Poland
Investing in Foreign Real Estate Goes Mainstream
Dec 26, 2006

New international real estate funds with low minimums let you to take advantage of property growth overseas and they provide portfolio diversification.

Garish shopping centers in Warsaw and Prague. Sleek offices in the City, London's financial district. Single-family home communities and condo projects in (oh, the prices!) Tokyo. Real estate projects of this sort have long been beyond the reach of the typical U.S. investor. But now the investment industry is finally making foreign property accessible to the average Joe. Consider that development an opportunity for a portfolio twofer: combining the lure of real estate with the attraction of foreign stocks.

The breakthrough is the arrival of international real estate funds with minimum investments of as little as $1,000. These funds are poised to capitalize on an explosion of publicly traded property securities in Europe and Asia. Until recently, says John Robertson, portfolio manager of the new DWS RREEF Real Estate Securities fund, investment firms regarded overseas real estate stocks as suitable only for institutional investors. The attitude was that ordinary people would find these securities risky and hard to understand. So there were very few ways for us to invest, other than to buy one of the few foreign property stocks that traded in the U.S. as American depositary receipts.

Now that's all changed, and it's about time. What I've noticed during my travels abroad is that an elegant shopping mall in Sao Paulo, Brazil, with tenants such as Bally and Armani, has more in common with its counterparts in New York City and Los Angeles than with a Brazilian soybean or coffee company. If you can read an annual report -- and those of many international companies are usually available in English on the Internet -- you can note revenue and income trends and tell if a foreign real estate company has a solid business. It's also cool to see what properties in other nations look like.

But results are what matters, and in that regard property securities everywhere are having a bang-up 2006. So far this year, European real estate securities, measured in dollars, have returned 61%, and Asian property stocks 32%. Toss in the 36% return of U.S. real estate investment trusts and you have a global gain of 40%, as expressed in an index assembled by the National Association of REITs and Britain's Financial Times newspaper.

Nearly all the surge, as with domestic REITs, is from appreciation in the underlying properties. Dividend income, which is running about 4% everywhere, is secondary. The declining dollar, while not the determining factor in a foreign developer's success, helps U.S.-based investors. That's because investments in euros, yen or pounds translate into more dollars when the greenback shrinks.

With this as a backdrop, there are three factors to consider when contemplating adding international real estate to your investment plan. First, by adding foreign real estate stocks or funds, do you get extra diversification above and beyond what you get from U.S. REITs? Second, what can you buy? And, third, which funds look attractive? (I name my favorite fund selections later.)

The diversification effect

European and Asian property markets are generally healthy. Their building booms are likely to outlast ours. That suggests that you should switch money invested in domestic real estate funds and export it. But don't overdo it. Several academic studies have found that the performance of global real estate securities has more to do with how real estate is doing globally than with any differences between American and overseas stock markets.

By Jeffrey R. Kosnett for Kiplinger.com