Developers abroad

Boston Globe, MA
Feb 16 2005

Developers abroad
Sluggish commercial property market in Boston sends local builders
overseas for major projects

By Susan Diesenhouse, Globe Correspondent | February 16, 2005

As the Greater Boston commercial property market slogs along, some
local developers are doing what New England investors have done for
centuries: seeking fortunes abroad. They’re focusing on countries
with strong growth prospects, welcoming governments, and the promise
of enormous returns.


Paul Korian, managing member of AK Development LLC, and his team of US
and Latin American investors acquired, gutted, and renovated a hotel
in downtown Yerevan, the capital of Armenia, and hope to reap a return
of about 20 percent on the $42 million they spent on the project.

“In Boston, under normal circumstances, we couldn’t even buy a prized
property in a prime location for under market value,” Korian said.

Last June with construction completed, Marriott planted its flag on
the 229-suite hotel, which was purchased from the government of this
former Soviet republic in 1998.

Despite the uncertainties of an emerging economy, the Armenia Marriott
Hotel offers classic property advantages.

“It’s a real estate play; a hard asset,” said Korian.

Some of his partners have invested elsewhere in the Caucasus region
bordered by Turkey, Iran, Azerbaijan, and Georgia, where in 2003 they
also opened the Tbilisi Marriott Hotel.

In Yerevan, “There’s a lot of risk, but in 10 years we expect a lot
of reward,” he said of the property, whose value has risen 30 percent
since June.

In the last half of 2004, the occupancy rate averaged 50 percent for
double rooms priced from $110 to $180 a night. In the next 10 years,
with Marriott’s global marketing systems, occupancy should rise to
about 70 percent, Korian said.

Meanwhile, there are two other income streams. Above the hotel —
which has four restaurants, 14 meeting rooms, and a banquet hall —
23,000 square feet of offices are leasing for about $21 per square
foot, with 22 percent available. Behind it is another money maker,
a four-acre lot on which they plan to construct a 35-unit time-share
to rent for about $9,000 a week.

“We have the advantage of being early investors in an emerging market,”
Korian said.

But his risk/reward ratio pales in comparison to that faced by John
B. Hynes III, chief executive of Gale International and its joint
venture partner, Seoul-based POSCO E&C. They’re developing a South
Korean metropolis called New Songdo City. Within 20 years, they expect
to invest $25 billion to build 100 million square feet on 1,000 acres
near Incheon International Airport.

In May, after more than three years of preparation, construction is
scheduled to start on the $925 million first phase of the project:
2,300 residential units in eight buildings, the first 300,000 square
feet of a 1.2 million square foot convention center, and a 1,000-room

Never a traveler, Hynes didn’t seek out such a far-flung project.

“But once I looked at the dynamics of the deal, I was hooked,” he
said. “Partly, it’s ego; the size of it. Then, it’s about managing
mixed use.”

The project will include housing, retail, offices, hotels, a hospital,
aquarium, museum, garages, utilities, roads, and parks.

“Where else could I possibly experience the thrill of designing and
building a new city from scratch?” he asked.

The South Korean government has invested $10 billion to build the
airport and bridges and improve the land and public transit. It also
will allow Gale to intensively develop the property, building about 12
million square feet per 100 acres compared to about 2 million square
feet they could build on 100 acres in suburban Boston.

With its fast-growing economy, South Korea also holds the promise of
an ample upside.

At $1 million an acre, said Hynes, “We feel our land price is 25
percent of what fair market value will be when the project matures.”
He added: “If we execute properly, we may realize the profit margin
that hooked us in the first place.”