Capital in late 2010. As part of its overhaul, the company is focusing on modernizing restaurants. It recently launched its biggest menu expansion, which includes healthier and trendier selections.

Fairgate at Ballston

Washington Real Estate Investment Trust (WRIT) has acquired Fairgate at Ballston in Arlington, VA for $52.25 million (373.48/sf) in cash, according to The Street. The eight-story (147,000sf) office building is close to Interstate 66 and Ballston Metro Station. It was built in 1988 and is 84 percent leased. The building previously sold for $51.35 million (364.04/sf) in 2006.

Partial Interest Deals

Partial interest deals are transactions in which investors take partial stakes in buildings instead of buying them outright. In 2011, partial interest deals accounted for $9.9 billion (63 percent), of the $15.7 billion in Manhattan office transactions, according to the New York Times. In 2007, when the market was at its height, less than $5.7 billion (19 percent) of Manhattan’s $30.3 billion in office transactions were partial interest deals.

In some of these deals, the owner uses the outside investor’s capital and credit to persuade the lender to restructure the debt. In exchange, the investor receives equity in the property – a process known as recapitalization. Of the 98 Manhattan office transactions over $100 million that have closed since 2010, 40 involved partial interest deals or recapitalizations.

According to the article, three market forces are fueling the partial interest/recapitalization trend:

1. The plentiful supply of capital that investors are eager to place in coveted properties.

2. Maturing commercial mortgages that must be paid off and replaced with new financing amid conservative lending practices.

3. The seller can avoid paying a transfer tax by selling less than 50 percent of the property (combined city and state transfer tax in Manhattan is 3.025 percent – one of the highest in the nation).

Research in CRE

Commercial real estate is maturing as an asset class and becoming increasingly attractive to investors looking to diversify their portfolios. As a result, the demand for dedicated research and analysis is also growing.

The Washington Post reports that CBRE has a research staff numbering 450 worldwide. Furthermore, the growth of data collection services like CoStar permit in-house research staff such as those at CBRE to spend less time on information collection and more time on assessing how the data affects their clients.

The article also indicates that brokerage firms are selecting researchers who are less likely to use the position as a stepping-stone to becoming a broker and more likely to view research and analysis as a long-term career.

Cost Segregation

Deprecation reduces the reportable taxable income of investment property. It is calculated using either the straight-line method or the cost segregation method (also known as segmented depreciation).

The straight-line depreciation method does not extract the personal property elements of the investment. Instead, everything depreciates at the real property rate – 27.5 years for multifamily and 39 years for other commercial property. The cost segregation method on the other hand, uses a cost segregation study to identify portions of the investment property designated as personal property and therefore eligible for an accelerated depreciation schedule of five, seven or 15 years.

Higher depreciation deductions, such as those obtained by using the cost segregation method, lead to greater tax savings and thus increased cash flow.

Debt Yield Ratio

Debt yield ratio is a method used to determine the maximum amount of commercial real estate loans. It is the Net Operating Income (NOI) as a percentage of the total loan amount (first mortgage). For example, if a commercial property has a NOI of $5 million/year and the loan amount is $35 million, then the debt yield ratio is 14.29 percent (5/35 x 100 = 14.29). Most lenders establish ten percent as a minimum debt yield ratio.

High Returns in Calgary

The Investment Property Databank’s Global Annual Property Index ranks Calgary’s commercial real estate market as having the highest total return on investment (21.6 Percent) in 2011 among the 60 cities surveyed, according to the Calgary Herald.

The report attributes Calgary’s robust CRE market to an energy-driven economic boom in Alberta. Calgary’s total return on investment went from 10.3 percent in the first quarter of 2011 to 21.6 percent in the fourth quarter.

The report indicated that in North America, capital values in the Western/Pacific Coast markets consistently outperformed the Midwest markets during 2011. San Diego came in second (19.5 percent) followed by Portland (18.0 percent), Seattle (17.7 percent) and Philadelphia (15.9 percent).