THE WALL STREET JOURNAL
06/24/2007
Investing in real estate once meant owning rental property or buying shares in a U.S.-based real estate investment trust. Today, it increasingly means putting money in a REIT trading in Singapore or buying a pied-a-terre in a refurbished medieval village in northern Italy.
These days, real estate investing is an international proposition. Nearly a score of global real estate mutual funds have launched in the United States in the last two years, more than doubling in number. They now manage some $16.8 billion collectively, with more than $5.8 billion in new money flowing in this year alone, according to investment researcher Morningstar Inc.
Earlier this month, the American Stock Exchange listed its second international real estate exchange-traded fund in the last six months, the WisdomTree International Real Estate fund. And last summer, private bank Northern Trust Corp. launched the first international real estate index fund, Northern Global Real Estate Index, which now has more than $1 billion in assets.
Not content with owning real estate through the stock market, some Americans are venturing abroad to buy properties, especially in lower-cost markets such as Brazil, Morocco and Portugal. They then turn them over to property-management firms to generate income
That's what Beth Damberger, of Vallejo, Calif., and her husband, Orlando Londres, are doing. Instead of investing in stocks and bonds, the couple, who own a pet-care business, in the last year have put their investment dollars into a villa in southern France, a beachfront apartment in Brazil and a studio in a Bulgarian ski resort. They hope to one day move to France with their two young children, but for now are renting the villa to vacationers to cover the mortgage payments. The apartments in Brazil and Bulgaria — each of which cost about $60,000 — "are purely investments," said Damberger.
The trend comes as U.S. investors seek ways to sidestep the weakening U.S. housing market — and as they grow wary of a domestic REIT market that has been exceedingly strong in recent years. At the same time, real estate is emerging as a more-viable asset class around the world and among U.S. institutional investors. As recently as five years ago, REITs — publicly traded real estate portfolios — were a rarity outside the United States and a few other developed markets. Now, roughly 30 countries have REIT-like investment vehicles that trade in the local stock market, or are considering adding them.
The chief benefit to investors from going abroad: diversification. Real estate is the ultimate "local" investment, because what happens in New York or London, for instance, has little effect on the real estate market in, say, Perth, Australia. Moreover, foreign real estate is only mildly correlated with the movement of U.S. stock prices, meaning a hit to the American stock market won't necessarily ripple through foreign real estate investments.
The risks include a crumbling economy in a particular real estate market, or a swoon in stock prices for local REITs. Then there's the dollar, whose current weakness against many other currencies makes foreign real estate more expensive for Americans. Worse, if the dollar rises after you buy property overseas, the value of your investment will erode, because a stronger greenback means foreign assets, from stocks to bonds to houses, are worth less in dollars.
Ibbotson Associates, a Chicago investment-research firm, recently studied international real estate and concluded that foreign real estate should equal about 8 percent to 9 percent of an investor's portfolio. Charles Schwab & Co., which recently launched the Schwab Global Real Estate mutual fund, says investors should have about 3 percent to 5 percent in overseas property.
Buying shares in a mutual fund or an exchange-traded fund — which resemble index funds that trade like stocks — is easy to do in your brokerage account. But buying property directly presents numerous logistical challenges. For one thing, many hot property markets are exceedingly difficult for foreign investors to access.
Damberger, 37, and Londres, 39, used a firm they found on the Web, London-based Bulgarian Properties Ltd., to locate a studio in a new resort being built in Bulgaria's Pirin Mountains. They hired a local attorney to ensure all the title work was accurate and to help open a local bank account.
When the resort opens next spring, the couple plans to begin generating rental income through a property-management firm that will lease the studio to vacationers. The cash will be directly deposited into their Bulgarian bank account, and any bills will be directly debited. Any local taxes due will be handled by the property firm.
Their ultimate goal: to sell the studio when Bulgaria, which joined the European Union in January, begins using the euro in 2010. That, Damberger said, "should drive the property prices higher" as Western Europeans look east toward cheaper markets for second homes and investment opportunities.
Foreign property-management companies in places as obscure as Mauritius say they routinely hear from U.S. investors looking for ways to diversify their money across other economies and across assets other than stocks and bonds. At Realinvest Ltd., a London firm matching buyers to properties in Italy, more than half the online traffic comes from Americans. Sotheby's International Realty Canada, meanwhile, says that it hears from U.S. investors daily and that Americans bought 55 percent of the 130 mountain-resort units in British Columbia the firm sold in March.
Firms such as Sotheby's, Realinvest and Propertyshowrooms.com work with clients on everything from finding properties to helping to secure a mortgage. Most offer property-management services and, in some cases, offer guaranteed minimum rental income for a certain number of years, basing the amount on projected occupancy rates.
Joe Azelby, global head of real estate and infrastructure at JP Morgan Asset Management, said, "We're seeing great interest from our high-net-worth investors who want a global approach to their real estate allocation," mainly through private real estate funds with a minimum investment of $250,000. A widely held view among clients "is that there are real growth opportunities in real estate when you look at the growing economies around the world and the massive urbanization taking place," said Azelby.
But there are also ways for smaller investors to participate. Linda Lubitz-Boone, a wealth manager in Miami, said 18 months ago she began splitting equally the real estate allocation for all of her clients between U.S. and foreign real estate mutual funds. Her foreign funds of choice: Cohen & Steers International Realty and Alpine International Real Estate. Both have $1,000 minimums.
Be aware, though, of what you're buying. The Dryden Global Real Estate fund, for instance, has more than a third of its assets in U.S. real estate investments. That's not necessarily bad, so long as you're not overloading your U.S. real estate holdings elsewhere. Other funds, such as the Fidelity International Real Estate fund, own no U.S. stocks and don't hedge their currency exposure, providing the purest play for foreign property. Typically, "global" funds will own U.S. investments, while "international" funds won't.
The trend comes as U.S. investors seek ways to sidestep the weakening U.S. housing market — and as they grow wary of a domestic REIT market that has been exceedingly strong in recent years. At the same time, real estate is emerging as a more-viable asset class around the world and among U.S. institutional investors. As recently as five years ago, REITs — publicly traded real estate portfolios — were a rarity outside the United States and a few other developed markets. Now, roughly 30 countries have REIT-like investment vehicles that trade in the local stock market, or are considering adding them.
The chief benefit to investors from going abroad: diversification. Real estate is the ultimate "local" investment, because what happens in New York or London, for instance, has little effect on the real estate market in, say, Perth, Australia. Moreover, foreign real estate is only mildly correlated with the movement of U.S. stock prices, meaning a hit to the American stock market won't necessarily ripple through foreign real estate investments.
The risks include a crumbling economy in a particular real estate market, or a swoon in stock prices for local REITs. Then there's the dollar, whose current weakness against many other currencies makes foreign real estate more expensive for Americans. Worse, if the dollar rises after you buy property overseas, the value of your investment will erode, because a stronger greenback means foreign assets, from stocks to bonds to houses, are worth less in dollars.
Ibbotson Associates, a Chicago investment-research firm, recently studied international real estate and concluded that foreign real estate should equal about 8 percent to 9 percent of an investor's portfolio. Charles Schwab & Co., which recently launched the Schwab Global Real Estate mutual fund, says investors should have about 3 percent to 5 percent in overseas property.
Buying shares in a mutual fund or an exchange-traded fund — which resemble index funds that trade like stocks — is easy to do in your brokerage account. But buying property directly presents numerous logistical challenges. For one thing, many hot property markets are exceedingly difficult for foreign investors to access.
Damberger, 37, and Londres, 39, used a firm they found on the Web, London-based Bulgarian Properties Ltd., to locate a studio in a new resort being built in Bulgaria's Pirin Mountains. They hired a local attorney to ensure all the title work was accurate and to help open a local bank account.
When the resort opens next spring, the couple plans to begin generating rental income through a property-management firm that will lease the studio to vacationers. The cash will be directly deposited into their Bulgarian bank account, and any bills will be directly debited. Any local taxes due will be handled by the property firm.
Their ultimate goal: to sell the studio when Bulgaria, which joined the European Union in January, begins using the euro in 2010. That, Damberger said, "should drive the property prices higher" as Western Europeans look east toward cheaper markets for second homes and investment opportunities.
Foreign property-management companies in places as obscure as Mauritius say they routinely hear from U.S. investors looking for ways to diversify their money across other economies and across assets other than stocks and bonds. At Realinvest Ltd., a London firm matching buyers to properties in Italy, more than half the online traffic comes from Americans. Sotheby's International Realty Canada, meanwhile, says that it hears from U.S. investors daily and that Americans bought 55 percent of the 130 mountain-resort units in British Columbia the firm sold in March.
Firms such as Sotheby's, Realinvest and Propertyshowrooms.com work with clients on everything from finding properties to helping to secure a mortgage. Most offer property-management services and, in some cases, offer guaranteed minimum rental income for a certain number of years, basing the amount on projected occupancy rates.
Joe Azelby, global head of real estate and infrastructure at JP Morgan Asset Management, said, "We're seeing great interest from our high-net-worth investors who want a global approach to their real estate allocation," mainly through private real estate funds with a minimum investment of $250,000. A widely held view among clients "is that there are real growth opportunities in real estate when you look at the growing economies around the world and the massive urbanization taking place," said Azelby.
But there are also ways for smaller investors to participate. Linda Lubitz-Boone, a wealth manager in Miami, said 18 months ago she began splitting equally the real estate allocation for all of her clients between U.S. and foreign real estate mutual funds. Her foreign funds of choice: Cohen & Steers International Realty and Alpine International Real Estate. Both have $1,000 minimums.
Be aware, though, of what you're buying. The Dryden Global Real Estate fund, for instance, has more than a third of its assets in U.S. real estate investments. That's not necessarily bad, so long as you're not overloading your U.S. real estate holdings elsewhere. Other funds, such as the Fidelity International Real Estate fund, own no U.S. stocks and don't hedge their currency exposure, providing the purest play for foreign property. Typically, "global" funds will own U.S. investments, while "international" funds won't.