NAA and its members are looking outside of the United States for development and management opportunities, strengthening ties that bind the global real estate market.

In the crowded streets of Hong Kong, the cosmopolitan corner of New York, the peaceful countryside of Ireland and the colorful villages of Mexico, there is one universal—everyone needs a place to live.

Despite language barriers, cultural differences and regulatory red tape, many U.S.-based apartment management companies and owners are reaping the benefits of a global approach to multifamily housing.

For Kyle Kazan, Principal of Long Beach, Calif.-based Beach Front Properties LLC and Beach Front Property Management, Inc., investing in global real estate came from a lack of opportunity in the United States.

"In 2002 the Southern California fundamentals were leaving, so I started traveling around, looking for new investments," says Kazan, who began buying properties in the early 90s with his wife. "My business partner ran a hedge fund in Asia and he said Shanghai had great fundamentals, including huge population growth. People called us absolute idiots for flying into Asia during the SARS outbreak, but we thought the market there was poised to take off at a good value."

Kazan's risk paid off. He purchased A+ real estate—mostly penthouse condos—and began renting them to expats interested in high-end rentals, including the head of Molson Asia.

"The same fundamentals that worked in Los Angeles worked in Shanghai," Kazan says. "And we were getting better returns in Shanghai."

Two years later, he branched out to Berlin.

"In 2005 Berlin had no REIT market, but was on the verge," Kazan says. "The city was still suffering from the fall of the wall, but Germany had named it the capital and it had an infrastructure that could support a booming population more than twice its current size. Even if we were wrong about some of the fundamentals, the value play was there."

That's not to say Kazan's first global foray was not without its challenges. He says he had to first convince investors to take a leap of faith. 

"They said you want to do what—and where?"

Additionally, the process of educating himself on the "rules of the game" in another country took far longer than he originally anticipated—nearly half a year from initial interest in 

Shanghai and Berlin to closing the deal in the respective countries.

"We wanted to make sure something stupid didn't take down our investment," Kazan says. "You have to understand how taxes and property rights, among other things, work in other countries. The better part of the first two days of any trip we made to a new, international market was spent sitting with lawyers and accountants to understand the framework we were about to play in. You have to thoroughly vet the market and system in place so that you can get an even shake."

We're Not in Kansas Anymore

When it was time to market Kazan's first Berlin property, his initial instinct was to litter the surrounding area with "For Rent" signs and balloons.

"In Los Angeles, we want the community to look like a circus," he joked. "That's just not done in Berlin—it would turn people off. I had an American moment of being like, 'Hey, we're Americans, we're exceptional and so is our marketing.' I had to remind myself that all real estate is local."

Instead, Kazan put one small sign in front of the community—and it did the job.

While his Shanghai properties boasted the same amenities as a Class A community in Santa Monica, Kazan says the amenity packages in Berlin are almost non-existent because the properties were built closer to the turn of the century.

"It's purely location, location, location there—and our locations were phenomenal. We didn't really have competition."

Berlin's bare-bones amenities seem to be the rule in most global markets. Roger Southam, Chairman and Chief Executive of London-based Chainbow, says there are very few management companies in the United Kingdom with a professional delivery on amenity space.

"The U.K. market is still amateur in nature and needs radical upheaval to ensure a consistent quality service delivery," says Southam, whose company manages 1,400 apartments among 17 properties. "The letting services are variable and the management services are indifferent. So there are great opportunities for U.S. investors, although one of the U.K. restrictions is the lack of space and land, which means we do not have the luxury of some aspects such as loading bays. Also investors generally look at the loss of rental and not the benefit of additional services."

Southam says there is a split in thinking, with some insisting U.K. residents will never pay extra for amenities, and others who don't want the amenity space should they decide to try and sell the flats in the future. Still others are fully on board.

"It will take a shift in mindset that we are managing a business and not just property managers," Southam says. "We are offering services and not just a flat. From our research we are finding the business space, gym space, dining rooms and club rooms are the most popular amenities. It is going to take a while to get to golf simulators and basketball courts!"

"Since many of the countries are dominated by 'for sale' product, the amenity offerings are typically much less than what we provide in the United States," says Rick Graf, President and Chief Executive Officer of Texas-based Pinnacle. "The concept of catering to pets is also very unique in our country."

Graf's company has been involved in global real estate for some time, providing consultancy for Asian and U.K. markets. Pinnacle's newest platform initiative, Rhapsody Property Management Services, was formed to support major Canadian cities with a preliminary focus in Toronto, Calgary, Edmonton and Vancouver. Graf says efforts are geared toward managing purpose-built multifamily properties—currently 2,000 units in various stages of development—in markets that have not traditionally been penetrated.

"The Canadian markets are adopting something similar to the U.S. multifamily management model quicker than other countries," Graf says. "Latin American locations, such as Mexico and Chile, are also intriguing, as are European countries like the United Kingdom, Spain, Netherlands and Germany."

Although Pinnacle has experience in the Asian market, Graf says it's a particularly challenging area due to currency instability, language barriers and cultural differences—such as hesitancy to rent, living at home longer with one's parents, a tendency to buy an apartment versus renting and the stigma associated with renting.

"One of the most significant things Pinnacle has learned from traveling the globe is that the American rental structure we know and love doesn't exist in many other countries," Graf says. "Cultural barriers and the regulatory environment, such as rent control in countries like Denmark, make property management operations very difficult.

"The learning curve for every foreign market is different. Taxation, monetary policy, human resources matters, landlord/tenant laws; it must all be learned. We have found that the value of good legal and tax representation is very important."

Studying Abroad

American students have it made.

Jackie Rhone, CPM, CAPS, Senior Managing Director for Greystar Real Estate Partners, says community amenities are not as commonplace in most international student housing communities as those in the United States. It's something her company is trying to change.

Greystar owns and manages 53 student housing properties and approximately 22,000 beds in the U.K., and has introduced residents to amenities ranging from study areas to gaming rooms, rooftop decks, common-area Wi-Fi and even a bowling alley at one community. 

"It has been a huge hit," she says. "Because of the climate, there are very few community pools—unless indoors. Most buildings are very dense in configuration, with few community spaces and green areas. We are trying to bring more community amenities to the properties."

In addition to making waves across the pond, Greystar has also traveled south of the border—managing six high-rise luxury assets in Mexico City and Monterrey. Rhone says Latin America is another 'very intriguing' market they may next explore.

"The demographics of most Latin American countries with young populations and rapidly growing middle classes are very attractive for our business model," she says. 

For Greystar, such decisions include careful consideration of the local culture in each prospective market. Rhone says the culture in the U.K., for example, is very resident friendly—particularly for student housing. Evictions for lease violations are highly frowned upon, she says, making it more culturally challenging for owners to enforce the terms of their lease.

Navigating these obstacles often hinges on attracting and retaining the best apartment industry professionals in a market—a task easier said than done. Despite Greystar's dominating U.S. presence, Rhone says they are still the new kids on the block internationally.

"You need veterans from within your organization that may be willing to relocate for a period of time, as well as top local talent who are open to working with you as a new player in the market," she says.

Global Goods

Despite the challenges and limitations, Graf says global markets also have a lot to teach American owners and managers.

In particular, he says unique design aspects—such as much smaller floor plans, an area for maid quarters and limited kitchen and bath amenities—make the utilization of space much more efficient abroad. Additionally, sustainable practices are also far more widespread and advanced outside of the United States.

"We can learn and enhance our products in both of these areas," Graf says.

Unfortunately, many American companies struggle to see beyond their immediate world view.

"Many German cities, such as Berlin, are still under-evaluated and cheaper than other European metropolises," says Andreas Jelonnek, CEO, Emerging Markets, at ista International, based in Germany, who frequently serves as NAA's European ambassador.  "Some have as little as 3 percent resident turnover. In the U.S., some turnover is as high as 70 percent. Worldwide, balanced portfolios have a clear advantage." 

Kazan agrees, and says there is much to be gained for multifamily housing companies that are willing to put the time and energy into exploring new areas of opportunity.

"It's reasonable to ask, 'Why jump on an airplane and fly 14 hours when you could just feed your machine at home,'" Kazan says. "Personally, when a market no longer makes sense, I close shop and look elsewhere—including outside of the country. What guides my own Ouji board is a return on my own investment. I've never lost money on an investment."

Part of Kazan's success is entering and exiting global markets at the right time. 

"In Shanghai each unit was a $1 million-plus investment," he says. "We bought four office floors and 25 units. Our fund manager was on the front page of the Asian Wall Street Journal, because what we did was a game changer at that time. We had no competition, partly because there was no exit strategy."

The goal was to sell the Shanghai buildings between 2010 and 2012—a plan to which Kazan stayed true. He says the value played out and it was time to move on. Investors made a 6 percent annual yield on their money—"not huge, but not bad. When we sold, our IRR's were in the 20s and everyone was very happy."

While it made sense to sell in Shanghai, Kazan still owns three mixed-use properties in Berlin. With an 8 percent return year-over-year, Kazan says investors would make four or five-times their money if the buildings were sold today.

"Our investors are pretty darn happy and we have no intent on selling."

Neighbors to the North

There are more apartments built in Dallas every year than in all of Canada. Eh?

The lack of competition may be surprising, but Derek Lobo says his country offers incredible opportunities for owners and operators who want to expand their portfolios.

"Canada parallels the United States more than any other country in the world and we have fabulous real estate, but we have a history of rent control that pretty much eliminated our rental housing sector," says Lobo, founder and CEO of ROCK Advisors and DALA Group of Companies, who is based in Ontario. "No one built and the entire industry was left behind."

Although all rent control legislation was lifted in 1998, Lobo says developers didn't know what to do next.

"I started visiting the U.S. to pull down the border and peek into the future," says Lobo, who is speaking on a global panel at the 2015 NAA Education Conference & Exposition. "I was amazed at the sophistication of the industry. I'm quite in awe of it. The U.S. apartment industry is way ahead of the rest of the world."

Lobo was so enamored with the U.S. that he secured a work visa and began consulting U.S. developers who are interested in the Canadian market. He says some U.S. developers did build in Canada, but not nearly enough. After September 11, everything slowed down again.

"Our vacancy rates are consistently 1 percent to 2 percent," Lobo says. "There's no competition. Of the little rental housing stock we do have, 90 percent are concrete high-rises. There's nothing in the suburbs."

What Canada lacks in stock, it makes up for in stability. Lobo says the country has a stronger, highly regulated banking system and didn't experience the housing meltdown that occurred in the U.S. 

The only thing missing are developers who are willing to lead the herd, with the majority interested in buying but not building.

"Canada has one-tenth the population of the U.S. and approximately the population of California," Lobo says. "Now imagine the sort of competition you would have if there were no apartments built in California for 30 years. That's what it's like in Canada."

Another selling point: Canadians are essentially friendlier Americans. Lobo says they read the same books, watch the same TV, eat the same food. Their desired amenities are no different, either.

"Canadian renters are identical to U.S. renters—they just don't have a choice, and must settle for what currently exists," Lobo says. "We're the Motel 6 and you're the Ritz-Carlton."

Five years from now, Lobo predicts Canada's apartment industry will be improved due to increased U.S. involvement, but still not saturated. 

"I encourage everyone to take the short flight and come visit our housing stock, and you'll see what's missing in Toronto, Montreal, Vancouver—all of our world-class cities," Lobo says. "Canadians have always invested in the U.S. That's a well-beaten path. But coming the other way—that we haven't seen. The skill of being an apartment merchant was lost in Canada. We need owners and operators with the courage to do it again."

A World of Opportunity

Most U.S.-based owners and management companies that already have a foothold abroad say they have no plans to slow down.

Pinnacle sees great potential in expanding its global portfolio.

"The importation of U.S.-based professionalism, customer service and asset performance metrics are in great demand," Graf says. "Pinnacle is excited about our opportunity to breach the Canadian markets at a time when purpose-built rental product is becoming more widely accepted. Our development pipeline in the country is rapidly taking shape and we will continue to grow our efforts there."

Kazan has considered opportunities in the Ukraine, Poland and Hungary.

"I visited Kiev in 2012 and really liked the nice parts of the city," Kazan says. "Unfortunately the property rights laws there are corrupt—something we never faced in China because we were dealing with high-end Hong Kong REITs. But if the country is pushed into the European Union and some new property rights laws are enacted, you're going to take a free ride in the Ukraine. It's a war-torn country, but if you believe the crisis will subside at some point, it's worth considering."

Ultimately, Kazan's interest in the Ukraine did not move past his initial vetting. He's still interested in Hungary and Poland—keeping a particular eye on both countries due to recent financial instability.

"Most commercial real estate in Hungary and Poland involves loans denominated in Swiss francs, which makes no sense" he says. "Switzerland's central bank abandoned its policy of restraining the franc a few months ago, which greatly affected their financial markets. For most properties, it's game over. Provided the property rights are favorable, it may be a great opportunity for groups of investors with cash."

Regardless of the country, Graf says the purpose of multifamily housing is always the same—meeting basic housing standards and providing resident services.

"There are many opportunities to operate globally," he says. "Be smart about which ones you pursue and spend the up-front time doing your homework. Where possible, utilize the expertise of a local professional—either on your team or as a consultant—to help you navigate the local laws and customs."

Adds Kazan, "The rules of the game are different, but that even applies city-to-city in Los Angeles county. Understand those rules and be flexible. You're no longer playing Monopoly. Now you're playing Life." 

Lauren Boston is NAA's Staff Writer and Manager of Public Relations. She can be reached by email or at 703-797-0678.