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.
from the February 26, 2007 edition
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"Most of these firms had domestic REIT funds for years," notes James Reilly, a certified financial planner with RegentAtlantic Capital LLC in Chatham, N.J. "Now they're adding international REIT funds."
Altogether there are approximately 70 global real estate funds, according to NAREIT. Most of the growth has been recent. In 2006, AIM, DWS Scudder, Goldman Sachs, The Kensington Funds, Northern Funds, and Dimensional Fund Advisors launched foreign REIT funds. Cohen & Steers, a money-management firm specializing in REITs, started two such funds in 2005, and Fidelity opened one in 2004.
Today, more financial planners are recommending that international REIT funds be part of investors' portfolios. Part of the allure is diversification on two counts: first, within mixed-asset portfolios and, second, geographically. Investors have the opportunity to broaden their portfolio exposure in REITs in other countries and on their exchanges as well. There is also a low correlation of returns between real estate securities listed in North America and those in Europe and Asia, according to Morgan Stanley figures.
"This provides exposure to varying economic cycles, varying rates of return, and higher yields," says David Taube, founder and president of Kalorama Wealth Strategies in Washington, D.C. "Companies and investors are seeking acquisition opportunities outside the US because the US property market is very competitive. There has been significant property return compression over the past decade."
Another reason the fire is burning is performance. According to NAREIT, real estate securities, of which REITs are a part, have outperformed other equities and government bonds around the globe, providing double-digit returns over time periods of five, 10, and 20 years. Foreign commercial real estate is also currently selling at more attractive valuations than US commercial real estate. "Foreign REITs are a bit cheaper than US REITs," says Mr. Stanasolovich.
One caveat: Don Cassidy, senior research analyst at fund tracker Lipper Inc., warns against investors chasing performance. "This movement reflects two predictable trends: product differentiation and the chasing of performance by investing internationally," he says. "It makes sense to have some international property exposure, but it is interesting to note that the interest is coming now, after a huge run, rather than earlier, when prices were lower."
Investors should be forewarned that most of these funds are young, with limited track records, and some economies, particularly in Asia, are more volatile, Mr. Cassidy says.
Indeed, the risks of investing in foreign REITs are similar to the risks of investing in international stock markets: limited public information; less liquid trading; and a range of different political environments. There is also the added cost of investing in foreign markets. International REIT funds tend to have higher expense ratios than their US counterparts, Cassidy says.
Other challenges investors face include logistics, language barriers, and different reporting standards. "Real estate is still a local business. You need to have local market knowledge and know the customers," says Mr. Taube.
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