Like any other emerging sector, the real estate industry has faced its own share of hurdles in the last couple of years. But after two brutal years, the markets have sprung back and Cushman & Wakefield, one of the world's largest privately held commercial real estate firms, has participated in the rebound.
In an exclusive interview with CNBC-TV18, Glenn Rufrano, President and CEO of Cushman & Wakefield, talks about how the industry has weathered rough waters. He talks about the real estate market across geographies.
Below is an edited transcript of Rufrano's exclusive interview on CNBC-TV18. Also watch the attached videos.
Q: How brutal have the last two years been for you?
A: Not brutal. Living through 2007, 2008, 2009 was brutal. Living in real estate for 2010, 2011 and 2012 has been very reasonable, the markets have rebounded and Cushman & Wakefield has participated in the rebound. I feel very good about working with the firm for the last two years.
Q: Has the US commercial real estate bounced back? Is equity coming back into those markets?
A: The US real estate market is in a very good state right now. We were in a tough state in 2008-2009. It took the first half of 2010 before the community had enough understanding of the fundamentals to get the investment come back. It’s important we had business people making decisions to increase space needs. So, from the middle of 2010, we have seen a better and robust capital market.
In terms of capital plenty of debt, the market had debt that could be sourced from savings and loans. The CMBS market is back and certainly the banks. So, we feel like putting a bit of capital. The fundamentals are good, by fundamentals, I mean supply and demand. We have not built any space in the US for the last 5 years. Therefore, occupancies are getting better.
Q: Are they in pockets or across the country? What kind of geography spread are we seeing there?
A: There are pockets in better markets and less better markets. The coastal cities, by and large, are better than the interior of the US. But each of the coastal cities can have a different story. For instance, San Francisco is a very good market because of technology. Dallas and Houston Texas are booming markets because of energy. The North East is doing well. We understand that financials are doing little less well, but technology, media, healthcare are growing very rapidly in the North East. So, each section of our country may have a different driver, but by and large, it’s the coastal cities that are benefitting.
Q: There are no bubbles left to explore anywhere?
A: Not many bubbles. What is more difficult is the single-family housing in the US - that’s where we were oversupply. That’s different from commercial, but it’s getting better. Our housing market is gaining more traction in terms of new homes, absorption and the low interest rates have helped tremendously.
Q: Are commercial rates back at 2007 levels or are they just steady?
A: Cap rates depending on the property type are very close to 2007. For instance, in New York City, prime NYC office buildings are selling in the 4-5% cap rate. We have a hot market throughout the United States, which is multi-family residential. That’s the rental market, which is in the 4-5% cap rate again somewhere in 2007.
Q: There have been reports in the past of a lot of foreign money looking to invest in the real estate in the United States. Is it a good time to get into the United States, would you advise high networth individuals from India to buy real estate in the United States?
A: We would love all the capital we can get. Now we have had a number of sources of capital, sovereign funds, for instance, from around the world and other forms of capital. It can be high networth capital trying to understand those markets in the United States. But as of now, the dominant player has been the US investor. But I would expect to have more foreign investment over the next 24 months because they are now getting more comfortable with the market.
Q: Which cities in the US would you put money for commercial? Which area is as attractive as residential or which looks better?
A: The first question always is risk. If you are looking for core real estate, which we would say has the least risk, we would recommend the office market in the major cities like San Francisco, West Los Angeles, Houston, Dallas, New York, Boston, Chicago. These cities have very sound markets for office, very safe and core investment could go in there.
If we were looking across appropriate type, it would be multi-family because the highest growth rate potential is in multi-family. Many of the people in the single-family homes have moved out or have moved into multi-family and we have not seen the amount of supply necessary to take care of that demand.
Q: How is Europe looking? You have been bullish on Asia and Pacific in most of your interviews since 2010. How are those markets looking?
A: If you look at America, from Canada right down to South America, the US 2% GDP growth, Canada is 3%, perhaps Brazil at 5%. In this part of the world, if you leave Japan out, certainly your markets here at +-7 or +-8%, China in 9% range, the lowest by far is Europe. In terms of growth, the expectation is flat.
Though it's not only low GDP growth, it’s the Euro. So, they have a double issue - there is lack of growth and second is the form of currency, which is unstable. So those two problems are causing that part of the world to not grow as much, in the real estate.
Q: Two years ago, Asia-Pacific accounted for 8% of your revenues. Where does that stand now?
A: It's about 8%, it's growing in proportion to the country; a little higher but not enough to make a much difference.
Q: What would you like to see it at because it's an area for large growth but the markets aren’t mature? What stops you from growing faster in these areas?
A: First of all, we would like to see it double. We would love to see it at +/-15% because we believe that’s the proper diversification for Cushman & Wakefield. The difficulty in growth is getting the right people in place. We want to make sure that the company grows with the requisite people, the right people in the right spots. We are hiring a quite a bit.
We hired 1900 people at Cushman & Wakefield throughout 2011, everywhere, a third of that was in Asia. So with 8% of our revenue, a third of our hiring has been here. So we are attempting and we will grow this market and the only constraint we have is getting the right people in place.
Q: This isn't a developed market. It’s a market in India especially where the rules and regulations are still developing, they are still being made. It’s a market where there are a lot of black money dealings. So how difficult is it for a corporate to work in this market?
A: First of all, what we care about is having people who understand the fundamentals of the market - who live, breathe and work there. India is no different; India has a staff of over almost 1500 people. We have been here for 15 years. We have very good understanding of the market place ideally to provide good core competency to our clients is what counts. We believe we have it here.
Q: Is there something in India that you would like to do, that you don’t do too much outside? For instance, you don’t look at retail too much as a part of your portfolio in the globe, but is retail interesting in India?
A: It is certainly. Retail is a very large business for Cushman Wakefield and a growing business. We are very strong all throughout Europe. We have strong capabilities in the Americas and we have very reasonable capabilities here in Asia. We are building that capability as we speak now. We are building it in all the major centers including India. We maintain a very good retail force here, but it will grow.
Q: What services do you provide in India?
A: We have five basic business lines. Leasing for office retail and industrial primarily; capital market includes investment sales, selling major commercial buildings throughout the country. Corporates occupying investor services, which we have an agreement with CAS. There, we are representing many corporations from around the globe who want to be here. We take care of their transactional business, we take care of their facilities management business and we take care of their project management business. Then there is valuation and general consulting.
Q: You have experience before you joined Cushman Wakefeild, you founded a real estate investment trust. You work closely in that space. It's a market that’s unlikely to take off in India because the authorities are not confident with that idea, but do you think REITs is something that India needs?
A: I have worked for 10 years in that business. It’s a wonderful business. It's a wonderful way to finance real estate. It's a product and the product is security that is purchased by an individual or a fund most likely for income. So, it's secure. If you can provide that product in any country around the globe, I don't see why it would not work. Here in India, it could be very advantageous.
Q: How different is it from a real estate mutual fund because that’s one of the arguments against bringing REITs into India because they say you can invest in a real estate mutual fund. So, if you bring REITs, people will get confused. How would you differentiate between the two?
A: The concept of retail has worked very well. It is normally taxed less than a mutual fund and that’s been the concept around the globe. In the United States, for instance, instead of double taxation, it is single taxation. It is a similar situation in Europe and Australia. So, the purpose is to take a large piece of real estate and be able to give it to the people, to the populist, have someone buy it with good income and good tax advantages. I don't believe the mutual funds have same advantages.
Q: Could an investor get confused or do you think investors should be allowed to decide for themselves?
A: It will depend upon the investors. If you took the world, in United States, Australia, UK it’s both, some investors who do it directly and others who just place it into a mutual fund and then mutual fund invests in the REIT. But in all cases, the benefits of the REITs are always coming back to that individual.
Q: We have had a lot of consolidation in the industry over the last year. How far do you see this consolidation carrying on and do you have any plans to enter this market?
A: We created a business plan a year ago to present to our ownership. It’s a five year business plan where we understand exactly where we want to be in five years in terms of geography and business. We have been taking this company into that position as we speak. We can take it organically or we could take it through acquisitions or mergers, we aren’t different. We have the right people in the right spot and we get to the mosaic we are looking for in five years.
Q: Were you surprised by the flurry of consolidation that happened over the last 12-18 months?
A: Not surprised because what all of us are looking for are good long term diversification. It was logical to take those positions because they represented diversification. Global role for companies like ourselves diversifying is the way to ensure business model. It makes sense for those two companies and it will make sense for Cushman and Wakefield.
Q: Although you don’t track Indian markets closely in individual capacity, but you have people here on the ground, what are they telling you about Indian commercial market? Are they telling you which cities to get into?
A: They are telling me that there have been hard lessons learnt over the last 2-4 years. Some of those lessons revolve around locations, where there are locations that provide the densities to make markets work or properties work. Certainly, there are certain markets where the owner must understand the tenancies, what the tenancies are requiring and that those markets provide the maximum value for real estate. Lot of lessons have been learnt, whether it's office, retail, industrials, hotels, I believe that your owners and developers have learnt. We have learnt so that we can advise properly. Other very important lessons are how much to build? When to build?
Q: At what stage of a cycle are we in at the moment?
A: My sense is there are two ways to think about this; I think sentiment isn't as good as the cycle really is. As we speak to owners, occupancies are okay, rents are okay, yet there seems to be a negative sentiment in real estate. So, we have a mismatch going on right now. If the real estate market prevails and occupancies get better, sentiment will get better.
Q: What are the downside risks to this and is this then a good time for someone to get into this market?
A: Downside risk is that people start believing what they read and then it spirals down. I think what will happen is there is more transparency in this market and transparency is good and important. As the true facts in terms of occupancy and vacancy come out, I believe that sentiment will get better. I think it will be in an upswing over the next few years.
Q: You think any segment in this market that you spotted two years ago and didn't get into because of either policy or it didn’t turn out as good as you thought it would. Is there any part of the market that you will safe suffer from these drawbacks?
A: It's a question of how we would advise people. If there is anything that hasn't changed in the last two years, it's the policy on retail. There has been policy to let some retailers in. So, having a clear policy for retail from outside of the country come in will be very important for the growth of that market. I don't think that policy is clear yet. I would hope and expect that it can get clearer over the next few years.
Q: If it should, are Indian markets overpriced for retailers?
Q: A lot of retailers we speak to seem to think that the Indian metros are too expensive for them to enter. Do you think that if the policy is clear, you would anyway find supply coming in and that would bring the prices down?
A: Over priced is a relative term. It depends on who you speak to. You speak to the retailer everything is overpriced. If you speak to developers, there isn’t enough rent. So you have to be careful. But the real point, which I would agree with, is that if you allow the markets to work, if you allow proper retailers to come in to the proper markets, the market will then build a requisite housing at the right price.
More importantly, they will trade. If retailers trade well and create sales, they will be happy to pay rent. Rent is nothing more than a function of sales. For instance, in this market, it is not different anywhere around the world.