The top two investment groups in the world are The Government of Singapore Investment Corp. (GIC) and Dutch Pension Funds. GIC is active in Hawaii with the recent portfolio purchase of The Grand Wailea hotel in Maui, Hawaii. The Dutch Pension Funds is new to our market and some predicts they will be the largest institutional investors in the US in the coming twelve months.
Of the top 30 institutional real estate investors, five are invested in Hawaii's commercial real estate. Two of the companies are Japanese based and one is Korea based. These investors have more money to invest in this year than the previous year and are all pension or retire funds.
Yesterday, I toured three major shopping complexes in Beijing. I wonder what it must be like to live here, have lots of spending cash from your manufacturing or mining business, and able to spend it freely. Well, it's a pretty easy thing to do here in Beijing. Louis Vuitton has conveniently located 3 shops across the city with its largest at 17,000 SF.
With 20 million people living in modern Beijing, there is demand of all types of goods and services. The upscale consumer appreciates all the international brands we have in Waikiki and many more. The tenant mix at these properties are breath taking, although prices are high- higher in China than in Hawaii (which is actually great for Hawaii, another reason for Chinese investors and their families to invest in our state).Two of the top three shopping centers have been developed by Hong Kong- based developers so they look and feel like the busy high-end centers in Hong Kong. The most successful shopping centers combine a subway station underneath the project, driving base level traffic. The Pradas and Giorgio Armanis of the world are not living off the subway traffic though. Their customers are driving to the centers on nights and weekends to make very large, individual purchases. The luxury side of these malls seem slow during most of the weekdays but sales figures confirm they are real producers.
There are similarities we can learn from China and apply them to all of our Hawaii Shopping centers. First, ground level is by far the most productive level for retailers. The next level up can see results as low as 50% of sales and revenues and similar declines as you go up floor by floor. Second, retailers are comfortable paying percentage rents and for new centers, that may be all they pay for the best tenants. Like Hawaii some tenants will locate to a project just for advertising value, particularly when they are only offered an upper level or a lower level near a dead end traffic zone. The majority of the developers work with brokers here and pay a tenants brokers fee.
Properties are leasehold, like many in Hawaii. The government has made some great tracks of land available for lease in the heart of the city. All of these developments are mixed-use with three to four floors of retail surrounded by office and residential uses. The ground leases are 40-50 years in term and are typically paid all upfront. The real estate community is working on some leases where the leases are spread out and paid quarterly instead of all up front. In residential properties there is an automatic right to extend the terms at the end of the lease. The real estate community would like to see some adoption of this policy or at least a first right of refusal added to the typical ground lease. The 40-50 year term is not amenable to many individual trusts and pension funds but there are plenty of REIT's and private developers who investing in these types of shopping center developments.
In summary, Chinese investors feel comfortable investing in Hawaii shopping centers. They are familiar with a majority of the tenants, how percentage rents work, and are used to a leasehold ownership structure. We will see more Chinese investors in Hawaii commercial properties.