When you're wheeling and dealing in international real estate, experts have a word of advice: Go in with your eyes wide open.
Or, as Mark Klender, partner, Deloitte & Touche Fantus Consulting puts it: "Don't try to do this on your own!"
Some of the reasons for this admonition?
"You will get overwhelmed, you won't make right decisions, and you stand a very good chance of getting snookered," he said.
| "There are very dramatic differences
between markets here
and overseas. And an error
could result in your getting
locked into a wrong, but
very long, lease."
-- Mark Klender, partner, Deloitte & Touche Fantus Consulting |
"Much of your U.S.-based expertise won't help you. You are in a very vulnerable situation. There are very dramatic differences between markets here and overseas. And an error could result in your getting locked into a wrong, but very long, lease."
Noting that in the UK, leases can typically mean25-to 30-year durations instead of the five-to-10 common athome, Klender said that these leases are typically much harder to alter or to exit from than those in the United States.
His advice is to work closely with an international brokerage firm, law firm, and/or consultants from "Big Six" accounting firms such as his. They can offer local expertise and offices throughout the world.
"That means having people on the ground who understand local conditions and have a solid network of unbiased local sources," Klender said.
He also suggests working with local economic development officials, although their advice must be weighed against the demands of their job "to sell you on coming to their location."
Get the inside scoop
Factors to Consider in a
Buy vs. Rent Decision:
- The availability of suitable space
- The level of technological specification required
- The desire to enhance or create a public image for the
organization
- The use for which the space is required (a head office
building may require a higher specification and more
prestigious location than a branch office)
- Economic incentives which may influence the costs
of building
- The length of time for which the space will be
required
- The amount of flexibility in space planning,
depending on the complexity of the
processes to be undertaken in
the space
Source: Choosing Your European Business Location,
Ernst & Young's International Location Advisory Service |
For Robert Gaudreau, executive vice president, Regus Business Centers, another critical reason for seeking help is finding the correct location for your business.
"In Europe, you don't want to be on the 'wrong side of street,'" he said. "There are definite pockets where certain industries are located, and you want yours to be there."
"For example, in London whether it's being in the West End for advertising, the city of London for insurance, banking or finance, or high-tech in the Thames Valley, companies tend to congregate in similar areas," Gaudreau said. "It's not unlike San Francisco where high-tech firms are in Silicon Valley while banking and finance are downtown."
Gaudreau also stresses that other questions must be answered, including whether your business requires visitors to find you.
"Due to the older infrastructure in major European cities, access is surprisingly critical," he said. "For instance, driving within Amsterdam can be pure hell. If you expect clients to reach you, don't locate somewhere where driving and parking is a nightmare."
Even more threatening are cost factors you might not know to look for.
"There are rates (in the UK), a fee that acts rather like a domestic property tax," Gaudreau said. "It goes to the municipality but is collected by your landlord. In London, rates can account for as much as half your rent.
"You must be aware of their existence or your costs could be in for a very unpleasant shock."
London-based David Pearson, managing consultant, Ernst & Young Real Estate Group, also emphasizes there are a number of key considerations which U.S. corporate real estate directors must be aware of prior to embarking on European property acquisition.
For starters he says there are significant differences between the different countries in terms of lease lengths, lease terms and building specifications.
"Most new city center UK developments include full air conditioning and raised floors, while these are rarely installed as standard in other countries such as the Netherlands or Denmark," he said.
"This can be critical if the proposed use of the building involves a high utilization of staff and a sophisticated IT infrastructure."
An example of a company doing its homework is Wang's acquisition of Olsy, a software company in Italy. Andrew Burt is director of European corporate services for FPD Savill's, a real estate consulting firm that did the background work for Wang, a network solutions provider, before the acquisition.
Savill's researched all of Olsy's holdings in Europe to find ways to save Wang money. As a result of the consulting work, Wang was able to avoid a $10 million payment on a sale lease-back agreement Olsy had due just two weeks after the scheduled takeover.
"We looked at 40 buildings in 15 countries during the due diligence period," Burt said. "We advised Wang on what the (fully-owned properties) were worth and what leases were non-standard."
Wang approached Savill's in October of 1997, and ended up acquiring Olsy in March of this year.
Telecommunications readiness
Gaudreau says that while physical location is obviously critical, so is communications access.
"Don't assume anything," he warns, "including the ability to get sufficient phone lines. And, if you require ISDN or T1 lines, you must know whether the area where you want to be has the connections you require.
"If you're putting in 100 employees but can only get five phone lines because of old infrastructure, you're dead."
Gaudreau said that since the European telecom market has only recently been deregulated, there was little need for monopolies to compete on the basis of expanded services or upgraded technology.
"You must closely scrutinize the territory you are considering," he said. "While in France, Sweden and Germany you'll find very advanced technological infrastructure, in Southern Europe you definitely must ensure the capacity of phone lines coming into your building. And in Eastern Europe, examine the capacities within each city.
"Otherwise, you could pick a site where you will be unable to work.
"And," he added, "in places where phone service isn't currently adequate, it can take a bloody long time for new lines to arrive."
For firms that are seeking an immediate office set-up, are on a short-term assignment, or are testing the waters, Regus International provides completely-equipped temporary offices in business centers throughout the world.
"We spare companies all the start-up headaches, and let them come in and immediately start doing business," Gaudreau said.
Getting informed
| Issues to Consider in European Property Rental
- Availability
- Repairing obligations
- Insurance obligations
- Opportunities for early termination
of a lease or agreement/break clauses
- Rights to renew commercial leases
- Standard lease lengths
- Rent review periods and basis of
review (open, market- or turnover-
indexed)
- Assignment and sub-letting clauses
- Availability of options to purchase
- Transaction costs
- Construction costs and their effect
on rental values
Source: Choosing Your European Business Location, Ernst & Young's International Location Advisory Service
|
The advice from Jean-Claude Goldenstein, who heads JCG International in New Rochelle, N.Y., is that seekers of European real estate should seek guidance from peers on the scene.
"Talk to companies that are where you might want to locate, preferably firms that are in your line of business," he said. "And, talk to people who are happy and those who aren't.
"The economic development people will point you to companies that have expanded recently. Find out not just what's positive about their situation, but also if they've had any problems, or would do anything differently about their start-up.
"But also find firms that have left. Why did they leave, where did they go, what didn't work?"
Burt said the best advice is to be aware of the different rules in each country.
"What you can actually negotiate varies from country to country," Burt said.
He noted that the employing of agents can be tricky.
"If you go to somewhere like Germany, if you aren't careful and you speak to five different agents and they introduce you to the same property, you could be liable to pay all five.
"You must be able to prove that you wrote a letter or informed the agents you didn't use that their fax came in behind the first one," Burt said.
Goldenstein also emphasized the need to be absolutely on top of any location's current real estate scene.
"In an age of mergers and acquisitions, there often are bargains to be had," he said. "For instance, when two large firms merge, they invariably don't need all the property both individually controlled."
But, Goldenstein says, similar scenarios exist in much less dramatic settings.
"There are many surplus situations due to massive European restructuring by product line or division," he said. "And other properties become available due to situations such as the restructuring of France's defense industry. For example, armament producer Giat recently laid off 3,600 workers and shut down a number of facilities."
He also pointed to potential real estate bargains emerging from projects that failed, or where production was no longer feasible.
"Real estate is dynamic," Goldenstein says. "Companies come, stay and go. And those seeking sites must be aware of local conditions so they don't overlook situations that might prove highly favorable.
"As multinational firms move to consolidate production of each product, that clearly will make available sites that the current scene have made redundant."
Also, Goldenstein says many major firms have special divisions whose mission is to dispose of surplus property. Consulting those firms would certainly be a worthwhile effort for those on a European property hunt.
Other sources of information
| "Talk to companies that are where you might want
to locate, preferably firms that are in your line of business.And, talk to people who are happy and those who aren't."
-- Jean-Claude Goldenstein, JCG International, New Rochelle, N.Y. |
In addition to using savvy consultants, another good source of information and contacts is major trade shows.
For example, at major events staged by the International Association of Corporate Real Estate Executives (NACORE) and MIPIM (a French acronym for International Real Estate Professional Market), there are opportunities to gain exposure to marketplaces and meet key contacts.
NACORE's next meeting is its 25th annual symposium in Chicago, Oct. 4-7. For more information, call (561) 683-8111.
MIPIM's annual meeting in Cannes, France -- the next is March 11-14 -- brings together the world's largest group of international real estate players.
"In one location you can talk to city, regional and national representatives of areas you might be interested in, and developers that actually have buildings to sell or lease, and who are actively looking for tenants," said Ronald Kolber, vice president of sales, Reed Midem Organization. "You'll also meet architects, investors, service providers, consultants, brokers, software providers, and a host of other critical individuals."
Last year, MIPIM drew approximately 8,200 attendees and 400 exhibitors from 55 countries.
MIPIM is also holding a similar but smaller meeting Nov. 22-24 in Miami, this one aimed specifically at Latin America. For more information on MIPIM, call (212) 689-4220.
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