Green roots in emerging markets
Investing in emerging markets is the latest vogue among those seeking to piggy-back on the success of some of the world’s most vibrant economies. However, it is nothing new to AIG Global Real Estate. While many investors and developers talk big about Brazil, Russia, India and China, the so-called Bric markets, AIG’s real estate arm is already on the ground in Moscow, Mumbai, Hong Kong and Shanghai. Worldwide, AIG Global Real Estate has 500 professionals searching out opportunities.
Emerging markets are at the heart of AIG’s heritage. The US insurer started out in China when in 1919 its founder, Cornelius Vander Starr, opened an insurance company in Shanghai. From there, AIG expanded into other parts of Asia, Europe, Latin America and the Middle East. So AIG is not a US or a western company that went overseas to become international but one with a global focus at the core of how it operates. As an insurer, AIG has always been huge in emerging markets, and that tradition is apparent in its real estate group.
"AIG has invested in real estate from the beginning," says Kevin Fitzpatrick, AIG Global Real Estate’s president. "The founder [Vander Starr] had a keen eye for real estate and real estate opportunities."
When Fitzpatrick joined AIG in 1987 to form the global real estate group, the firm was in the midst of developing a landmark project in China – the Shanghai Centre – a property still performing well today even amidst the city’s continuing construction boom. From those beginnings 20 years ago, Fitzpatrick and his team have seen AIG’s real estate business grow to manage $18.4 billion in equity. And now, as then, the group’s focus is still firmly on emerging markets, including the Bric countries – so much so that it doesn’t really distinguish between emerging and developing markets in its overall strategy. In part, no distinction is made because that’s the nature of the asset class.
"Real estate is local and it’s conducted slightly differently in each country," says Fitzpatrick. "But, from a basic standpoint, real estate is real estate. The fundamentals of going through and building, leasing or selling a building, although it’s different country to country, is to a large degree the same."
With its huge network, AIG is well positioned to delve into emerging markets, perhaps on a level its competitors can’t access. That’s the local level.
"We’re very local in the way that we operate," says Fitzpatrick. "We have people in-country doing the investments, not being in a situation of operating in major cities like New York and London and then making decisions on emerging markets. We actually have people on the ground doing the business."
Unless an investor or developer has a huge affinity for a country, the tedious process of commuting to and from projects in sometimes far-flung locations tends to wear people down, Fitzpatrick warns. That’s where having people on the ground doing deals and understanding where the market dynamics are moving really gives AIG a competitive advantage.
Another factor setting AIG apart is its heavy orientation to development and its ability to build on a global basis. It co-invests with clients, dealing with many of the same tenants and investors worldwide. The group’s position within the AIG family is another advantage. It counts AIG’s chief investment officer, its head of fixed income, its head of the transaction review process, as well as colleagues from the public debt markets team and Fitzpatrick as members of its real estate investment committee. This broad scope of experience and expertise gives it the ability to look at pricing and risk across different regions, as well as different real estate and investment products.
"Having the expertise of different product specialists has given us an advantage in that we are able to make sure the pricing for individual markets and individual products is the best available. As investors we’re always concerned with maximizing the highest return based on the risk. Obviously we share that with our co-investors," says Fitzpatrick.
This same global structure governing its investment approval process also applies to deal structuring and risk management. When making investments in various countries, AIG’s global platform enables it to understand what the risks are and to minimize them as much as possible. It uses many of the risk management techniques developed within its insurance business to mitigate risk on the real estate side.
"Emerging markets, if done properly, are not as risky as a lot of people believe," says Fitzpatrick. "Done properly they can offer superior returns without superior risk. Don’t get me wrong, there is risk involved in emerging markets, but there is risk in every market."
Working with many of the same clients on property development projects over the past 20 years is one way AIG can mitigate emerging market risk. So when it has a large manufacturing company that it builds for in Latin America as well as eastern Europe, it looks at whether it is taking the risk of that multinational or the risk of the individual country. And what AIG is able to do is balance that risk back and forth from the standpoint of the corporate risk together with the country risk, which makes the pricing in the emerging markets very attractive.
Since its debut investment in Shanghai in 1986, AIG has been active in the other Bric markets, albeit less so in Brazil. The Shanghai Centre, a mixed-use project including residential, office, retail space and the Ritz Carlton Shanghai hotel, marked an auspicious beginning to the global real estate group’s activities. Twenty-one years ago, when construction started, the Shanghai Centre very much epitomized the way the city’s landscape would develop, and was one of its tallest buildings. These days, there are many taller high-rises surrounding Shanghai Centre and it doesn’t stand out on the skyline the way it used to. However, it is a testimony to AIG’s staying power in that market. Its location attracts luxury retailers and, combined with the Ritz Carlton, has proven to be a long-term winner.