Sam Zell, chairman of private investment firm Equity Group Investments, presented the keynote for the Commercial Real Estate Finance Council‘s annual conference, held this week at the New York Marriott Marquis. Interviewed by Thomas Flexner, global head of real estate for Citigroup Global Markets, Mr. Zell addressed topics from the challenges the commercial real estate finance arena faces to where he thinks the best international investment opportunities are.
When asked what “keeps him awake at night,” Mr. Zell said it’s “the cliff that’s coming in financing.” Even with many borrowers locking in 10-year mortgages, it’s hard to think that rates will not go up, he said. “I believe the cost of capital is materially lower than the inflation rate, and I just don’t think that can go on for any long period of time without a major alteration.”
In relation to growth in the U.S., a first step is to cut regulations in half, according to Mr. Zell. “We have created such high levels of uncertainty that [businesses/investors] are unwilling to make the commitments necessary for this country to go forward.”
For the last four years, the U.S. has seen growth in the first three months of the year, only for it to fall off in later months, said Mr. Zell. This is the result of a cycle of planning, then postponing that many businesses fall into because of the uncertainty in U.S. markets.
“I suggest that the reason [first quarter economic momentum] went down is because business improved to the point where somebody was required to make a capital investment in order to continue expanding, and they looked at all the issues and the uncertainties and said ‘maybe next year,’” he said.
In addition to higher interest rates borrower credibility is of substantial concern, Mr. Zell said. But while he was anxious about growth and regulation stateside, he said the horizon is significantly brighter abroad.
Looking forward, Mr. Zell said that there are three areas where he sees significant investment opportunity: Mexico, Colombia and India.
Mexico is a logical place for investors who do not want to leave themselves exposed if supply chains are inhibited, he said. Additionally, Pemex, a leader in the country’s fast-growing oil and gas industry, should attract foreign capital to Mexico.
Colombia and India are also primed to experience continued growth, according to Mr. Zell. Colombia is producing close to one million barrels of oil a day and India has just completed elections, which should aid in decreased corruption and bureaucracy.
“There is a lot to be said for investing in countries that are off the radar screen,” said Mr. Zell. “We were one of the first players in Brazil, and we did very well across three or four asset classes.”