By Michael Fickes

Sometimes major initiatives start out small.

"In 1991, we just started nosing around in Europe to see what opportunities might exist," says David Grant, president and chief operating officer with Seattle-based self-storage REIT Shurgard Storage Centers, Inc. (NYSE: SHU).

Since that initial exploration, Shurgard has built 140 self-storage centers in Belgium, Denmark, France, the Netherlands, Sweden and the United Kingdom, exporting its U.S. self–storage concept overseas.

		There's No Place Like Home In this era of globalization, the temptation to become an international company is more prevalent than ever.

Shurgard is not alone. A number of REITs have expanded their businesses to include international locations. Self-storage, industrial and retail companies have had the greatest success at translating what works domestically into foreign markets. Some prominent U.S.-based international players include Alexandria Real Estate Equities, Inc. (NYSE: ARE), AMB Property Corporation (NYSE: AMB), American Financial Realty Trust (NYSE: AFR), Capital Automotive REIT (Nasdaq: CARS), Entertainment Properties Trust (NYSE: EPR), General Growth Properties, Inc. (NYSE: GGP), Highland Hospitality Corporation (NYSE: HIH), Kimco Realty Corporation (NYSE: KIM), The Mills Corporation (NYSE: MLS), ProLogis (NYSE: PLD), Simon Property Group (NYSE: SPG), Taubman Centers, Inc. (NYSE: TCO) and W.P. Carey & Company, LLC (NYSE: WPC).

By and large, these REITs are transplanting the platforms and marketing concepts that made them successful in the U.S., with the advice of partners familiar with local customs and practices. Shurgard's experience offers a prime example of how the right U.S. real estate concept, executed successfully, can perform well overseas.

Moving Self-Storage to Europe

In the early 1990s, Shurgard executives predicted that the U.S. self-storage market would begin to mature in 1999, with supply and demand sliding into balance. In anticipation, they concluded that opportunities for large-scale growth would need to be found elsewhere.

Simon Property sets its sights on China (above), while Shurgard (below) has shed its light on Europe's storage needs.

Europe appeared to be a wide open market. In fact, Shurgard's research found that the grand total of self-storage facilities operating in Europe was zero. But would the U.S. self-storage concept work for Europeans? In 1994, Shurgard and Belgium-based property developer Grana International struck up a partnership to find out by pilot testing self-storage in Europe. After surveying potential locations, Shurgard and Grana built their first test center in Brussels in 1995.

"We liked Brussels as a diplomatic capital," Grant says. "Our business does well in areas with lots of change and turnover." By 1997, the Brussels location had proven itself, and Shurgard and Grana expanded the pilot test. They built a store in Stockholm and bought a small three-store chain in Paris.

For two years while the new centers matured, Shurgard studied population and social trends in other major European cities, gauging self-storage needs in different regions in terms of square feet per person. According to Grant, research showed that self-storage demand in Europe mirrored demand in the U.S.—dynamic cities with mobile populations appeared to have high demand, while more static cities with little population turnover appeared to have only a moderate need for self-storage facilities.

Spurred on by the successful pilot tests, Shurgard founded Shurgard Europe in 1999 as a joint venture that included AIG, CSFB of London, Deutsche Bank of London and Fremont Realty Capital of San Francisco. Through Shurgard Europe, Shurgard retained about 57 percent of the undertaking, which operated on a five-year timeline, characteristic of short-term venture capital funding. Between 1999 and 2004, Shurgard Europe added 120 stores to the 20 it had opened between 1995 and 1999.

In 2004, Shurgard began buying out its joint venture partners and in June of this year, the company announced that Shurgard Europe was now a wholly owned subsidiary of Shurgard Storage Centers.

Happy Returns

Shurgard expects its European platform to fuel company-wide growth in net operating income over the next decade. In 2004, U.S. revenue totaled about $320 million, and European revenue was $102 million. The European operation runs about one-third the number of centers (140) as the U.S. operation (475) and generates about one-third of the revenue produced in the U.S.

AMB Narita Air Cargo Center, Tokyo, Japan

However, Europe's net operating income (NOI) is less than proportional to its size. Compared to NOI of $189 million generated by U.S. operations in 2004, Europe's $27.8 million of NOI is nowhere near one-third of the U.S. number. Grant believes that coming years will produce a steady increase in Europe's NOI as well as company-wide NOI. "Our European stores are younger and newer than the U.S. stores," he says. "Their average occupancy is 68 percent. It takes two to three years to rent up a self-storage property, and 72 of our stores are very new."

ProLogis Park Marston Gate, Midlands, UK

According to Grant, the cost structure of self-storage facilities is static. The costs incurred when the facility opens and has no occupants are the same as when it is filled to capacity. Moreover, the last 20 percent of occupancy gain produces revenue that goes straight to the bottom line. As Shurgard fills its existing European stores, Grant expects revenue and NOI relationships to come more into line with U.S. stores.

Grant also believes that Europe remains wide open for new self-storage development. Currently, the U.S. population of 280 million people supports 45,000 storage facilities. In Western Europe, where the population is 350 million, there are only 650 storage facilities. Will the European market be as deep as the U.S.?

"I have no idea," Grant says. "But I do know that there is a lot of room to find a ceiling between 650 stores and 45,000 stores."

Simon Says China

Like the self–storage category, the enclosed mall business seems to have reached a balance between domestic supply and demand. As a result, large U.S. mall REITs have begun to tap into the growth potential of international expansion. In addition to U.S.-based companies like Simon, General Growth, Mills and Taubman, Australian-based Westfield Group (ASX: WDC) is aggressively growing internationally.

"The big advantage to being outside of the U.S. is that the U.S. is pretty fully retailed," says Steve Sterrett, chief financial officer of Simon Property Group.

Simon made its first international investments in 1998, with the purchase of shopping centers in France and Poland. Last year, the company followed up with the acquisition of Chelsea Property Group, Inc., the outlet center developer with wildly successful shopping centers in Japan.

"Chelsea's U.S. premium outlet centers were the reason for making the deal," Sterrett says. "But their presence in Japan was the icing on the cake. It gave us operational expertise in a part of the world where Simon has no history."

The Chelsea acquisition marked the beginning of what now appears to be a major international expansion by Simon. Today, Simon operates 51 centers in Poland, Italy, and Portugal. The company operates one center in Mexico and five centers in Japan, all under the Chelsea banner.

In April of this year, Chelsea began to expand Simon's foothold in Asia under a joint venture agreement with the Seoul-based Shinsegae Co., Ltd. and Shinsegae International Co., Ltd. The joint venture company, called Shinsegae Chelsea Co., Ltd., will develop Premium Outlet centers in South Korea, adapting Chelsea's outlet concept to the development of upscale, fashion outlets. Chelsea will contribute leasing, design, marketing and operations expertise; Shinsegae will manage the venture's entitlement, development, and construction activities.

In May, Simon formed a new subsidiary called Simon/chelsea International Ltd., to direct Simon's retail activities in east and Southeast Asia from offices in Hong Kong.

"From Hong Kong, Simon and Chelsea will be better positioned to pursue both full-price and outlet development opportunities in Asia," says Leslie Chao, president of Chelsea.

At the end of July, Simon announced a major undertaking in China, the first of its kind. The company will work with Morgan Stanley Real Estate Funds (MSREF) and SZITIC Commercial Property Co. Ltd. (SZITIC CP), a retail property subsidiary of a Chinese state-owned firm, to develop retail shopping center projects in China.

With initiatives in Japan, Korea and China, it appears that Simon is building an Asian platform. "We're not interested in establishing a global footprint," Sterrett says. "The only reason to develop international properties in specific world markets is because we think those opportunities make sense for our shareholders, that they will create shareholder value."

General Expansion

While Simon is expanding in Asia, General Growth Properties, Inc. has its sights set on an entirely different part of the globe: Central and South America.

In August 2004, General Growth announced joint venture investments in Costa Rica and Brazil. In San Jose, Costa Rica, the company will construct and manage a 500,000 square foot regional mall, Sambil Costa Rica. Joint venture partners for the project are Grupo Sambil of Venezuela and Genesis Fund of Costa Rica.

In Brazil, General Growth is participating in a joint venture with Nacional Iguatemi Group (NIG) to own interests in two regional malls and a property management company.

Why has General Growth decided to invest in this part of the world? "Our strategy in going abroad is the same as our strategy in the U.S.: to create a platform that accommodates the needs of national retailers," says John Bucksbaum, General Growth's chief executive officer. "In Brazil, where there are many independent mall owners, we see an opportunity to begin developing a platform that will enable us to become a large owner of retail space in that country and potentially expand further into the rest of South America. We have the same strategy in Costa Rica. We hope to create a platform and extend it into more of Central America."

Following Customers

A company's decision to target international expansion might follow one of many business strategies. One of the simplest is the industrial sector's strategy of following its customers.

"There are lots of strategic possibilities," says Guy Jaquier, executive vice president and chief investment officer with AMB Property Corporation. "You might want to diversify into different markets to add value for shareholders. You might also decide to invest opportunistically like an opportunity fund, buying low and selling high.

"Our strategy has been to follow our customers. Our customers are by definition in the global supply chain. As global trade grows, and more and more boxes move around the world, our customers need to move more and more boxes."

Customers prefer safety to experimentation; hence the consistent popularity of established consumer brands. AMB has adapted consumer brand strategy to international warehousing and logistics. A logistics company that leases from AMB at Hartsfield-Jackson Atlanta International Airport may prefer to lease from AMB in Paris at Charles de Gaulle International Airport. Why? Because AMB presents a familiar face and consistent business practices. That's the benefit of following your customers.

To date, AMB has followed customers to Canada, China, France, Germany, Japan, Mexico, the Netherlands, Singapore and Spain.

A Global Pro

The question for all companies testing global markets is this: Has the globalization of business and capital markets created international opportunities where none previously existed? If there is one company for which the answer has been an emphatic yes, it would be ProLogis, and for a couple of key reasons.

Among U.S. REITs, ProLogis stands out as having the most internationalized portfolio and investor base with 40 percent of its investments in 13 foreign countries including China, Japan, Mexico, Canada and Europe. Yet, as Walter Rakowich, ProLogis' president and chief operating officer, explains, the company had no international investors when it was founded in 1991.

"Today, we believe we have a minimum of 20 percent to 25 percent of investor shares held by foreign companies and the proportion likely is much higher because you cannot track the capital from international sources held at U.S.-based mutual funds," Rakowich says.

The reason for the large share of foreign investors, says Rakowich, is because "we are more familiar to them because of our footprint in their domestic markets."

ProLogis also has actively raised private capital overseas. Its European Property Fund raised about e1.2 billion ($1.4 billion) in 1999. "One of the things investors got comfortable with was that ProLogis had a successful publicly traded entity in the U.S., a proven track record and REIT overlay with transparency and public information," Macquarie Capital Partners Managing Principal and CEO Donald Suter says.

Sale and Leaseback in Europe

W.P. Carey & Co. began to export its sale and leaseback strategy to Europe in 1998. "Actually, the first deal we made in Europe was a joint venture purchase and renovation of a multi-tenant office building in Paris," says Edward V. LaPuma, president and chief investment officer of W.P. Carey International, W.P. Carey & Co.'s global investment subsidiary. "It's taken a number of years for the sale and leaseback concept to take hold in Europe. It was actually considered to be a negative thing for a company to do. It gave the impression that a company was in financial trouble."

But LaPuma points out that sale and leasebacks were also viewed negatively in the U.S. before W.P. Carey made its sales pitch positioning property as a financial asset that ought to be put to work. "We did run into the same thing in the U.S. The only real difference is that the international markets seemed to convert more quickly than the U.S.," LaPuma says.

Since 1998, W.P. Carey's international portfolio, built in Canada, Mexico and nine European countries, has grown to 14 million square feet and a value of more than $1 billion, about one-seventh of the total value of W.P. Carey's numerous private REIT portfolios.

Real Estate International

"Real estate investors have gone international," says Dale Anne Reiss, global director of real estate at Ernst & Young. "I'm not just talking about REITs; I mean everyone—opportunity funds, homebuilders, construction companies, hospitality companies, you name it. Real estate has become global over the past 10 years, and REITs are a large part of that global market."

However, some barriers remain. "You still see some countries with requirements that restrict what international investors can do," Reiss says. "In India, for example, national laws permit foreign ownership of certain types of properties such as hotels, but prohibit foreign ownership of retail companies."

For the most part, however, global real estate markets appear to be opening up to international investors, wherever they are from, wherever they are going.