Real estate investors find solid gains overseas
A growing number of foreign countries are making it easier for American investors to buy shares in foreign properties.
By Bruce W. Fraser | Contributor to The Christian Science Monitorfrom the February 26, 2007 edition
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NEW YORK - As most folks know, real estate is all about location. And for real estate investors, that location increasingly does not bear a United States ZIP code.
Lately, foreign real estate investment trusts, or REITs, have been looking especially enticing as US real estate holdings began to wobble after seven straight years of huge gains. So those looking for a good investment have been taking a hard look at overseas REITs or global REIT mutual funds.
REITs are tax-free investments that, like stocks, trade on exchanges, giving investors a transparent and liquid way to tap into a variety of holdings – malls, hotels, office parks, skyscrapers, etc. REITs pay out some 90 percent of income derived from such properties as dividends. Little wonder they have been such a popular investment in the US over the past seven years or so.
Over the past few years, foreign regulators have given the green light for the development of REIT markets in Europe and Asia, solving a liquidity problem that kept American investors away in the past.
"Investors have come a long way in terms of including real estate in their portfolios," says Christina Chiu, a research analyst with Morgan Stanley Investment Management's Global Real Estate team. "We expect this to continue as a global real estate market evolves and gains acceptance as a distinct asset class."
According to the National Association of Real Estate Investment Trusts (NAREIT), more than 20 countries have created REIT-like structures, and more are seriously considering doing the same. Within the past five years, France, Hong Kong, South Korea, Taiwan, Singapore, and Japan have established regulatory frameworks for REITs. Other countries that already offer REIT-like structures include Canada (since 1993), Australia (since 1971), the Netherlands (since 1969), and Belgium (since 1995). Britain legalized REITs as of Jan. 1, 2007. Germany also is moving in this direction. as well.
About a dozen REIT companies in the US have expanded their businesses to include international exposure. The largest player is ProLogis, with properties in Asia, Europe, and North America. Others include Kimco Realty Corp, Mills Corp., AMB Property Corp., Simon Property Group, and Shurgard Storage.
According to NAREIT, American REITS have handily beaten all major benchmarks over periods of three, five, 10, and 15 years. But cold air is setting in. Current yields of domestic REITs are hovering around 3.8 percent – down from recent highs of 7 to 8 percent. So it's little wonder the hot money in this sector is moving in the direction of foreign real estate investments.
"We expect the same kind of situation that prevailed in US REITs will occur in foreign countries," says Louis Stanasolovich, president and CEO of Legend Financial Advisors Inc., in Pittsburgh, Pa. "The recent move going into foreign REITs is relatively new. At this point, it's effectively been a trickle, but it could be the start of something big."
Indeed, some mutual fund companies have begun to offer this foreign asset class. Big names like Morgan Stanley, Fidelity Investments, and AIM Investments are leading the way.
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