Gains In International Real Estate

By Aaron Levitt | January 24, 2011 AAA

After posting terrible returns during the global credit crisis, real estate may have finally turned the corner in 2010. Broad real estate indexes like the Vanguard REIT Index ETF (NYSE:VNQ) saw gains of nearly 20% or more in 2010, as investors snatched up bargains and sought income. These strong gains have some analysts thinking that many of the U.S. real estate bargains are long gone. But, investors willing to break out their passports can find real estate deals overseas.
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Global Property Barons
Currently, the United States only represents about 30% of the global real estate market. With more than 70% located overseas, there are certainly bargains to be had. Despite this, the global securitized real estate market is relatively small, compared to the broad international equity and fixed income markets. The global real estate market is quickly growing, however. Since the mid-90s, nearly 30 different countries, from Singapore to France, have adopted the Real Estate Investment Trust (REIT) tax structure. (For related reading, see The Basics Of REIT Taxation.) Prior to 1990, only four nations had REITs. In addition, the global real estate sector's market capitalization has expanded several fold, almost reaching a trillion dollars today.

In light of the dour forecast issued by the IMF about the fate of global real estate over the next eight years, now may be a goodtime for investors to expand their real estate holdings globally, as the sector still remains in bargain territory. Analysts estimate that real estate stocks in Asia - particularly in China, Hong Kong, Singapore, and Australia - should generate per-share cash flow growth of around 8% in 2011. Europe should generate growth of around 3%. Globally, average property values are beginning to increase and non-bank lenders in Europe have boosted commercial real estate lending by 24% throughout 2010. According to real estate consultancy group Dealogic, firms and individuals have made 18 real estate acquisitions in Japan this year, valued at $372 million. This is a dramatic increase from the eight deals made in 2009.

Investors may also want to expand their REIT focus to include international firms for another reason: A weakening dollar. According to NAREIT, from 1990 to 2009, when the U.S. dollar was falling against the Japanese yen, average total returns for investors were 12.1% per year for investments in Asian REITs. However, 10.4% of that return was from currency gains and just 1.7% was from the REITs themselves. The industry group found similar results for Europe. As the dollar continues to weaken long term, investors in international real estate can prosper.

Adding Exposure
The exchange traded fund boom has made this formerly difficult to access asset class, quite easy to add a portfolio allocation. The SPDR Dow Jones Global Real Estate (NYSE:RWO), for example, combines both domestic and foreign real estate into one fund. Investors looking to add a straight dose of international real estate to their portfolios do have some choice in the sector.

The largest and most heavily traded in the sector is the SPDR Dow Jones International Real Estate (NYSE:RWX). The fund follows 132 different REITs and Real Estate Operating Companies (REOCs) and includes its largest weightings in Japan and Australia. The fund yields 8.76%. The iShares FTSE EPRA/NAREIT Dev REIT ex-US (NASDAQ:IFGL) can also be used to gain wide access.

Analysts estimate that even with China's red hot property market that the highest-priced properties in the nation are still selling at a fraction of the valuations for prime properties in Manhattan and other major markets, like London. The Guggenheim China Real Estate (NYSE:TAO) and the iShares FTSE EPRA/NAREIT Dev Asia Index (NASDAQ:IFAS) offer targeted exposure to the region.

Bottom Line
After an impressive run throughout 2010, many of the U.S. real estate bargains are long gone. However, the international real estate market place is now renewing its march upwards. Investors with long term timelines may want to add the low correlated asset class through funds such as the Cohen & Steers Global Realty Majors ETF (NYSE:GRI). (To learn more about REITs, see The REIT Way.)

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