Meet the world's biggest landlord, General Electric Co. () famous for lightbulbs and jet engines, GE has quietly built one of the most profitable empires of office buildings, shopping centers, and apartment houses around the globe. Last year the business, GE Commercial Finance Real Estate, earned more than a cool $1 billion on its 7,500 properties, part of a portfolio valued at $29 billion. That was seven times the profits at one of GE's largest public rivals, developer Sam Zell's Equity Office Properties Trust () in Chicago, which held $25 billion in properties. Generating returns of more than 25% in each of the past 12 years, the real estate business now accounts for 7% of GE's bottom line. "Under the umbrella of GE, which is involved in so many businesses, we don't get a lot of attention," says Michael E. Pralle, the unit's chief executive since since 2000.
GE's real estate arm may get overshadowed, but the backing of a cash-rich parent comes in handy during acquisition sprees. That is, until lately. All the money sloshing into real estate these days is changing the game. "There was a time when the balance sheet was a weapon," says Mark Finerman, head of real estate finance for RBS Greenwich Capital. "Today, you'd better bring something more than just money to the table."
So GE's Stamford (Conn.)-based unit is increasingly shifting its focus overseas -- especially toward emerging markets such as India, China, and Eastern Europe -- where it believes there are better values. That squares with GE CEO Jeffrey R. Immelt's goal of eventually getting 60% of the conglomerate's revenue from emerging markets. This year it is paring its North American assets from 54% of its portfolio to 47%. Last year profits from outside the U.S. rose to 54% of overall earnings, up from just 22% in 1999. "Our single biggest challenge is to grow, so we have to get into new markets," says Pralle. "We are having to push out of our very traditional strike zone." In all, GE will invest $16 billion in real estate this year, most of it overseas. It now manages $35 billion in assets.
GE is far from alone in scouring foreign markets for lucrative deals. Private-equity players such as Blackstone Group, Goldman Sachs' () Whitehall Funds, and Lone Star Partners are jumping into overseas markets. Still, GE, may have a big advantage over its rivals: New players can have a tough time breaking into new markets, especially without a network of contacts on the ground. "There's a learning curve," says Gordon F. DuGan, CEO of W.P. Carey & Co. (), a New York investment firm that owns more than 650 commercial and industrial properties worldwide. "You can't just show up with a suitcase of money."
Back in the last real estate boom, GE was primarily a big lender -- and got burned. It wound up with $7 billion in bad loans on its books when the frenzied market of the late '80s came to an end. "We got hit badly," recalls Pralle. "The real estate industry was on its back, and nobody had any cash."
Nobody, that is, except GE. The company decided to become a buyer as well as lender, scooping up shopping centers in Florida, apartment houses in New Jersey, and office buildings in San Francisco. The deals were often done for pennies on the dollar, but they added up to some $2 billion. By 1993, GE was one of the largest buyers of distressed real estate from the Resolution Trust Corp., the government agency set up after the savings and loan debacle.
Today, GE finds itself in a very different market. Increasingly, it's elbow-to-elbow with flush hedge funds, private-equity folks, life insurers, and foreign investors, all hungry to diversify their portfolios and bolster returns with high-yielding real estate. Sales of commercial properties valued at more than $5 million, for example, totaled $187 billion this year through Sept. 1; in all of 2003, only $130 billion in deals got done, according to Real Capital Analytics Inc., a New York real estate research firm. "We're having a $100 million, trophy-building-a-day kind of year in sales," says Dan Fasulo, Real Capital's director of market analysis.
GE avoids trophy buildings. Its average acquisition is only $7 million. And it often finds itself outmaneuvered on bigger deals. In June, for example, GE lost out to ING Clarion Partners, a unit of Amsterdam-based ING Group (), in a bid for Boca Raton (Fla.)-based Gables Residential Trust (). ING Clarion sees Gables' 20,000 apartments as ripe for condo conversions, the hottest slice of the commercial real-estate market. It paid $3.6 billion, or $43.50 a share, edging out GE's $41 offer. "The other bidder clearly didn't value the business for its potential and its land inventory," says ING Clarion's managing director, Frank L. Sullivan, Jr. Says Pralle: "If someone has a differing view, we get outbid. That's happening more."
Pralle concedes that some deals he has lost over the last five years turned out to be good investments for the buyers. But he says that if GE made less money as a result, so be it. "We won't lose as much money when real estate markets turn -- and eventually they will turn," he quips. Expect GE to have its checkbook ready when it does.
By Mara Der Hovanesian in New York