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Recap gains

Foreign investors and U.S. owners both come out ahead in U.S. recapitalizations. The lure abroad isn't just the weak dollar.

Late last year Macklowe Properties, a New York real estate firm, decided to pay back the $300 million it had borrowed from Vornado Realty Trust and Soros Capital to help buy the General Motors Building for $1.4 billion in 2003. It was confident that a variety of investors would be eager to write a check in exchange for a stake in the landmark Manhattan office tower.

In January, after considering various prospects, Macklowe struck a deal with Jamestown, a firm with dual headquarters in Atlanta and Cologne, Germany, that specializes in buying U.S. properties and syndicating them to German investors.

"This is a time when owning real estate is stressed by the surge in values," says Stephen Zoukis, a partner at Jamestown. "Partnerships provide an alternative to swallowing hard and paying up or sitting on the sidelines."

Like Jamestown, other foreign investors attracted by the weak dollar and the solid long-term fundamentals of U.S. real estate have become conspicuously active in U.S. recapitalizations. For these investors, a recap can offer an equity holding in a prime property alongside an established partner, like Macklowe, that retains a significant interest in the building and handles its day-to-day management. For U.S. owners, meanwhile, a recapitalization is preferable to an outright sale: It provides a way to raise cash on favorable terms while maintaining control of a property.

"It's an increasing trend," says Howard Michaels, chairman and CEO of the Carlton Group, a New York real estate investment bank that helped Macklowe find an investor for the GM Building. "The window has opened for sellers to get terrific prices, and people are taking advantage of an abundance of capital. Because of the weak dollar, there's been a lot of overseas money."

IPC US REIT, a Toronto real estate investment trust that invests exclusively in the U.S., has made several recap plays in the past nine months. One notable purchase: its March acquisition of an 89 percent stake in United Plaza, a 621,000-square-foot office tower in downtown Philadelphia.

"It's very difficult for foreign investors, unless they're well established in the U.S., to compete for properties in very strong markets," points out Jonathan Caplan, an executive director at real estate services firm Cushman & Wakefield. "Joint ventures can be an attractive alternative."

Recaps can get quite creative. Last November, GIC Real Estate, the property investment arm of the government of Singapore, teamed up with New York's Tishman Speyer Properties to tap into the Australian investor market. The goal: to recapitalize GIC's $1.85 billion portfolio of U.S. buildings, including the 1.5-million-square-foot AT&T Corporate Center in Chicago.

GIC sold a 51 percent interest to Tishman Speyer, which took the bulk of its stake public in the Australian market, holding on to only about a 5 percent interest. GIC thus retains the largest share.

Remarkably enough, the U.S. real estate market can still look inexpensive from abroad. To their delight, foreign investors are finding that capitalization rates -- properties' net annual operating income divided by purchase price -- seem comparatively cheap in U.S. deals, despite soaring real estate values.

"In the U.S. we look at today's cap rates and think they are perhaps unrealistically low," explains Rob Speyer, senior managing director of Tishman Speyer. "In fact, cap rates in the major European centers are 50 to 100 basis points lower than in major U.S. cities." Capitalization rates for U.S. central business district office buildings averaged 7.20 percent at the end of 2004, compared with 8.13 percent at the end of the prior year. By contrast, business district office space in the U.K. was yielding 5.75 percent.