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Friday, June 18, 2010 5:20 AM ET
Jones Lang LaSalle's Colin Dyer
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In-depth, insightful interviews with movers and shakers in SNL's sectors, including executives, analysts, investors, academics and authors.

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Colin Dyer, a Chicago-based Brit, is the president and CEO of global property services firm Jones Lang LaSalle Inc., which earned $2.5 billion in revenues in 2009 and has a real estate investment arm with more than $40 billion in assets under management.

Dyer, Jones Lang LaSalle's chief since 2004, spoke to SNL about the sustainability of the global property recovery, the implications of European austerity, BP plc and the next generation of REITs. He also tells SNL where he would invest an imaginary pension pot if he had to put it all in real estate.

The following is an edited transcript of the June 17 telephone interview.

SNL: Jones Lang LaSalle's "office clock" shows capital value growth accelerating in the first quarter in several key centers, but is there evidence of deceleration in some places like London and Shanghai?

Dyer: The rate of compression has definitely slowed. You've picked a couple of markets where the slowing is most pronounced. The reasons are very different. Because what you had in Shanghai was a government bank-boosted bubble, particularly in the residential market, which spilled over into the commercial market. And the government for the last five months now has been working hard to take some of the air out of that bubble. In London, the phenomenon is different. [Here] I wouldn't say we've had a bubble by any means, more a recovery of asset prices from very low levels. It's been a largely equity-fueled price recovery and as with any recovery, it's never linear. So our view is that this is just a bit of a pause. People are evaluating assets coming to market because there are now more assets coming to market. So the huge demand that was there has more choice.

I'd like to pick you up on that issue of a "pause" because the background double-dip concerns cannot be altogether ignored. To what extent is this shaping up to be one of the fastest global real estate cycles of recent times? To what extent could capital values begin to fall later in 2010 or 2011?

Asia has got tremendous underlying growth while in Europe and America there are very anemic levels of growth and different underlying [real estate] dynamics. Our scenario at this point is that we are still in a reasonably steady recovery phase from the depths of recession. And in any recovery, you get periods where things slow and pick up again as confidence builds and as access to equity and debt rebuilds. … We see it just as a pause in the rate of recovery, both in terms of pricing and transaction levels. Whether there is a double dip or not, I think it's way too early to say. 

What are the implications of long-term austerity measures for European real estate markets?  Which subsectors or markets are most or least exposed?

We're in new territory. We've never had a situation of having a euro in place. The classic mechanism of a bit of [interest rate] tightening and a devaluation isn't available at this point because the devaluation lever isn't there. So you've got the euro effectively acting as a gold standard and forcing some of the weaker countries to cut back on spending quite significantly. The effects of that on Portugal, Italy, Spain and Greece have yet to really show through, but they are obviously not positive for short-term economic growth. Even so, the fiscal discipline is probably positive on a three- to five-year horizon for those countries. [Dyer then highlights the case of Ireland, which he says had the biggest problems early on]. Our head of Ireland was actually feeling quite positive because … there is a sense that the government there has been on the job fixing the issues for over a year, and that is resulting in a more rapid recovery in business and consumer confidence. 

Real estate markets are sharply polarized between primary and secondary, and the consensus appears to be that that will stay the case for the foreseeable future. But where, if anywhere, is real estate risk most mispriced, potentially?

The recovery to date has only been in prime assets and obviously in major cities, particularly London and Paris, but what we're beginning to see where the cap rate yield compression has been most significant is that money is beginning to flow into secondary markets again. If you take London as a template, about a year or a year and half after the recovery in primary assets began, you are beginning to see money flowing into secondary assets. To that extent, you can look at practically at any city in any asset class where primary product has begun to recover and expect to see secondary assets recover over time. So if you are looking for mispricing, yes, it's probably across a broad set of secondary assets, where yields are high and where, inevitably, as confidence recovers you'll see money flowing in and re-pricing those assets

The globalization of listed real estate markets ground to a near-halt in late 2007. When do you see it picking up again, and when and where is the next generation of REITs likely to emerge?

That process will pick up again as confidence recovers in the next two years or so because there is a demand for REITs, for stable cash flow from a whole range of real estate assets. So that is going to come through. It's just a matter of time. We would expect to see the next generation of REITs coming through in developing countries, not Brazil for particular reasons around the legal system there and tenant/landlord security, but certainly in China and eventually India. If a REIT structure gets through the regulatory system, there will certainly be demand from investors. 

The whole BP debacle has put the whole issue of stable cash flow in a new light, hasn't it?

Companies have paid a lot of attention to the concept of risk and risk management over the last five to ten years, post-Enron. And there may have been some cynicism about that focus on risk from more swash-buckling adventurer investors or businessmen. But what the BP episode brings home is just how very quickly something which is a normal part of the business can expose a company to huge levels of reputational or financial risk. It's a sobering thing.

Jones Lang LaSalle recently said that it is beginning to see debt financing for nonprime assets in the United States. Can you elaborate on that?

The reason why the real estate downturn in the U.S. was greater than anywhere else was because the banking system was so cracked by the whole subprime [crisis] and by subsequent events. So it's taken this long for banks to get their heads around just what exposure they have and to work out how to deal with it. … But they are now in quite a good position because they are able to borrow on the wholesale market or from the retail market, if they have retail branches, and from the discount window, all at very low rates. The spreads on lending are upwards of 200 or 300 basis points. So there is very attractive lending business to be done in real estate, among other sectors.

And what about elsewhere?

In Asia, banks have been in good shape for some time. There's been no problem raising debt funding across Asia. In fact it's been too easy in China. …  The only possible exception is Japan, where they have certain loans from three or five years ago which are coming to maturity now and will create a refinancing challenge over the coming couple of years. Europe is a mixed picture. 

Finally — and this is just for fun — if you had a spare $1 million pension pot and had no choice but to invest in real estate, in which subsectors/markets would you invest based on the three following scenarios: you retire at the end of 2012; you retire in 2016; and you retire in 2022.

The key issue with retiring in 2012 is liquidity because that is a very short horizon for a real estate investment project. In fact, it's too short because two and a half years gives no wiggle room to pick the right point of the cycle. So, basically, what you are looking at is buying cash flow from a REIT. I'd go for stable cash flow in mature markets on that time horizon.

In 2016, you can envisage extraordinarily good buying opportunities at this point in broken development deals which only got halfway and never got completed.  Construction costs have come back down to sensible levels and the trend on cap rates is downwards, so you're not going to lose money with them moving out again. So you can get yourself some extra value by moving into development projects. We're seeing some of the private equity funds, LaSalle included, doing these kinds of deals at this point on that sort of a horizon.

And I think with 2022, you're probably looking at one and a half cycles. So whatever the economy you're thinking about the timing of the sale point. But really the further out you get, the more I would say go for India, go for China. Be selective on the vehicle you use. If you do it directly, you have to be extraordinarily careful about how you do it. But certainly the growth opportunities in those economies over that time horizon are going to be extraordinary. If you do the compound interest sum and assume that your real estate assets are going to grow something like the underlying rate of economic growth and if you take 1% to 2% annual growth in Europe and compound that and then compare the two, then really there is no contest.