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11/13/2007

Real Estate Finance Pioneer Sees Staggering Global Potential

Sam Zell, 66, has been a pioneer in real estate finance, championing the real estate investment trust (REIT) as the optimum model for owning real estate in terms of liquidity.

His biggest real estate transaction to date was this year�s $23 billion sale to the Blackstone Group of Equity Office, the office-tower company he spent three decades building up.

Zell says he was never driven by accumulation, but rather by achievement. His favorite adages are: �Unless you�re the lead dog, the scenery never changes,� and, �Be a risk taker...however, define risk by your own terms.�

What about the future? The following are some of the comments he made last month at the New York Historical Society, in Manhattan.

Zell said we were in the �greatest monetization period in the history of the world.� What does this mean? Think of it this way: if you own an office building, and go public offering shares on your property, you have �monetized� the asset.

You have realized cash, turning a physical thing into a tradable security. That tradable security is in high demand these days, because people want that steady income from real estate. And the monetization of real estate is the process used for meeting that demand. On a global scale, this trend is only just beginning.

If you examine the size of publicly traded real estate markets around the world, compared with the total stock of real estate in each region, you see that very little real estate trades in the public markets. Europe has total real estate properties worth some $6.3 trillion, yet has only a tiny sliver in the public markets�about 2.8%.

That�s because European countries only recently enacted U.S.-style real estate legislation. According to Cohen & Steers, �In Europe, in 2007 alone, the United Kingdom, Germany and Italy enacted [such] legislation.� Suddenly, sealed-off private real estate has an open door to public markets.

Cohen & Steer goes on to note: �The sheer size of German private real estate holdings, for example, is extraordinary; a significant amount of these holdings could enter Germany�s public real estate market by 2010.�

Then there is Asia. Parts of Asia, such as Japan, Singapore and Hong Kong, have had U.S.-style real estate laws in effect since 2000. So they are ahead of Europe. But the opportunity remains large. As you can see, there is still only a small sliver of real estate holdings in public hands. Privately held real estate makes up the vast majority.

Zell is bullish on even North American commercial real estate. He said, �You must remember that commercial real estate is a global market. For a euro-based investor, U.S. real estate looks cheap.� As the dollar tumbles, it puts U.S. assets on sale. (For a U.S.-based investor, this trend of global monetization of real estate is a great thing. The more publicly traded global real estate out there, the more ways you have to hedge yourself against a falling dollar.)

Zell is no pie-in-the-sky theorist. He is active himself in Brazil, Mexico and Asia. He owns property and businesses all over the world. He sees with his own eyes the deals still there for the taking. Recently, for example, he described picking up a Mexican warehouse only 100 miles from the Texas border that pays a 14% cash yield.

Investors want that �steady income from a tangible thing�more now than ever, as Zell pointed out. And the market will respond. The big trend in real estate is the conversion of private real estate into public stocks. Also, rapidly growing economies in Asia and South America push the demand for all things real estate. They need more of everything�from retail space to office buildings to warehouses.

So you have lots to build, lots already out there in private hands and vast pools of money ready to own real estate. Today we see sovereign wealth funds�those huge piles of cash in government hands (especially those of the Persian Gulf states and China).

Zell pointed out that we have �only begun to see the impact of sovereign wealth funds on world demand [for real estate].� Zell opined they will be steady buyers, his advice, � buy bricks and mortar...especially overseas.�

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