International Portfolio Management vs. US Only Portfolios

It was early summer of 1995, and I was aboard a French SST Concord traveling at roughly Mach3 from New York to Paris. The CFO of my company had received an alarming call from European headquarters. Apparently the General Manager of the French company had unilaterally contracted with his brother-in-law to build out a new French headquarters in a suburb of Paris. The GM had not put the project out on competitive bid, and it was feared that beyond the conflict of interest there was the specter of kick-backs and other fraudulent issues involved. My mission was to confront the French manager with this issue and attempt to shut down the project pending a competitive bid process. Needless to say the French manager refused and was subsequently fired by senior corporate management.

This brief tale highlights some of the more exotic issues with international real estate management. As a general statement, Europeans are quite independent and insist on a degree of autonomy in running their businesses. In managing a far flung international portfolio, it’s wise to have local advisors overseeing projects and lease portfolios, to inject a level of local control in the process.

So what are some of the best practices needed to manage an international portfolio versus a US only portfolio? From my experience, here are five that top my list:

·      Understand local cultures and practices and attempt to work within them wherever possible. Avoid imposing standardized policies and standards; it will only antagonize local management and slow down the process. Maintain a level of flexibility and use local advisors to handle lease negotiations and project management activities. Consider using advisors that have pan-continental services, with offices in the US to insure coordination. Such firms as Jones Lang LaSalle or Cushman and Wakefield are examples of international service firms with a global presence.

·      Be mindful of unique real estate practices. For example, in the UK there’s a practice called “upward only rent reviews.” This refers to the somewhat bizarre practice of only escalating the rent periodically. US practitioners are typically bewildered by these local industry practices.

·      Insure that the lease management system has language and currency translation capability. It’s critical that international portfolios can be normalized both in currency and space data. Most international portfolios are denominated in metric units such as square meters versus square footage.

·      Involve your local advisor in lease and other contract negotiations. Perhaps the greatest risk in negotiations is differences in language. I recall negotiating a lease in Japan when my counterpart kept saying “hai,hai,” to many of our deal points. I wrongfully interpreted this response as his agreement. But I later learned that “hai” means “I understand,” not “I agree.” Big difference!

·      Integrate the international portfolio into the over-all real estate database, to provide a company- wide view of the real estate portfolio. But have local lease administrators update and maintain the database to insure language, currency, and space accuracy from country to country. I would typically designate someone in the country’s finance group to take on this responsibility, and report on a dotted line back to lease admin in the corporate office.

Conclusion: Managing an international real estate portfolio requires focus on local practices, cultures, and differences in language. But beyond these local differences, real estate management is essentially uniform in the underlying economics of the transaction whether in the US or internationally. Understanding how the concept of discounted cash flow affects the economics of the deal is true whether in New York, Amsterdam, or Tokyo.